What Is NOI? Net Operating Income Explained

Net operating income, or NOI, is the yearly income a commercial property produces after paying its operating expenses but before paying any mortgage or income taxes. It is the starting point for nearly every valuation, loan, and offer on income property in Sarasota. If you know a building’s NOI and the market cap rate, you can estimate what it is worth.

The NOI Formula

NOI = Effective gross income − Operating expenses

Effective gross income is the rent and other income the property actually collects after allowing for vacancy and credit loss. Operating expenses are the recurring costs of running the building. What is left is the income the property generates on its own, regardless of how the owner financed it.

What Counts as Income

• Base rent: the scheduled rent from every lease

• Expense reimbursements: taxes, insurance, and CAM charges that tenants pay back under their leases

• Other income: parking, signage, storage, or cell tower and billboard leases

• Vacancy and credit loss: a deduction for empty space and tenants who do not pay

What Counts as an Operating Expense

• Property taxes

• Property and windstorm insurance

• Utilities paid by the owner

• Repairs and routine maintenance

• Landscaping, janitorial, and trash removal

• Property management fees

• Reserves for replacements, when the buyer or lender requires them

What Does Not Belong in NOI

Some costs are real but are left out of NOI because they depend on the owner, not the property. Leaving them out lets buyers compare buildings on equal terms.

• Mortgage payments: principal and interest depend on how the owner financed the building

• Depreciation: an accounting deduction, not a cash cost

• Income taxes: these depend on the owner’s tax situation

• Capital improvements: a new roof or parking lot is usually treated separately from yearly operating costs

• Leasing commissions and tenant improvements: often shown below NOI as part of cash flow

A Worked Example

Here is an illustrative example for a small Sarasota retail center. The figures are for illustration only.

Where the Money Goes

This chart breaks down the operating expenses in the example above. Taxes and insurance are usually the largest costs for Florida commercial property.

How NOI Sets Value

Buyers convert NOI into a price with the cap rate. At a 7% cap rate, the example center’s $327,900 NOI suggests a value of about $4.68 million. At 6.5%, the same income points to about $5.04 million. See how to calculate a cap rate for the full method.

This is why every dollar of NOI matters when you sell. At a 7% cap rate, adding $10,000 a year to NOI adds roughly $143,000 to the value of the property.

Ways Owners Raise NOI Before a Sale

1. Bring below-market leases up to market when renewals come due

2. Recover more expenses by moving gross leases to NNN or modified gross terms

3. Fill vacant space, even with shorter lease terms

4. Shop insurance and appeal property taxes when the assessment looks high

5. Add income, such as paid parking, signage, or storage

Frequently Asked Questions

Is NOI the same as cash flow?

No. NOI is measured before debt service. Cash flow is what remains after the mortgage payment, capital costs, and leasing costs. Two owners of the same building can have the same NOI and very different cash flow.

Do buyers trust the seller’s NOI?

Buyers verify it. During due diligence they review leases, rent rolls, tax bills, and operating statements, and they often adjust expenses to reflect their own costs. Clean, well-documented financials help a seller defend their number.

Should reserves be included in NOI?

It depends on the market and the lender. Many lenders and appraisers deduct a reserve for replacements, while some sellers present NOI without one. Always ask how a quoted NOI was calculated.

If you own an income property and want to know how buyers will read its NOI, talk to an investment advisor or call Eric Barnes at 941-207-9707.