How do you calculate net operating income for a commercial property?

Start with the rent payable under the current leases, plus any other income the property earns, such as car parking. Deduct the costs of running the building that the owner bears and cannot recover from tenants: rates, insurance, maintenance and management under gross leases, and any items a net lease leaves with the owner. For a forecast, deduct an allowance for vacancy. Do not deduct interest, depreciation or income tax, and usually not capital spending.

Is NOI calculated before or after debt service?

Before. Net operating income is measured before interest and loan repayments, so that it describes the property rather than the way its owner has financed it. That is what makes it useful to a lender: the same NOI can be compared with the interest on any proposed loan to give interest cover, or with the loan amount itself to give debt yield.

Does NOI include capital expenditure?

Usually not. NOI is a measure of the building's running income, and capital items such as a new roof, a refurbishment or incentives to secure new tenants are treated separately because they are irregular. A lender still reads them, because they come out of the same cash: many deduct an allowance for them before testing whether the property can service its loan, and some valuations do the same.

What is the difference between NOI under a gross lease and a net lease?

Under a net lease the tenant repays its share of the building's outgoings, so the owner keeps most of the rent as NOI. Under a gross lease the owner pays the outgoings out of the rent, so the same rent leaves less NOI. Many leases sit between the two, with some costs recovered and others not. A lender reads each lease to see which costs it passes on, rather than relying on the label.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Net Operating Income: a Worked Example

The rent is the starting point. The leases decide what is left.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07 · 6 MIN READ

// THE SHORT ANSWER

Net operating income is the number a property lender actually lends against, because it is the cash a building produces for its owner before anyone is paid interest. A lender builds it from the leases, not the income statement: the rent the tenants pay, less every cost of running the building that the owner cannot pass on to them, and, in a forecast, less an allowance for space that will sit empty. Valuation, debt yield and interest cover all start from it. Two buildings with the same rent can carry very different loans, because the leases put the running costs in different places.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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PART OF Property Development Finance

// 01 — WHY A PROPERTY LENDER STARTS HERE

An investment property has one job: to turn leases into cash. A lender to its owner wants to know how much cash that is in a normal year, measured in a way that does not depend on how the owner is financed or taxed. Net operating income does that. It is struck before interest, so it can be compared with the interest on any loan; before depreciation and income tax, which depend on the owner rather than the building; and usually before capital spending, which a lender reads separately.

The figure is built from the rent roll and the leases. The question on each line is not what the cost is but who bears it. Under a net lease the tenant repays its share of the building's running costs, often called outgoings; under a gross lease the rent is meant to cover them and the owner pays. A cost the owner recovers leaves NOI unchanged, whether or not it is shown as income and cost. Only the cost the owner keeps is deducted.

// 02 — HOW THE FIGURE IS BUILT

NOI (passing) = rent payable under the current leases

− property costs not recovered from tenants

NOI (forecast) = NOI (passing)

− vacancy allowance (lost rent and the costs that come with it)

Not deducted: interest, depreciation, income tax,

usually capital spending and leasing costs

Unrecovered costs are typically the owner's share of rates, insurance and maintenance under gross leases, management fees where the leases do not pass them on, and repairs the leases leave with the owner, such as structural work. A vacancy allowance recognises that some space will be empty for part of the time; it removes the rent and also the recoveries that space would have paid, because an empty unit's running costs fall back on the owner. Below NOI sit the capital items, roof replacements, refurbishment, incentives to new tenants and agents' fees, which a lender reads as a separate claim on the same cash.

// 03 — THE EXAMPLE

An estate of eight light-industrial units, constructed for this page like every figure in it, collects rent of US$1.60m a year. Six units, paying US$1.20m, are on net leases; two, paying US$0.40m, are on gross leases. Rates, insurance and building maintenance cost US$0.40m, of which the six net-lease tenants repay their US$0.28m share, about US$0.047m each. The owner also pays a management fee of US$0.04m, which these leases do not pass on, and US$0.03m of structural repairs.

