CRE Dictionary

Net operating income (NOI) – a commercial real estate (CRE) term – is also known as annual net income (ANI).

This is the final number in a property’s “income statement” – used to analyse the profitability of real estate investments over a twelve-month period. These forward-projected cash flows run one year from, specifically, the estimated date of transfer of the asset.

Net operating income is used as a basis for financial calculations – from disposal motivations to debt funding coverage ratios, to property valuations.

Comparing NOI to the income statement

The NOI formula is similar in principle to that of an income statement – with a focus on recurring revenue and recurring cost items, and a cash bias.

Incomes and expenses are recognised in the relevant financial period. In certain instances, revenues can be transparently attributed to vacant space, on clear re-let assumptions.

Similar to an income statement, capital / once-off items such as new development or refurbishment costs are not recognised.

However, unlike an income statement, property depreciation is ignored, as are both financing costs and taxation from profits on the building. Further, tenant allowances and leasing commissions are generally neither recognised nor amortised / allocated.

Formula for net operating income

Values included

• Add: Direct rental income
  • Space rental (both for GLA / rentable area and rent attracting supplementary areas)
    • This could extend to disclosed turnover rental and attributed rental
  • Parking rental
  • Non-GLA income (e.g. signs and antennae)
• Add: Expense recoveries from the tenant (expenses included in gross rental)
• Less: Expenses
  • Operating expenses as defined – these may or may not include
    • Rates and taxes
    • Security
    • City improvement district or park levies
    • Generator costs
    • Back up water supply costs
    • Security
    • Other “common area” expenses
  • Expenses included in net rentals – these may or may not include
    • Insurance
    • External maintenance
    • Roof maintenance
    • Pest control
    • Repairs
    • Cleaning and hygiene etc.
  • Expenses paid for property management

Values excluded

• Debt / mortgage payments
• Tenant improvements
• Leasing commissions
• Depreciation and replacement provisions
• Income taxes on the property’s profits

Other information related to net operating income

A capitalisation rate (cap rate) is applied to net operating income to establish an indicative market value of the property.

NOI / the actual sales price is used to determine the yield of the property on acquisition.