Net Operating Income (NOI)

The NOI Formula

For a 100-unit Orlando apartment building with $1,800/month average rents:

• Gross Potential Rent: 100 × $1,800 × 12 = $2,160,000
• Less vacancy/credit loss (5%): −$108,000
• Plus other income (RUBS, fees, parking): +$60,000
• Effective Gross Income: $2,112,000
• Less operating expenses (40% expense ratio): −$844,800
• NOI: $1,267,200

What Is INCLUDED in Operating Expenses

• Property taxes (including increases following sale, often a Florida-specific consideration)
• Property insurance (including hurricane/wind coverage — significant for Florida CRE)
• Property management fees (typically 3–7% of EGI in Central Florida)
• Repairs and maintenance
• Utilities paid by landlord (water/sewer/trash common in multifamily)
• Landscaping, pool, common area maintenance
• Marketing and leasing costs
• Replacement reserves (capital reserves for HVAC, roof, etc.)

What Is NOT Included in Operating Expenses

• Debt service (principal and interest on mortgage) — NOI is pre-debt
• Income taxes
• Depreciation
• Capital expenditures (major renovations, additions)
• Tenant improvements & leasing commissions (often broken out separately)
• Owner's personal expenses charged to the property

NOI in Florida: Watch These Items

Florida operating expenses have unique characteristics that affect NOI relative to other states:

• Insurance is very high. Florida hurricane and wind insurance has increased dramatically; underwriting must use post-renewal premiums, not seller's historicals.
• Property tax resets at sale. Unlike residential homesteaded property, commercial property is fully reassessed at sale price, often spiking taxes significantly.
• Reserves should be larger. Hurricane wear, humidity, and salt-air exposure (in coastal markets) drive higher HVAC, roof, and exterior replacement costs.

NOI vs. Cash Flow vs. EBITDA

NOI is the property-level operating return. Distinguish from:

• Cash Flow = NOI − Debt Service. Reflects what the investor actually receives after mortgage payments.
• EBITDA is a corporate finance metric. NOI is its CRE equivalent for an operating property.
• Cap Rate = NOI ÷ Property Value. NOI drives valuation.
• DSCR = NOI ÷ Annual Debt Service. NOI drives lender approval.

What is the difference between NOI and gross income?

Gross income is the total rental income before any deductions. NOI is gross income minus vacancy/credit loss and minus all operating expenses, but before debt service and income taxes. NOI is the property-level operating return; gross income overstates economic performance.

Is property management fee included in NOI?

Yes — property management fees are an operating expense and are deducted before arriving at NOI. Even owner-managed properties should include a market-rate management fee in NOI to enable apples-to-apples comparison with third-party-managed properties.

Why is NOI so important in commercial real estate?

NOI is the foundation of CRE valuation (cap rate), lender underwriting (DSCR), and refinance proceeds. A $100,000 increase in NOI at a 6% cap rate is approximately $1.67M in property value. Operators focus on NOI growth because it drives every other return metric.

How is NOI different in Florida vs other states?

Florida NOI is materially affected by elevated property insurance premiums (hurricane coverage), property tax reassessment at sale, and the absence of state income tax. Underwriters must use post-acquisition tax and insurance levels — not seller historicals — to project a realistic forward NOI.

Apply Net Operating Income (NOI) to Your Florida Deal

Get a free consultation with Michael R. Linton — 39 years of Central Florida CRE transaction experience.