What is Net Operating Income (NOI)?

TL;DR: Net operating income (NOI) equals a property's effective income minus operating expenses. It excludes debt service, capital expenditures, depreciation, and income taxes. Investors use NOI to set cap rates, size loans via DSCR, and compare deals. In small bay industrial, vacancy, credit loss, and lease structure (NNN vs modified gross) move NOI as much as face rent does.

What is NOI?

NOI is the annual income a property produces after paying the costs to operate it, and before paying the costs to own or improve it.

In plain terms:

1. Start with income you actually expect to collect
2. Subtract the operating expenses required to keep the building running
3. Stop before mortgage payments, major capital projects, depreciation, and taxes on profit

That leftover number is NOI. Acquisition models, appraisals, and lender packages commonly use it as the income input.

The formula

A slightly expanded version that matches how small bay underwriters usually build the stack:

The NOI calculator runs the same stack against a rent roll.

What counts as income

Potential gross income is rent if every unit were occupied at the underwritten rate for a full year. In a multi-tenant flex building that is usually unit count × average in-place (or market) rent × 12.

Vacancy and credit loss reduce that figure to what you can reasonably collect. Small bay parks with many short-term tenants often underwrite vacancy in the 5–10% band, but the right number is local and vintage-specific. Credit loss covers tenants who occupy but pay late or not at all.

Other income includes items that are not base rent: late fees, NSF fees, dumpster or parking charges, storage lockers, antenna or signage leases, and similar. One-time recoveries are usually excluded from stabilized NOI.

What counts as an operating expense

Operating expenses are the recurring costs of running the property as a going concern. Typical small bay line items:

• Property taxes
• Property insurance
• Property management fees
• Repairs and maintenance (landlord side)
• Common area utilities and services
• Landscaping, snow, trash (when landlord-paid)
• Administrative costs tied to the asset

What does not go in operating expenses for NOI:

• Debt service (principal and interest)
• Capital expenditures (roof replacement, HVAC replacement, parking lot rebuild)
• Tenant improvement allowances treated as capital
• Depreciation and amortization
• Income taxes
• Owner's personal overhead unrelated to the property

Capital vs. expense treatment should stay consistent year to year. Reclassifying the same work between capital and R&M changes reported NOI even when cash spend does not.

Lease structure changes the shape of NOI

The same building can show different expense stacks under different lease forms.

For a refresher on structures, see Gross, Modified Gross, or NNN. For how recoveries get trued up, see CAM reconciliation.

On a typical NNN small bay park, landlord NOI often approximates:

Collected base rent + other income − vacancy/credit loss − landlord-retained OpEx

Landlord-retained OpEx can still include structural reserves, vacant-suite utilities, or management costs above what leases recover. NNN does not automatically mean zero landlord expense; the leases define what is recoverable.

Worked example (illustrative)

Assume a 24-unit multi-tenant industrial flex building:

• Potential gross rent: $360,000 / year
• Vacancy & credit loss: 7% → $25,200
• Other income: $6,000
• Effective gross income: $360,000 − $25,200 + $6,000 = $340,800
• Operating expenses (landlord P&L after recoveries): $48,000
• NOI = $340,800 − $48,000 = $292,800

Figures are typical-band math for illustration, not a market survey. Actual vacancy, recoveries, and OpEx vary by market, vintage, and lease mix.

If a buyer pays $4,200,000 for that income stream:

The same NOI feeds cash-on-cash return after debt service and DSCR when compared to annual debt service. The cap rate calculator and cash-on-cash calculator use the same NOI input.

Trailing vs pro forma NOI

Trailing (T12) NOI uses the last twelve months of actual income and expenses. It reflects recent history. It can sit below in-place rents after recent lease-ups, or above a stabilized run-rate if a large tenant just vacated.

Pro forma NOI uses expected rents, vacancy, and expenses under a stated business plan, often for lease-up or value-add cases. Assumptions typically include market rent, downtime, renewal probability, expense inflation, and recovery rate, and should be labeled as such.

A common small bay approach is T12 as the base, plus a marked-to-market rent roll with explicit vacancy on vacant units. Trailing and pro forma figures are not interchangeable unless the adjustments are disclosed.

Small bay factors that move NOI

1. Many small tenants. Income is spread across units, so turnover and credit loss often appear as an ongoing rate rather than a single large vacancy event.
2. Short terms. 1–3 year leases reprice more often than long industrial terms. T12 can lag a rising market; pro forma can assume renewals that have not yet occurred.
3. CAM and recoveries. Estimated vs actual CAM reconciliation can move year-end results. Recoverable vs non-recoverable expenses change landlord NOI even when total building OpEx looks unchanged.
4. Owner-operator expenses. Self-managing owners sometimes omit a market management fee from OpEx. Lenders and buyers commonly impute one when comparing deals.
5. Capital vs R&M. Suite turn painting is usually treated as OpEx. Parking lot replacement is usually capital. The classification changes NOI without changing cash spent.

How NOI connects to other metrics

NOI is the shared income input across these metrics. Disagreements on value often trace back to different NOI definitions rather than different prices alone.

Common mistakes

• Using face rent with no vacancy or credit loss
• Including debt service in expenses (that produces cash flow, not NOI)
• Booking one-time insurance proceeds or TI reimbursements as stabilized other income
• Comparing a gross-lease NOI to an NNN NOI without adjusting for expense responsibility
• Presenting seller add-backs as trailing NOI without documentation

The Bottom Line

NOI is operating income before financing and capital expenditures. Cap rate, DSCR, and cash-on-cash all depend on how income, vacancy, and expenses are defined in that number.

Related tools: NOI calculator, cap rate calculator, cash-on-cash calculator. Related lease mechanics: NNN vs modified gross and CAM reconciliation.