NOI, US$m Passing

Rent 1.60

Outgoings on the two gross-lease units −0.12

Management fee −0.04

Owner's repairs −0.03

NOI 1.41

One net-lease unit empty for a year:

1.41 − rent 0.20 − its outgoings 0.047 = 1.163

Rent falls 12.5%; NOI falls 0.247 ÷ 1.41 = 17.5%

Same rent, all eight on gross leases:

1.60 − 0.40 − 0.04 − 0.03 = 1.13

What the lender does with US$1.41m:

Value at a 7.0% capitalisation rate: 1.41 ÷ 7.0% = 20.1

Debt yield on a US$11.0m loan: 1.41 ÷ 11.0 = 12.8%

Interest cover at 6.5%: 1.41 ÷ 0.715 = 1.97×

The US$0.28m the net-lease tenants repay does not appear as income or cost: it passes through. An empty unit costs the owner more than its rent, because its share of the outgoings returns to the owner's side. And the same US$1.60m of rent produces US$0.28m less NOI if every lease is gross, about a fifth less, which at the same capitalisation rate is US$4.0m of value. The rates and ratios are the example's, not a market norm.

// 04 — THE FIGURES READ BESIDE IT

NOI is not the same as a property company's EBITDA, though they are close. EBITDA covers the whole company, with its head-office costs and any income that is not rent; NOI is one building's. Nor is it cash flow available for debt service: a lender that wants to know what the owner can actually pay deducts the capital spending and leasing costs the building will need, and in some markets a reserve for them, before it compares the result with the loan payments. The capitalisation rate turns NOI into a value, and debt yield compares it with the loan.

Where the costs fall differs by market. Commercial leases in New Zealand and Australia commonly list the outgoings a tenant repays, but legislation can override the lease: in Victoria, for example, a retail premises lease is void to the extent that it makes the tenant pay the landlord's land tax. In the UK, business rates are usually billed to the occupier directly, so they do not pass through the owner's accounts while a unit is let; in England, an owner becomes liable for an empty building's rates after a relief period, three months for most property and six for industrial.

DEFINED IN ONE PARAGRAPH → · DEBT YIELD → · THE RENT ROLL →

// 05 — WHERE IT DECIDES A FILE

A lender recalculates NOI rather than accepting the owner's. It reads each lease for which costs the tenant repays and whether recoveries are actually collected, sets the forecast vacancy and the costs that come with it, and compares its figure with the valuer's. The loan amount is often the lowest of several limits, a loan to value, an interest cover and sometimes a debt yield, and NOI drives all but the first directly and the first through the valuation. A lease expiring soon on a net lease is therefore read twice: once for the rent that might stop, and once for the outgoings that would return to the owner.

WEIGHTED AVERAGE LEASE EXPIRY → · LOAN TO VALUE →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Victoria, Retail Leases Act 2003 (authorised version No. 024, published by the Victorian Small Business Commission) — section 50 — A provision of a retail premises lease is void to the extent it makes the tenant liable for the landlord's land tax, an example of legislation fixing who bears a cost — section 04.
GOV.UK, Business rates relief: empty property relief — Business rates are not payable on an empty property in England for 3 months from when it becomes empty, and industrial premises such as warehouses are exempt for a further 3 months — section 04.

// QUESTIONS PEOPLE ASK

How do you calculate net operating income for a commercial property?: Start with the rent payable under the current leases, plus any other income the property earns, such as car parking. Deduct the costs of running the building that the owner bears and cannot recover from tenants: rates, insurance, maintenance and management under gross leases, and any items a net lease leaves with the owner. For a forecast, deduct an allowance for vacancy. Do not deduct interest, depreciation or income tax, and usually not capital spending.
Is NOI calculated before or after debt service?: Before. Net operating income is measured before interest and loan repayments, so that it describes the property rather than the way its owner has financed it. That is what makes it useful to a lender: the same NOI can be compared with the interest on any proposed loan to give interest cover, or with the loan amount itself to give debt yield.
Does NOI include capital expenditure?: Usually not. NOI is a measure of the building's running income, and capital items such as a new roof, a refurbishment or incentives to secure new tenants are treated separately because they are irregular. A lender still reads them, because they come out of the same cash: many deduct an allowance for them before testing whether the property can service its loan, and some valuations do the same.
What is the difference between NOI under a gross lease and a net lease?: Under a net lease the tenant repays its share of the building's outgoings, so the owner keeps most of the rent as NOI. Under a gross lease the owner pays the outgoings out of the rent, so the same rent leaves less NOI. Many leases sit between the two, with some costs recovered and others not. A lender reads each lease to see which costs it passes on, rather than relying on the label.

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THE READING ROOMIN ONE PARAGRAPHNet operating income (NOI) What is net operating income on a commercial property, and what goes into it?