What Is NOI in Commercial Real Estate?

You built a tight underwriting model. The debt yield clears. The DSCR clears. You submit the loan package expecting to close at the number you modeled.

The term sheet arrives at $1.2 million less than requested. Nothing in the capital structure changed. The only variable that moved was NOI — and the lender's version of it is not the same as yours (see our guide on Pro Forma vs. Underwritten NOI to understand how lender recasting creates this gap).

NOI is the single most important number in commercial real estate finance. Every formula a lender uses to size your loan starts with it. Understanding exactly what it is, how it is calculated, and how lenders adjust it before applying it to any formula is the difference between modeling accurately and getting blindsided at term sheet.

The NOI formula

Net operating income is a property's total income minus vacancy losses and operating expenses, before any debt service.

NOI = Gross Potential Income
    − Vacancy and Credit Loss
    − Operating Expenses

It deliberately excludes mortgage payments. The point is to measure the property's income independent of how it is financed — the same property in the same market should produce the same NOI whether it carries $5M or $15M of debt. That neutrality is why every lender uses it as the foundation.

What counts as operating income

Gross potential income includes:

• Base rent — contractual scheduled rent from all tenants, at full occupancy
• Expense reimbursements — NNN tenants who pay their share of taxes, insurance, and CAM
• Parking income — structured or surface lot revenue
• Laundry and storage — on multifamily properties
• Signage and antenna income — rooftop or facade lease revenue
• Miscellaneous fees — late fees, pet fees, amenity fees on multifamily

What does not count: interest income, loan proceeds, capital contributions, or any income that is not tied to the property's ongoing operations.

What counts as operating expenses

Operating expenses are recurring costs to keep the property running:

• Property taxes
• Insurance premiums
• Property management fees (typically 3%–5% of EGI)
• Repairs and maintenance
• Utilities paid by the landlord
• Landscaping, snow removal, security
• Accounting and legal fees specific to the property

What does not count: mortgage payments, capital expenditures (a new roof, a parking lot replacement), depreciation, or income taxes. Those are handled separately.

The replacement reserve: where borrowers most often go wrong

Keep operating NOI before reserves separate from lender cash flow after reserve deductions. A reserve adjustment does not change the meaning of the property's underlying operating statement.

A replacement reserve is an allowance for future capital replacements. Its amount and funding requirements depend on the property and loan program. Fannie Mae defines NCF as NOI less underwritten replacement reserve expense, whether or not deposits are made. See the replacement-reserves guide for a worked reconciliation.

For an illustrative 75,000-square-foot building, assume a reserve of $0.25 per square foot per year. This is an example input, not a quoted program requirement:

Reserve deduction: 75,000 × $0.25 = $18,750 per year

That $18,750 deduction reduces post-reserve cash flow. If a hypothetical lender applies a 9% debt-yield test to that adjusted income, the corresponding loan limit falls by $18,750 / 0.09 = $208,333. The effect depends on the numerator required by the actual loan documents.

Vacancy: the number borrowers underestimate most

Reconcile actual collections with the vacancy and credit-loss assumptions in the lender's cash-flow analysis. Do not subtract vacancy twice from a revenue figure that already reflects it. A fully occupied rent roll and collected revenue are not necessarily the same measure.

Vacancy assumptions should reflect the applicable program, rent roll, collection history, lease expirations and market evidence. The following 2% and 5% values are hypothetical comparison inputs, not agency minimums.

Illustrative comparison on $2,000,000 gross income, assuming no other income:

If an assumed 10% debt-yield test uses each displayed cash-flow figure, the $78,750 difference produces $787,500 less in the debt-yield loan limit. That comparison includes both the vacancy change and the reserve deduction; it is not a like-for-like comparison of operating NOI alone.

How lenders further stress NOI on riskier assets

On assets with near-term lease expirations, lenders do not stop at market vacancy. They run a stress-test scenario.

For an illustrative retail center with a near-term anchor-tenant expiry, model lost rent, re-leasing time and TI/LC costs explicitly. Distinguish recurring income adjustments from one-time capital needs instead of subtracting every cost from annual NOI. The lender's definitions determine how each item affects underwriting.

This explains why the same CMBS term sheet that quotes a 10% floor might produce a loan amount that implies an 11.5% debt yield on your submitted NOI. The lender did not raise the floor; they lowered the NOI.

Why NOI is not the same as cash flow

NOI measures property-level income before financing. It is not what the borrower takes home. The path from NOI to cash flow includes:

NOI
− Annual Debt Service (principal + interest)
= Before-Tax Cash Flow

Before-Tax Cash Flow
− Income Taxes
= After-Tax Cash Flow

Lenders care about NOI because it measures the property independently of the financing structure. Borrowers care about cash flow because it measures what they actually receive after the mortgage payment.

NOI in the three lender formulas

These ratios can use different income definitions in practice. For example, a cap rate based on operating NOI and DSCR based on post-reserve NCF do not have identical numerators. Reconcile the input for each test before comparing ratios or deriving one from another.

Use the debt yield calculator and the CRE loan sizing calculator to model what different NOI assumptions do to your maximum proceeds across all three constraints simultaneously.

Frequently asked questions

What is the difference between NOI and EBITDA? EBITDA (earnings before interest, taxes, depreciation, and amortization) is a corporate finance metric that includes all revenue streams across a business. NOI is a real estate metric that focuses specifically on a property's rental income and direct operating expenses. For a single-tenant NNN property, they may be similar. For a complex operating business like a hotel, they diverge significantly — which is why hotels require a different underwriting approach than traditional income properties.

Can a property have negative NOI? Yes. Operating NOI is negative when operating expenses exceed effective gross income. It cannot support a positive loan amount under a simple income-divided-by-positive-target sizing formula. Transitional financing may require other support and future-income assumptions; a negative current NOI alone does not describe every lender's decision.

Should I include capital expenditures in NOI? No. Major capital expenditures are distinct from ordinary operating expenses. A lender may deduct a replacement reserve below operating NOI to derive NCF. Check the applicable definition and avoid deducting the same reserve twice.

How does NOI differ on a multifamily property vs. an office building? The income composition differs. Multifamily NOI is built primarily from rent, pet fees, parking, and laundry. Office NOI includes base rent plus tenant expense reimbursements that vary by lease structure. The operating expense ratio also differs — multifamily operating expenses typically run 35%–50% of EGI, while office can run higher due to common-area maintenance, tenant improvement obligations, and leasing costs. Lenders apply different reserve and vacancy assumptions by property type for the same reason.

What is effective gross income (EGI) and how does it relate to NOI? EGI is gross potential income less vacancy and credit loss, plus other operating income not already included. Operating NOI equals EGI less operating expenses. A further reserve deduction may produce lender NCF; label that step separately.

Reconcile the inputs in our calculator & worksheet

Calculate your property's Net Operating Income line by line in real time using our browser-based NOI Calculator, or download the free Excel NOI Reconciliation & Loan Sizing Workbook to model gross revenues, itemized operating expenses, statutory vacancy floors, and capital replacement reserves. The worked sizing example explains every input and demonstrates how lender haircuts directly contract borrowing proceeds.