Tenant improvement costs are those associated with tenant upgrades that go above and beyond day to day maintenance. As such, they are not included in the NOI calculation. Taxes are charged based on the amount of income a property produces, but they are not associated with its daily operations. There are three common expense line items not usually included in the NOI calculation because they are not associated with operating the property on a day to day basis. This line item can also be tricky because it is a non-cash expense, but it is usually included as a line item in the NOI calculation, but may be added back for performance calculations. Depreciationĭepreciation is an accounting concept that allows property owners to expense a portion of the value of the property each year to account for its physical deterioration. The costs associated with the annual premiums are included in the insurance expense line item. To protect against loss from unforeseen events like a storm, fire, or flood, commercial properties carry one or more types of insurance. After the jump, taxes tend to rise slowly each year. When estimating NOI, it is normal for property taxes to make a big jump in the first year of ownership when a property’s value is re-assessed.

Property taxes are the cost assessed by the local city/municipality for the use of their services like trash pickup or water. Only those paid by the property owner should be included as an expense in the NOI calculation. Utilities can be especially tricky in the NOI calculation because some portion of them may be paid by tenants directly (if a property is sub metered) and some portion may be paid by the property owner. Utilities are the costs associated with using key services like water, electricity, or waste removal. When a tenant has to be evicted or when a rental property owner has to defend themselves against some sort of legal issue, they may incur legal fees. This could include things like painting, landscaping maintenance, or window washing. Maintenance costs are those associated with the normal, every day repairs that are necessary to keep a property in good working order. Property Management activities could be handled by a third party vendor or by the property owner themselves. Property management fees are costs associated with the day to day management of a property’s operations. Although each property and proforma are slightly different, the following expense line items are generally included as part of the operating expense argument. Expenses Included in NOIįrom Gross Income, a number of operating expenses are subtracted to get to NOI. When these three sources are combined, the result is a gross income figure that represents the first argument in the NOI formula. Vacancy Losses : The amount of income lost due to vacant units, expressed as a negative number.Other Income : The amount of money collected from non-rental income sources like fees or interest.Gross Rental Income : The amount of money collected from tenants on a monthly/annual basis in the form of rental payments.The income component is the easiest to calculate because it includes just three line items: Now, let’s look at which income statement line items are included in each component of this calculation. The formula is: Net Operating Income = Gross Income – Operating Expenses

The formula used to calculate NOI is simple, but choosing which line items to include/exclude can be a bit more complex. For this reason, it is one of the most closely watched metrics in a commercial real estate investment. The amount of Net Operating Income produced by a property forms the basis for its market value – the more NOI it produces, the more valuable it is.

Net Operating Income is a commercial real estate property performance metric that measures the profitability/efficiency of an investment property’s operating performance. If you are an accredited investor and would like to learn more about our current investment opportunities, click here.

By the end, readers will be able to calculate Net Operating Income on their own and use it to estimate their potential return on a commercial real estate investment.Īt First National Realty Partners, we specialize in the acquisition and management of grocery store anchored commercial properties. In this article, we will describe what Net Operating Income is, how it is calculated, why it matters, and when to use it. One of, if not the, most important metric is a property’s net operating income (NOI). When evaluating a commercial real estate investment, there are a handful of metrics that are absolutely critical to understanding the current and/or future return potential of the property.

Noi calculation example