What is the importance of Net Operating Income in regards to Commercial Real Estate?
Net Operating Income (NOI), is the net income generated by a property after deducting operating expenses. The NOI measures the ability of a property to generate income from operations as a single project. The NOI only accounts for the property in question and no other operations.
Income mostly consists of rent but could also include revenue such as parking fees, vending machines, laundry machines or service charges. The operating expenses are expenditure incurred to run and maintain the property e.g. insurance, property tax, and utilities. NOI is a before-tax figure; it also excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization. It measures the cash generated by a property.
Net Operating Income= Gross Income- Operating Expenses
NOI is a standard measure of profitability of a property during a commercial property loan evaluation. It also helps investors to measure a property’s anticipated cash flow.