CALCULATING NOI
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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:
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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) 
(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
CALCULATING NOI
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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).
o 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).
o 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 30day 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:
Effective Rental Income:
Real Estate Taxes:
Property Insurance
On Site Management
Repairs & Maintenance
Trash Removal
Common Electric
Water/Sewer
$650,000
$102,600
$2,555
$1500
3%
$2,500
$900
$4,500
$1,200
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Accounting & Legal
Advertising
Supplies
Pest Control
Reserve for Replacement
Total Operating Expenses
$1,000
$1,000
$2,500
$1,000
$1,056
$18,740
Tenant Information:
Tenant 1:
Tenant 2:
Tenant 3:
Tenant 4:
Tenant 5:
$25,900 annually
$22,800 annually (TAW)
$9,500 annually
$15,500 annually
$28,900 annually (currently vacant)
Process:
1. Enter this data into an APOD sheet
2. Ignore the Effective Rental Income provided; we will calculate the Effective
Rental Income based off actual rents and vacancies for the subject property
3. Create three columns: column A is the type, column B is dollar amounts, and
column C is notes
4. Create a line item for each of the 5 tenants and enter their rents in column B
a. For Tenant 2 we need to either enter $0 or calculate one month’s rent,
since it is occupied by a TAW
i. In cell B13 type =22,800/12
b. For Tenant 5 enter $0, since it is currently vacant
5. Total up the actual rents being collected to find the GOI
6. Next we need to calculate and total Operating Expenses
a. We need to calculate the On-Site Management amount, as it is an
Operating Expense
i. We know the On-Site Management is 3% of the GOI, so in cell
B23 type =.04*B18
b. Do not include Reserves as an Operating Expense; treat like a savings
account
7. Now total the Operating Expenses by typing into cell B31 =sum(B19:B29)
8. Now we need to subtract Operating Expenses from GOI to arrive at NOI; in cell
B32 type =B18-B31
CALCULATING NOI
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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:
Operating Expenses (annual):
Miscellaneous expenses:
Real estate taxes:
$254,800
$89,900
$8,200
$12,900
Process:
1. Enter this data into an APOD sheet
2. Create three columns: column A is the type, column B is dollar amounts, and
column C is notes
3. Enter GOI (cell B17) as $254,800
4. Next we need to calculate and total Operating Expenses
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a. Enter Real estate taxes (cell B19) as $12,900
b. Create row under operating expenses for “Misc expenses” and enter
$8,200
c. Create two rows for operating expenses: one for the subtotal and one for
total operating expenses
d. In the subtotal operating expenses (cell B32) enter $89,900
5. Now total the Operating Expenses by typing into cell B33 =sum(B19:B32)
6. 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:
Market Vacancy Rate:
$1,000,000
9.5%
CALCULATING NOI
Industrial reserves:
Property total space:
Tenant 1:
Misc. Operating Expenses:
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$0.25 psf
35,600 sf
$52,000
$10,500
Process:
1. Enter this data into an APOD sheet
2. Create three columns: column A is the type, column B is dollar amounts, and
column C is notes
3. Enter Tenant 1 (cell B12) in the Schedule Rental Income section for this single
tenant building
a. In cell C12 enter $52,000
4. 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
a. Enter Vacancy 9.5% in cell A16
b. In cell B16 type .095*52,000
5. Next we calculate the GOI by subtracting scheduled rental income from the
market vacancy
a. In cell B17 enter =B12-B16
6. Now we need to total the Operating Expenses
a. Create a new row (30) under Operating Expenses for “misc.expenses”
b. In cell B30 enter $10,500
c. Total Operating Expenses by typing into cell B32 =sum(B19:B30)
d. Do not include reserves in the Operating Expense Calculation. Treat
Reserves like a savings account: not available for spending, but also not an
expense
7. Now we need to subtract Operating Expenses from GOI to arrive at NOI; in cell
B33 type =B17-B32
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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:
Operating Expenses:
Tenant Type:
Reserve factor:
Tenant 1:
Tenant 2:
Tenant 3:
Tenant 4:
10.5%
$1.75 psf
Triple Net NNN
$0.12 psf.
$22,000 for 4,400 sf
$55,500 for 9,500 sf
$75,800 for 12,000 sf
$69,895 for 11,900 sf
Process:
1. Enter this data into an APOD sheet
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2. Create three columns: column A is the type, column B is dollar amounts, and
column C is notes
3. Enter each of the tenants in the Scheduled Rental Income section
a. In column A put the name of the tenant (e.g. Tenant 1, Tenant 2, et seq.)
b. In column B put the scheduled rent for each tenant
c. In column C put the square footage for each tenant
d. Create a new row (17) titled “Total Square Footage”
i. In cell B17 type =sum(C12:C15)
4. Next we need to toal the Scheduled Rental Income
a. Created a new row under the Scheduled Rental Income section (16)
b. In cell B16 type =sum(B12:B15)
5. 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
a. Enter Vacancy 10.5% in cell A18
b. In cell B18 type B16*.105
6. Next we calculate the GOI by subtracting scheduled rental income from the
market vacancy
a. In cell B19 enter =B16-B18
7. Next we will calculate Reserves
a. In B33 type B17*.12
8. Do not include reserves in the Operating Expense Calculation. Treat Reserves like
a savings account: not available for spending, but also not an expense
9. Now we need to total the Operating Expenses
a. Since the tenant is Triple Net, we do not need to Calculate any operating
expenses
b. Total Operating Expenses by typing into cell B32 =sum(B21:B32)
10. Now we need to subtract Operating Expenses from GOI to arrive at NOI; in cell
B35 type =B19-B34
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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:
Market Vacancy Rate:
Credit Loss:
Cell tower income:
Operating Expenses:
$ 852,900
20.5%
$ 3,200
$ 5,500
$ 225,982
Process:
1. Enter this data into an APOD sheet
2. Create three columns: column A is the type, column B is dollar amounts, and
column C is notes
3. In the row for Total Scheduled Rental Income (16), enter $852,900 in B16
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4. Create row in the Scheduled Rental Income section for “Other Income” (18)
a. In cell B17 enter $5,500
5. Create a row in the Schedule Rental Income section for “Credit Loss”
a. In cell B19 enter $3,200
6. 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
a. Enter Vacancy 20.5% in cell A18
b. In cell B18 type B16*.205
7. Next we calculate the GOI by adding scheduled rental income and other income,
and subtracting the market vacancy and credit loss
a. In cell B20 enter =(B16+B17)-(B18+B19)
8. Now we need to total the Operating Expenses
a. Total Operating Expenses by typing into cell B35 =sum(B21:B34)
9. Now we need to subtract Operating Expenses from GOI to arrive at NOI; in cell
B36 type =B20-B35
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Answer 5: The Net Operating Income (NOI) for this building is $454,373.
References
Gibson, F., Kapp, J. & Klayman, E. (1992). Real estate law (3rd ed.). Chicago, IL:
Dearborn Financial Publishing, Inc.
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The Appraisal Institute. (2008). The appraisal of real estate (13th 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 (4th ed.). Hoboken, NJ:
John Wiley & Sons, Inc
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