NOI, or net operating income, is the property-level measure of what a real estate asset earns from its own operations over a period: rental and other property income, after an allowance for vacancy and credit loss, less operating expenses. It stops above debt service, income taxes, depreciation and amortization, and capital items, so it describes the building rather than the owner’s loan, tax position or capital plan. Two investors who buy the same property with different financing report the same NOI and bank different amounts of money.
The Formula
Two steps, and the first one is where the judgment sits.
gross operating income = potential rental income - vacancy and credit loss allowance + other property income
net operating income = gross operating income - operating expensesPotential rental income is what the space would produce over the period with every unit leased and every tenant paying. The vacancy and credit loss allowance takes out the part that will not arrive, both the space nobody rents and the rent billed but never collected. Other property income is what the asset earns beside rent, and a bank supervisor’s version of the term names parking fees, laundry and vending, and adds tenant reimbursements when the reimbursed expenses sit in operating expenses (OCC, Comptroller’s Handbook, Commercial Real Estate Lending, Version 2.0, March 2022). Operating expenses are the costs incurred in the operation and normal maintenance of the property, which is where property taxes, insurance, utilities, repairs, management fees and on-site payroll sit.
Underwriters call that first subtotal effective gross income, and they build it from the vacancy the property is expected to carry over its life rather than the vacancy it happens to be carrying today (OCC, Comptroller’s Handbook, Commercial Real Estate Lending, Version 2.0, March 2022).
What NOI Leaves Out
The exclusions are the substance of the term, and each one is left out for a different reason.
Debt service. Principal and interest describe how the buyer paid for the asset, not how the asset performs, so leaving them out is what lets one property be compared against another financed differently.
Income taxes. Income tax is computed at the owner level, on the owner’s entity and the owner’s other items, so it is not a property expense at all.
Depreciation and amortization. These allocate a cost already incurred rather than money spent in the period, so including them would fold a cost-recovery figure into an operating one.
Capital expenditures. Amounts paid to improve the property are capitalized rather than expensed, so they never reach the operating line.
One qualification matters more than the others and most explanations skip it. Operating expenses do not include depreciation or capital items, but they do include a reserve for replacing capital items, and that replacement reserve is imputed for underwriting purposes whether or not it is actually funded (OCC, Comptroller’s Handbook, Commercial Real Estate Lending, Version 2.0, March 2022). So a lender’s NOI on a property is often below an owner’s NOI on the same property, by a reserve the owner never spent.
For a US taxpayer the repair line is a rule rather than a preference. A taxpayer generally must capitalize the amounts paid to improve a unit of property it owns, and the property is improved if the amounts are for a betterment, a restoration, or an adaptation of the property to a new or different use (26 CFR 1.263(a)-3(d)-3)). Amounts paid for repairs and maintenance are deductible if they are not otherwise required to be capitalized (26 CFR 1.162-4(a)). The tax test is not the same test, but it runs on the same facts, so on an owner-prepared statement the repair-or-improvement call moves the deduction and the operating expense line in the same direction. An underwritten NOI still does not follow the return, because some of the capital expenditures used to compute NOI never appear as an expense on a tax return (OCC, Comptroller’s Handbook, Commercial Real Estate Lending, Version 2.0, March 2022).
A Worked Example
Say a small commercial property closes a year on the amounts below, with subtracted amounts shown in parentheses.
Potential rental income 480,000
Vacancy and credit loss (24,000)
Other property income 16,000
Gross operating income 472,000
Operating expenses (188,000)
Net operating income 284,000Nothing outside the property’s own operations has been touched yet. Take the year’s debt service out and the owner’s position looks different while the property’s operating result does not move.
Net operating income 284,000
Debt service (210,000)
Cash flow after debt service 74,000NOI Is Not a Prescribed Caption
Net operating income is a market convention, not a line any reporting rule requires. The Commission rule listing the captions for a statement of comprehensive income runs from net sales and gross revenues at caption 1 to earnings per share data at caption 25, and none of those captions is net operating income (17 CFR 210.5-03).
For a property owner that files with the SEC, that makes NOI a non-GAAP financial measure, and the machinery that comes with the status, the Regulation G definition and the reconciliation to the most directly comparable GAAP measure, is set out in EBITDA. The filing rules also bar titles that are the same as, or confusingly similar to, the titles used for GAAP measures (17 CFR 229.10(e)(1)(ii)(E)), which is worth knowing on a filer whose statements also carry an operating income subtotal.
