**Calculating Net Operating Income (NOI)**

This tutorial presents the steps for calculating a commercial real estate property’s Net Operating Income (NOI). Please note that commercial real estate practitioners would typically enter these figures on an Annual Property Income Data “APOD” sheet.

**About this Guide**

The content, format, and problems in this guide derive from coursework designed by Professor Robert J. Nahigian for REALTOR® University’s Master of Real Estate CRIA course series. For more information, inquiries may be directed to the REALTOR® University Library.

The figures in this guide are calculated using Microsoft Excel. Many commercial real estate practitioners use the HP-12C or HP-2B calculator when calculating these formulas. Financial calculators sometimes round numbers in a different manner than Excel, so it is always good to compare numbers in Excel to those calculated using a financial calculator as a means of double checking work. If you do not have either calculator on-hand, check out your smartphone or tablet’s app store, as some app stores offer HP-12C or HP-2B apps.

**Disclaimer**

The information contained in this guide is intended for informational and educational purposes only, and does not constitute legal, tax, investment or other professional advice. Those using this guide should independently verify all information provided to ensure its accuracy and compliance with applicable law.

**Definitions:**

**Potential Gross Income (PGI)**→ “The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted” (The Appraisal Institute, 2008, p. 457). Also known as “scheduled rental income.”**Effective Rental Income**→ “The anticipated income from all operations of the real property after an allowance is made for vacancy and collection losses and an addition is made for any other income” (The Appraisal Institute, 2008, p. 457). PGI = (total effective rental income + other income) – (vacancy + credit losses)

**Gross Operating Income (GOI)**à

(Scheduled Rental Income – Vacancy) = Effective Rental Income

- Effective Rental Income + Other income = GOI (Peckham, 2006, p. 149).

**Operating Expenses**→ “The periodic expenditures necessary to maintain the real property and continue production of the effective gross income, assuming prudent and competent management” (The Appraisal Institute, 2008, p. 459). Such ordinary everyday expenses may include trash removal, heating/cooling, water and sewer, and supplies.*

**Net Operating Income (NOI)**→ “the actual or anticipated net income remaining after all operating expenses are deducted from effective gross income” (The Appraisal Institute, 2008, p. 457). Net Operating Income = Gross Operating Income (aka “effective rental income”) – Operating Expenses**Vacancy and Collection Loss**→ “A deduction from potential gross income made to reflect income reductions dues to vacancies, tenant turnover, and nonpayment of rent” (Appraisal Institute, 2008, p. 484).**Market Vacancy**→ Usually in the form of a percentage, market vacancy is based off an average vacancy rate for commercial properties in the same local market; multiply the vacancy percentage by the Scheduled Rental Income to calculate vacancy (Nahigian, 2013).**Actual Vacancy**→ Actual Vacancy is based off the actual vacancies in the subject property one is assessing; subtract the property’s actual vacancies from the Scheduled Rental Income to arrive at Actual Vacancy (Nahigian, 2013).

**Tenant-at-will (TAW)**→ “A tenancy that exists until either party chooses to terminate it” (p. 587). For the purposes of this example, we will consider TAWs as tenants whose lease is up and are now effectively “month-to-month” renters; this tenant can cancel lease at any time. One can treat such tenants either as a 30-day tenancy or as a 0 day tenancy when calculating a property’s effective rental income.

** ***Always seek the guidance of a Certified Public Accountant (CPA) when distinguishing between operating, capital, and financial expenses so as to mitigate tax and legal risk.

