Net operating income (NOI) in commercial real estate is a property's effective gross income minus its operating expenses, measured before debt service, capital expenditure, depreciation and income tax. It describes what the building earns rather than what its owner pays. The definition is standard in valuation practice (Wikipedia: net operating income), and NOI is the numerator when a value is derived with a capitalization rate (Wikipedia: capitalization rate).
Written by the Titleman team with AI assistance (Claude). Reviewed by Titleman's SEO/GEO review desk (AI-assisted, not independent of Titleman) before it went live. Links checked and page updated 22 October 2026.
The formula
Effective gross income is base rent, plus recoveries and other income such as parking or signage, minus vacancy and credit loss. Operating expenses are property taxes, insurance, unrecovered utilities, repairs, management fees, on-site payroll and common area costs. NOI is the first minus the second.
What is in NOI and what is not
| Line item | In NOI? | Why |
|---|---|---|
| Base rent | Yes | Income the asset produces |
| Recoveries and reimbursements | Yes | Tenant payments toward operating costs |
| Other income | Yes | Parking, storage, signage |
| Vacancy and credit loss | Deducted | Income not collected |
| Operating expenses | Deducted | Costs of operating the asset |
| Reserves | Varies | Allowance; position depends on the model |
| Capital expenditure | No | Not a cost of this year's operation |
| Debt service | No | A fact about the buyer |
| Depreciation and amortization | No | Accounting entries, not cash |
| Income tax | No | A fact about the owner |
Tenant improvements and leasing commissions also vary by model: many institutional models treat them as capital items, others as operating costs. Two NOI figures for one building that disagree usually differ here, or on the management fee: an owner-managed building often shows none, so a market fee is usually imputed.
A worked example (illustrative figures)
These figures are illustrative, not from a real property. A building collects 100,000 dollars of effective gross income and spends 40,000 dollars on operating expenses, so NOI is 60,000 dollars. At a 6 percent cap rate the income approach gives 60,000 divided by 0.06, or 1,000,000 dollars.
Leave out a 5,000 dollar management fee and NOI reads 65,000, which at the same cap rate gives about 1,083,000 dollars: a 5,000 dollar omission moves value by about 83,000 dollars. With annual debt service of 48,000 dollars, the debt service coverage ratio is 60,000 divided by 48,000, or 1.25 (Wikipedia: debt service coverage ratio).
In-place NOI vs pro forma NOI
In-place NOI is built from the leases and costs the property has today. Pro forma NOI adds assumed changes, such as rent growth or lower vacancy. A broker figure labeled "NOI" can be either, so ask which one it is. The comparison is on pro forma vs in-place NOI. To check in-place income against the leases, start with how to read a rent roll. Software such as Titleman's underwriting engine can lay out each line with its source document.
What this page does not replace
This page explains a definition. It does not replace a licensed appraisal, a lender's own guidelines (which set their own treatment of reserves and capital items) or an accountant's view on tax. Confirm the convention a counterparty uses before comparing two NOI figures.
FAQ
What is net operating income (NOI) in commercial real estate?
Net operating income is a property's effective gross income minus its operating expenses, measured before debt service, capital expenditure, depreciation and income tax. It describes what the building earns, independent of its financing or owner.
What is the definition of net operating income?
NOI is the income a property produces from operations after operating expenses and before financing and owner-level items: NOI = effective gross income - operating expenses, where effective gross income already deducts vacancy and credit loss.
Is NOI before or after debt service?
Before. Mortgage principal and interest are a fact about the buyer's financing, not the asset. Lenders then compare NOI with debt service to size a loan or test coverage.
What is pro forma NOI?
Pro forma NOI is a forward-looking figure that reflects assumed changes such as higher rents or lower vacancy. In-place NOI reflects what the property earns today under current leases.
What is excluded from NOI?
By convention: mortgage principal and interest, capital expenditure, depreciation and amortization, and income tax.
Are tenant improvements and leasing commissions part of NOI?
It depends on the model. Many institutional models treat them as capital items below NOI; others deduct them as operating costs. The two are not comparable, so state the treatment.
Is NOI the same as cash flow?
No. NOI is measured before debt service and capital expenditure, both real cash leaving the account.