CRE glossary
Net operating income (NOI)
Net operating income (NOI) is the income a commercial property generates from rents minus all operating expenses, before debt service or capital expenditures. NOI is the foundation metric for cap rates, valuations, and lender underwriting; everything in CRE finance compares back to NOI.
NOI = Gross Rental Income + Other Income (parking, storage, antenna leases) − Operating Expenses (taxes, insurance, CAM, management, payroll, repairs). Critically, NOI excludes debt service (mortgage payments), capital expenditures (roof replacement, HVAC), depreciation, and tax provisions. It's a property-level cash-flow proxy independent of how it's financed or owned.
Investors care about NOI because it's the numerator in the cap-rate equation. Doubling NOI (through rent increases or expense cuts) doubles property value at a constant cap rate, that's why landlords push hard on rent escalations and aggressive expense pass-throughs. A 5% NOI lift on a $20M property at a 6% cap is $830k of value created.
Stabilized NOI (the figure used for valuation) projects forward 12 months at full lease-up and market rents, normalizing temporary distortions. Trailing NOI uses actual past performance. Brokers should always confirm which the listing agent is quoting, the gap can be 20–30% on a leased-up property.
NOI
NOI = Gross income + Other income − Operating expenses
Example
- Gross rental income
- $2,400,000
- Parking + other
- $120,000
- Total income
- $2,520,000
- Operating expenses
- $880,000
- NOI
- $1,640,000
Broker perspective
When a tenant signs a lease, the landlord's NOI grows by exactly the rent committed minus the new operating-expense allocation. On a $1M annual lease in a building with $200/SF of operating cost basis, the lease adds ~$800k to NOI. At a 6% cap rate, that's $13.3M of property value created by the broker's signature. Charge accordingly.
Frequently asked
People also ask
Does NOI include mortgage payments?
No. NOI is property-level operating cash flow before debt service. The metric that includes debt is cash flow before tax (CFBT).
Does NOI include capital improvements?
Generally no, capex is treated separately. Some institutional underwriting reserves a percentage of NOI for capex; that's reserve-adjusted NOI.
What's a healthy NOI growth rate?
Office: 2–3% per year (matching escalations). Industrial: 3–5%. Multi-family: 3–4%. NOI growth is the primary driver of value creation in stabilized assets.
How does NOI differ from cash flow?
Cash flow subtracts debt service and capital expenditures from NOI. NOI is property-level; cash flow is investor-level.
Related terms
Capitalization rate (cap rate)
Annual NOI divided by purchase price, how investors quote yield on a CRE asset.
Operating expenses (OpEx)
All costs to run the building, taxes, insurance, utilities, janitorial, management, that get passed through to tenants in NNN and modified gross structures.
Base rent
The headline rent before pass-through expenses, usually quoted in $/SF/year and the starting point for every comp.
Effective rent
Present-valued average rent over the term, net of free rent and TI, the real apples-to-apples cost number.
See net operating income (noi) extracted from a real lease.
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