A private owner is outside all of it, so on that engagement the loan agreement, the partnership agreement or the firm’s own written policy is the definition.
Where the Operating Result Meets the Return
The return has no NOI line, and the figure it does produce is not NOI.
On the individual return, rental real estate runs through Part I of Schedule E. Rents received sit at line 3, expenses run from line 5 through line 19 and total at line 20, and line 21 subtracts that total from rents (IRS, Schedule E (Form 1040), 2025). Two of the four exclusions above reach that expense total, one of them only in part: depreciation expense or depletion at line 18, and the interest half of debt service at line 12, mortgage interest paid to banks (IRS, Schedule E (Form 1040), 2025). Principal is not deductible on the schedule at all. So against an owner’s NOI on the same actual figures, the rental result the schedule reports sits lower by the interest and the depreciation, on the same property in the same year. An underwritten NOI will not tie to that schedule, because of the imputed reserve and the vacancy factor an underwriter applies.
A partnership or an S corporation reports the same activity on Form 8825, and the shape repeats. Gross rents are line 2a and other income related to the rental real estate activity is line 2b, interest is line 8 and depreciation is line 14, total expenses land at line 18, and line 19 gives income or loss for each property (IRS, Form 8825, Rev. December 2025). Line 23 combines lines 20a through 22a, the totals of those per-property columns plus any net gain or loss from Form 4797 on a disposition of rental real estate and any rental real estate income passed up on a Schedule K-1, and carries the result to Schedule K, line 2, of Form 1065 or Form 1120-S (IRS, Form 8825, Rev. December 2025).
Neither form carries a deduction line for capital expenditures. Capitalized amounts are added to the basis of the property, and section 168 governs their treatment for depreciation (26 CFR 1.263(a)-3(d)-3)), so an improvement reaches the return over years through the depreciation line that NOI already excludes. Keeping that schedule straight for a commercial property is its own piece of work, and it is covered in commercial real estate accounting.
What NOI Is Confused With
Operating income. That is a subtotal on a whole entity’s income statement, gross profit less operating expenses and before interest and income tax, and both arrangements of it are set out in equation for operating income. NOI measures one property, so the two are not built from the same set of expenses.
Net income. Net income is the entity’s bottom line, after interest and income tax expense have also come out, and the order those subtractions run in is in net income.
Cash flow after debt service. That is NOI less the period’s principal and interest, and it is the figure the owner actually banks, which is why two properties with identical NOI can behave nothing alike.
EBITDA. EBITDA is an entity-level measure that also leaves out interest, taxes, depreciation and amortization, and how it is defined and reconciled is in EBITDA. NOI is narrower, since it covers one property and carries none of the owner’s corporate overhead.
Common Questions
Usually annual, and the regulator’s own definition says annual gross income less operating expenses (OCC, Comptroller’s Handbook, Commercial Real Estate Lending, Version 2.0, March 2022). A monthly figure is still legitimate as long as the income and the expenses cover the same month. The trap is annualizing one month, because a month carrying no insurance renewal and no property tax installment multiplies into a year the property will not produce.
No. NOI is not a tax figure at all. The rental result the return starts from is line 21 of Schedule E (IRS, Schedule E (Form 1040), 2025) or line 19 of Form 8825 (IRS, Form 8825, Rev. December 2025), after mortgage interest and depreciation have been deducted, and taxable income is computed further down the owner’s own return. Property taxes run the other way: they are an operating expense and they sit inside NOI.
Revenue is the rent and other income the property brings in before anything is taken out, and NOI is what is left after the same period’s operating expenses. Neither one is what the owner keeps, because debt service, income tax and capital spending all sit below both. The wider version of that word problem is in income vs revenue.
Higher, with a condition attached: the comparison holds only if both figures classify the same items the same way. Move a roof from an operating repair to a capital improvement and NOI rises on a building that did not change. It matters past the operating line, because NOI is the numerator of the capitalization rate, the ratio between a property’s stabilized NOI and its sales price used to convert income into value (OCC, Comptroller’s Handbook, Commercial Real Estate Lending, Version 2.0, March 2022), so a classification choice carries into the valuation the number supports.
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