**Question 1: What is the Net Operating Income (NOI) for the building below? **

** ***Note: the seller’s broker provided the information below; therefore one should revise as necessary to reflect the actual rent roll as provided.*

**Details:**

Total Assessed Value: $650,000

Effective Rental Income: $102,600

Real Estate Taxes: $2,555

Property Insurance $1500

On Site Management 3%

Repairs & Maintenance $2,500

Trash Removal $900

Common Electric $4,500

Water/Sewer $1,200

Accounting & Legal $1,000

Advertising $1,000

Supplies $2,500

Pest Control $1,000

Reserve for Replacement $1,056

Total Operating Expenses $18,740

Tenant Information:

Tenant 1: $25,900 annually

Tenant 2: $22,800 annually (TAW)

Tenant 3: $9,500 annually

Tenant 4: $15,500 annually

Tenant 5: $28,900 annually (currently vacant)

**Process:**

- Enter this data into an APOD sheet
- Ignore the Effective Rental Income provided; we will calculate the Effective Rental Income based off actual rents and vacancies for the subject property
- Create three columns: column A is the type, column B is dollar amounts, and column C is notes
- Create a line item for each of the 5 tenants and enter their rents in column B
- For Tenant 2 we need to either enter $0 or calculate one month’s rent, since it is occupied by a TAW
- In cell B13 type =22,800/12

- For Tenant 5 enter $0, since it is currently vacant

- For Tenant 2 we need to either enter $0 or calculate one month’s rent, since it is occupied by a TAW
- Total up the actual rents being collected to find the GOI
- Next we need to calculate and total Operating Expenses
- We need to calculate the On-Site Management amount, as it is an Operating Expense
- We know the On-Site Management is 3% of the GOI, so in cell B23 type =.04*B18

- We need to calculate the On-Site Management amount, as it is an Operating Expense
- Do not include Reserves as an Operating Expense; treat like a savings account
- Now total the Operating Expenses by typing into cell B31 =sum(B19:B29)
- Now we need to subtract Operating Expenses from GOI to arrive at NOI; in cell B32 type =B18-B31

** **

**Answer 1: The Net Operating Income (NOI) for this building is $32,561**

**Question 2: What is the Net Operating Income (NOI) for the building below?**

**Details: **

GOI: $254,800

Operating Expenses (annual): $89,900

Miscellaneous expenses: $8,200

Real estate taxes: $12,900

** Process:**

- Enter this data into an APOD sheet
- Create three columns: column A is the type, column B is dollar amounts, and column C is notes
- Enter GOI (cell B17) as $254,800
- Next we need to calculate and total Operating Expenses
- Enter Real estate taxes (cell B19) as $12,900
- Create row under operating expenses for “Misc expenses” and enter $8,200
- Create two rows for operating expenses: one for the subtotal and one for total operating expenses
- In the subtotal operating expenses (cell B32) enter $89,900

- Now total the Operating Expenses by typing into cell B33 =sum(B19:B32)
- Now we need to subtract Operating Expenses from GOI to arrive at NOI; in cell B34 type =B17-B33

**Answer 2: The Net Operating Income for this property is $143,800 **

**Question 3:**** What is the Net Operating Income (NOI) for the building below?**

**Details:**

Property Sale Price: $1,000,000

Market Vacancy Rate: 9.5%

Industrial reserves: $0.25 psf

Property total space: 35,600 sf

Tenant 1: $52,000

Misc. Operating Expenses: $10,500

**Process:**

- Enter this data into an APOD sheet
- Create three columns: column A is the type, column B is dollar amounts, and column C is notes
- Enter Tenant 1 (cell B12) in the Schedule Rental Income section for this single tenant building
- In cell C12 enter $52,000

- Next we need to calculate the market vacancy rate, because it is common practice for real estate investors to always calculate for vacancy, even when a property has a single tenant with an existing lease
- Enter Vacancy 9.5% in cell A16
- In cell B16 type .095*52,000

- Next we calculate the GOI by subtracting scheduled rental income from the market vacancy
- In cell B17 enter =B12-B16

- Now we need to total the Operating Expenses
- Create a new row (30) under Operating Expenses for “misc.expenses”
- In cell B30 enter $10,500
- Total Operating Expenses by typing into cell B32 =sum(B19:B30)
- Do not include reserves in the Operating Expense Calculation. Treat Reserves like a savings account: not available for spending, but also not an expense

- Now we need to subtract Operating Expenses from GOI to arrive at NOI; in cell B33 type =B17-B32

** Answer 3: The NOI for the building is $36,560 **

**Question 4:**** What is the Net Operating Income (NOI) for the building below?**

**Details:**

Market vacancy rate: 10.5%

Operating Expenses: $1.75 psf

Tenant Type: Triple Net NNN

Reserve factor: $0.12 psf.

