What is Net Operating Income (NOI) in Commercial Real Estate?

One of the most essential terms to understand in commercial real estate transactions – especially investment commercial real estate transactions is net operating income (NOI). Let’s define what NOI is, how it is calculated, and the role that NOI plays in the  commercial real estate industry.

Defining Net Operating Income

Net operating income (NOI) is not a complicated term to understand. The NAIOP Commercial Real Estate Association defines it as “the income generated after deducting operating costs [from a company’s total revenue] but before deducting taxes and financing expenses.” Financing expenses include capital expenditures, both principal and interest payments on loans, amortization, and depreciation.

How Net Operating Income is Calculated in Commercial Real Estate

In commercial real estate, revenues most often come from sources including rent, parking fees, and other service fees. Operating costs for a commercial property can include building and grounds maintenance, janitorial fees, utilities, insurance, and property management or legal fees. The total operating costs are subtracted from the total revenue in order to determine the property’s NOI.

The Place of Net Operating Income in Commercial Real Estate

In commercial real estate, lenders and creditors use a property’s NOI to help them determine the income that could be generated from its proposed use. Whether or not they will approve a mortgage application from an owner or investor depends on what this potential income is. If the lender or creditor finds the property can generate income, they are more likely to approve the application. If their determination is that a property will operate at a loss, the application is more likely to be rejected.

Final Thoughts

Some terms in the commercial real estate industry, like NOI, are easier to understand than others. We at Lee & Associates Orange are leading experts in the commercial real estate industry. This is why we want to help demystify some of the common terminologies that are used in this field. However, whether you are looking for help understanding terms or with finding a place for your company to call home! If you would like more information on acquiring commercial real estate, please contact us today! Likewise, hang out with us on FacebookLinkedInGoogle+, Instagram, and Twitter.

 


by Staff Writer, Lee & Associates Orange