Determining Net Operating Income (NOI)

A standard formula for calculating Net Operating Income or NOI would helpful in the Grand Junction market to assist commercial brokers and principals evaluating properties based upon capitalization rate (cap rate).

Gross Potential Income (GPI) - Total potential income if all leases were at market value
− Loss to Lease (spaces leasing for less than market value)
− Vacancy and Collection Loss (actual figures preferred / sometimes figured as a percentage)
= Net Rent Revenue
+ Miscellaneous Income (income from late charges, signage, vending machines etc..)
+ Expense Reimbursements (utilities, taxes, insurance etc.)
= Effective Gross Income (EGI)
− Operating Expenses (taxes, maintenance, insurance, janitorial, management etc.)
= Net Operating Income (NOI)

Capitalizing a property’s NOI for the next year is often the easiest way of estimating the property’s present value. Generally, using next year’s NOI to capitalize is recommended.

It is important to make sure the NOI is accurate from the sellers perspective in order to avoid overpricing a property, and from a buyers perspective in order to ensure investment strength and avoid overpaying.