Tenant 1: $22,000 for 4,400 sf

Tenant 2: $55,500 for 9,500 sf

Tenant 3: $75,800 for 12,000 sf

Tenant 4: $69,895 for 11,900 sf

**Process:**

- Enter this data into an APOD sheet
- Create three columns: column A is the type, column B is dollar amounts, and column C is notes
- Enter each of the tenants in the Scheduled Rental Income section
- In column A put the name of the tenant (e.g. Tenant 1, Tenant 2, et seq.)
- In column B put the scheduled rent for each tenant
- In column C put the square footage for each tenant
- Create a new row (17) titled “Total Square Footage”
- In cell B17 type =sum(C12:C15)

- Next we need to total the Scheduled Rental Income
- Created a new row under the Scheduled Rental Income section (16)
- In cell B16 type =sum(B12:B15)

- Next we need to calculate the market vacancy rate, because it is common practice for real estate investors to always calculate for vacancy, even when a property has a single tenant with an existing lease
- Enter Vacancy 10.5% in cell A18
- In cell B18 type B16*.105

- Next we calculate the GOI by subtracting scheduled rental income from the market vacancy
- In cell B19 enter =B16-B18

- Next we will calculate Reserves
- In B33 type B17*.12

- Do not include reserves in the Operating Expense Calculation. Treat Reserves like a savings account: not available for spending, but also not an expense
- Now we need to total the Operating Expenses
- Since the tenant is Triple Net, we do not need to Calculate any operating expenses
- Total Operating Expenses by typing into cell B32 =sum(B21:B32)

- Now we need to subtract Operating Expenses from GOI to arrive at NOI; in cell B35 type =B19-B34

**Answer 4: The Net Operating Income (NOI) for this building is $199,759 **

**Question 5:**** What is the Net Operating Income (NOI) for the building below?**

**Details:**

Potential Income: $ 852,900

Market Vacancy Rate: 20.5%

Credit Loss: $ 3,200

Cell tower income: $ 5,500

Operating Expenses: $ 225,982

**Process:**

- Enter this data into an APOD sheet
- Create three columns: column A is the type, column B is dollar amounts, and column C is notes
- In the row for Total Scheduled Rental Income (16), enter $852,900 in B16
- Create row in the Scheduled Rental Income section for “Other Income” (18)
- In cell B17 enter $5,500

- Create a row in the Schedule Rental Income section for “Credit Loss”
- In cell B19 enter $3,200

- Next we need to calculate the market vacancy rate, because it is common practice for real estate investors to always calculate for vacancy, even when a property has a single tenant with an existing lease
- Enter Vacancy 20.5% in cell A18
- In cell B18 type B16*.205

- Next we calculate the GOI by adding scheduled rental income and other income, and subtracting the market vacancy and credit loss
- In cell B20 enter =(B16+B17)-(B18+B19)

- Now we need to total the Operating Expenses
- Total Operating Expenses by typing into cell B35 =sum(B21:B34)

- Now we need to subtract Operating Expenses from GOI to arrive at NOI; in cell B36 type =B20-B35

**Answer 5: The Net Operating Income (NOI) for this building is $454,373.**

**References**

Gibson, F., Kapp, J. & Klayman, E. (1992). *Real estate law* (3^{rd} ed.). Chicago, IL: Dearborn Financial Publishing, Inc.

The Appraisal Institute. (2008). *The appraisal of real estate* (13^{th} ed.). Chicago, IL: The Appraisal Institute.

Nahigian, R. (2013). *Commercial real estate investment an analysis (CRIA) 540: Advanced analytics for real estate investments*. Chicago, IL: REALTOR® University.

Peckham, J. (2006). *A master guide to income property brokerage* (4^{th} ed.). Hoboken, NJ: John Wiley & Sons, Inc

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