Finance term
Net Operating Income (NOI)
Also known as: NOI, net operating income
Definition
Net Operating Income (NOI) is property revenue minus operating expenses — excluding mortgage payments and depreciation — and is the core underwriting metric for commercial real estate loans and SBA 504 deals.
Detailed explanation
NOI is the income a property or business generates from operations before debt service and non-cash charges. For commercial real estate, the formula is: NOI = Gross Rental Income − Vacancy Losses − Operating Expenses. Operating expenses include property taxes, insurance, maintenance, management fees, and utilities — but explicitly exclude mortgage principal and interest, depreciation, and income taxes.
NOI is the numerator in the DSCR calculation: DSCR = NOI / Annual Debt Service. A property with $180,000 NOI supporting a $150,000 annual mortgage payment has a DSCR of 1.20 — exactly at most lender minimums. NOI is also capitalized to estimate property value: Property Value = NOI / Cap Rate. At a 6% cap rate, $180K NOI implies a $3M property value.
For business loans beyond real estate, NOI is used more loosely to mean operating earnings before debt service — analogous to EBITDA but without adding back depreciation and amortization in the strictest definition. In SBA 504 underwriting (which finances commercial real estate and equipment), lenders calculate NOI from the business's operating projections plus the property's rental income where applicable.
Owners sometimes confuse NOI with net income. Net income subtracts debt service, depreciation, and taxes — making it lower than NOI. Lenders want NOI (pre-debt-service) to measure the property or business's inherent earning power independently of its current capital structure.
◈ Worked example
- Retail strip center: $300K gross rent − $20K vacancy − $100K operating expenses = $180K NOI
- NOI $180K / 6% cap rate = $3M estimated property value
- DSCR check: $180K NOI / $150K annual debt service = 1.20 DSCR — at minimum threshold
- SBA 504 underwriting: business NOI + rental income from owned property must cover proposed debt service at 1.25+
Common questions
The most-asked questions about Net Operating Income (NOI) — answered straightforwardly.
Does NOI include mortgage payments? +
No. NOI is calculated before debt service (principal + interest payments). This is what makes it useful for underwriting — lenders want to see how much the property or business earns independent of its current debt load, then they apply debt service to calculate DSCR.
How is NOI different from net income? +
Net income subtracts debt service (mortgage payments), depreciation, and income taxes from operating income. NOI stops before those deductions. For a leveraged property owner, net income can be near zero (or negative) while NOI is strongly positive — lenders care about NOI, not net income, for real estate underwriting.
What NOI do lenders require for a commercial real estate loan? +
Lenders don't set minimum NOI in dollars — they require a minimum DSCR (typically 1.20–1.25). Your NOI must be high enough relative to the proposed loan's annual debt service to hit the required coverage ratio. Higher NOI enables larger loan amounts or more favorable terms.
Further reading
This glossary entry is educational content. ClearValue Lending is a business & personal financing platform — not a lender, broker, or financial advisor. Specific product terms vary by lender; verify with the lender or issuer before applying. See privacy policy.