Net operating income (NOI)
Net operating income is annual gross income less operating expenses. The OCC CRE handbook glossary defines NOI as property operating income after operating costs, excluding interest, principal and income taxes. Gross income includes rents and other operating income such as parking, laundry and vending, and may include tenant reimbursements when the related expenses sit in operating costs. Operating expenses cover the costs of operating and maintaining the property. They exclude depreciation and capital items themselves, but include a replacement reserve for capital items.
Net operating income on bank CRE desks
Income-producing CRE underwriting treats NOI as the primary measure of a property's ability to service debt and support collateral value. OCC guidance states that repayment of loans financing income-producing CRE typically depends on the property's capacity to service debt from cash flow, and that collateral value is largely determined by NOI. Desks therefore challenge unsupported NOI projections and reconcile historical, current and projected rents, expenses, capital expenditure and vacancy assumptions under base and stress cases.
NOI feeds the main CRE credit ratios: debt service coverage ratio (DSCR) (NOI or cash flow over debt service), debt yield (NOI over loan amount), interest-coverage tests, and direct capitalisation used for cap rate valuation and loan to value (LTV). Covenant definitions of income and expense may differ from underwriting NOI, so credit papers usually state which NOI definition applies to each test.
Stabilised NOI and supervisory reporting definitions
For underwriting, OCC practice starts from gross income at full occupancy, applies a vacancy factor to reach effective gross income, then deducts operating expenses, including an imputed replacement reserve whether or not the reserve is actually funded. The vacancy factor may differ from current vacancy and should reflect comparable-market experience. Variable expenses may be adjusted to the vacancy assumption. NOI analysis may also assume market vacancy and expense levels that differ from the borrower's cash statements, including management fees and replacement reserves that are not immediate cash outlays.
Federal Reserve FR Y-14 CRE reporting defines NOI as all operating income net of operating expenses other than debt service and depreciation. Reported operating expenses include real-estate taxes (not income taxes), insurance, common-area maintenance, utilities, replacement reserves, management fees and administrative, accounting and legal costs. Replacement reserves allocated on the operating statement are deducted. Land and construction loans not generating income, and certain owner-occupied CRE, are reported as not applicable for NOI fields. Federal Reserve Bank of New York staff research similarly treats NOI as gross rental income minus operating expenses such as maintenance, common charges, taxes, insurance and management fees.
Boundaries relative to cash flow and EBITDA
NOI is a property operating metric, not a corporate free-cash-flow measure. It sits before debt service and income tax, and it is not identical to EBITDA or CFADS used in project-finance models. Capital expenditure beyond the replacement reserve, leasing costs and debt service sit outside NOI and must be analysed separately when testing refinance capacity, cash traps and distribution lock-ups.