Net operating income (NOI) is a property's total income minus its operating expenses, excluding debt service (mortgage payments) and capital expenditures. NOI is the core input for calculating cap rate and is the standard measure investors use to evaluate a property's income-generating performance independent of how it's financed.
The NOI formula
| Component | Included? |
|---|---|
| Base rent and NNN reimbursements | Included (as income) |
| Property taxes, insurance, CAM (landlord-paid portion) | Included (as expense) |
| Property management fees | Included (as expense) |
| Mortgage payments (debt service) | Excluded |
| Capital expenditures (roof, major repairs) | Excluded |
| Depreciation | Excluded |
Why NOI excludes debt service and capital costs
NOI is deliberately structured to measure a property's operating performance independent of its financing structure — two identical buildings with different mortgages would otherwise show different "income" even though the underlying property performs the same. Excluding capital expenditures similarly isolates the property's recurring operating economics from one-time or infrequent large expenses like a roof replacement.
This makes NOI comparable across properties regardless of how each is financed or capitalized, which is exactly why it's the standard input for cap rate calculations and property valuation.
What to watch for before committing
Pro forma vs trailing NOI
Confirm whether a quoted NOI reflects actual trailing 12-month performance or a forward-looking pro forma projection — the two can differ significantly.
Expense reimbursement accuracy
In a NNN lease, verify that tenant reimbursements are properly netted against landlord expenses rather than double-counted.
Vacancy and credit loss allowance
Confirm the NOI calculation includes a realistic vacancy and credit loss deduction rather than assuming 100% occupancy indefinitely.
One-time income or expense items
Check for one-time items (a lease termination fee, a large one-time repair) that could distort a single year's NOI relative to ongoing performance.
Management fee assumptions
Confirm whether the NOI calculation assumes market-rate property management fees, even if the current owner self-manages at lower cost.
Capital reserve planning
Since capital expenditures are excluded from NOI, separately budget for eventual roof, paving, and major system replacement costs.
When you need to know this
- Evaluating an investment purchase — calculating cap rate and comparing return potential across properties
- Underwriting a sale-leaseback — establishing the income basis a buyer will use to value the property
- Refinancing a property — providing lenders with the operating performance data needed for debt underwriting
- Annual asset management review — tracking a property's operating performance trend year over year
Frequently asked questions
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