How to Calculate NOI for Commercial Real Estate (With Examples)

The OM lands and the NOI line doesn't match your gut

The offering memorandum lands Friday afternoon. Page six shows a net operating income figure, and it's the number the seller's asking price is built on. Before you can trust that cap rate, you need to know whether the NOI underneath it was built correctly — or whether it's quietly carrying a capital expense, an unrealistic vacancy assumption, or a management fee that doesn't match how your firm actually operates a property. By the end of this article, you'll be able to rebuild NOI for an office, retail, or industrial asset from the rent roll and expense detail up, line by line, so you can check any seller's number instead of taking it on faith.

Net operating income is the foundation under almost everything else in commercial underwriting: the cap rate, the direct capitalization valuation, the debt sizing, the return projections. If the NOI is wrong, every number built on top of it is wrong in the same direction. Get this one calculation right and the rest of the model has a chance of being right too.

The NOI formula, stated plainly

Net operating income for commercial real estate is:

NOI = Effective Gross Income − Operating Expenses

That's the whole formula. The difficulty isn't the arithmetic — it's deciding what belongs in each side of the equation, and just as importantly, what doesn't belong in either side at all. NOI is a property-level, pre-financing, pre-capital-expenditure measure of operating performance. It answers one question: how much cash does the real estate itself generate before anyone thinks about how it's financed or what gets reinvested into it.

Two categories are deliberately excluded from NOI, and getting this wrong is the single most common error in a hand-built spreadsheet:

• Debt service — mortgage principal and interest are a financing decision, not an operating outcome. NOI has to be computed before debt service so that it can be used to size the debt in the first place (see debt yield and DSCR, which both start from NOI).
• Capital expenditures and depreciation — roof replacements, parking lot resurfacing, tenant improvement allowances, and leasing commissions are capital items, not operating expenses, even though cash leaves the property to pay for them. Depreciation is a non-cash accounting entry and never belongs in an NOI build at all.

If either of those categories is sitting inside an operating expense line, the NOI is overstated or understated, and the error carries straight through into direct capitalization and cap rate math downstream.

Building the revenue side: from Gross Potential Rent to Effective Gross Income

Start at the top of the rent roll, not at a single "revenue" number pulled from a seller's summary page.

1. Gross Potential Rent (GPR) — what every unit or suite would generate if fully leased at market or in-place rent, for the full period. For a multi-tenant office or retail building, this is the sum of every lease's base rent, annualized.
2. Less vacancy and credit loss — a deduction for space that sits empty or rent that goes uncollected from tenants who default. This is where the most judgment enters a commercial NOI build: a seller's trailing-twelve-month vacancy may not reflect what the property will realistically run at once your firm's lease-up or turnover assumptions are applied.
3. Plus other income — parking income, signage, storage, antenna or rooftop leases, late fees, and — critically for commercial property — expense reimbursements. Many commercial leases are structured as triple-net (NNN), modified gross, or full-service gross, and the reimbursement structure determines how much of the property's operating expense burden the tenants, rather than the landlord, actually carry. This line has to reconcile with the operating expense side or the NOI build double-counts or drops income.

The sum of those three pieces is Effective Gross Income (EGI) — the realistic, collectible revenue a property is actually expected to produce in a given period, as distinct from the theoretical maximum GPR.

Building the expense side: what belongs in commercial operating expenses

Operating expenses are the recurring costs of running the property day to day. A reasonably complete commercial operating expense build typically includes:

• Property taxes
• Property insurance
• Utilities not billed back to tenants
• Repairs and maintenance (routine, not capital)
• Property management fees
• On-site payroll (engineering, janitorial, leasing staff)
• Landscaping, janitorial, and common-area services
• General and administrative costs, legal, and accounting

What does not belong here: debt service, capital reserves or replacement reserves (some lenders require a reserve line be carried below NOI for debt-sizing purposes, but it is not an operating expense itself), tenant improvements, leasing commissions, and depreciation. A clean commercial NOI build keeps every one of these out of the operating expense section entirely, even when a seller's financial package bundles them together.

The reimbursement structure of the leases — NNN, modified gross, or full-service gross — determines how much of this expense list the tenants actually reimburse, and that reimbursement has to show up as income on the revenue side, not as a net reduction to the expense side.

A worked example: a small multi-tenant office building

The following figures are an example, built to illustrate the mechanics — not a market benchmark.

Assume a 40,000-square-foot multi-tenant office building, modified gross leases, with these example inputs:

• Gross Potential Rent: $1,000,000
• Vacancy and credit loss: 7% of GPR, or $70,000
• Expense reimbursements from tenants: $120,000
• Other income (parking, storage): $15,000

Effective Gross Income = $1,000,000 − $70,000 + $120,000 + $15,000 = $1,065,000

Operating expenses, example inputs:

• Property taxes: $140,000
• Insurance: $35,000
• Utilities (landlord-paid portion): $60,000
• Repairs and maintenance: $45,000
• Management fee (4% of EGI): $42,600
• Payroll and janitorial: $80,000
• G&A: $20,000

Total Operating Expenses = $422,600

NOI = $1,065,000 − $422,600 = $642,400

Notice that the management fee was calculated as a percentage of EGI, not GPR — a detail worth checking in any spreadsheet you inherit, since the two bases produce meaningfully different numbers. Also notice that nothing in the expense list includes a roof replacement reserve, a TI allowance, or loan interest; all three would belong below the NOI line in a full pro forma, not inside it.

Where NOI diverges by property type

The mechanics of the formula don't change across commercial property types, but the inputs that drive it do.

Office leases are frequently modified gross or full-service gross, meaning the landlord absorbs more of the operating expense burden up front and reimbursement income is a smaller, more complex line to model — often tied to a base-year stop and annual escalations.

Retail NOI builds usually carry NNN or near-NNN leases, so most operating expenses flow through to tenants as common area maintenance (CAM) reimbursements, and percentage rent (a share of tenant sales above a breakpoint) can be an additional, less predictable revenue line.

Industrial assets, especially single-tenant NNN, often have the simplest NOI build of the three — a single lease, minimal landlord-side operating expense, and a reimbursement structure that passes nearly everything through — but any vacancy or lease rollover assumption carries outsized weight because there's no tenant diversification to soften it.

A full commercial underwriting model needs to carry these distinctions through the rent roll and lease-by-lease reimbursement logic, not just the summary NOI line. Reconstructing that lease-level detail by hand in a blank spreadsheet is where hand-built models for office and retail properties most often go wrong — a single lease with the wrong reimbursement structure can shift NOI by tens of thousands of dollars and never get caught until a lender or LP asks where the number came from.

Common NOI mistakes worth checking before you trust a number

A few recurring errors show up often enough in seller-provided and hand-built spreadsheets to check for specifically:

• Capital items buried in repairs and maintenance. A seller's "R&M" line sometimes includes a one-time capital repair that inflates expenses in one year and understates them going forward.
• Vacancy applied inconsistently. Applying vacancy to GPR in one tab and to EGI in another produces two different NOI figures from the same underlying lease data.
• Reimbursement income missing or double-counted. If reimbursements are netted directly against expenses instead of added as revenue, the resulting NOI can look right in total while hiding an error in both EGI and the expense ratio.
• Management fee basis unclear. A fee calculated on GPR versus EGI versus collected rent produces three different numbers; always confirm which base a seller or prior model used.

Building NOI inside a model you can actually audit

Once the line items are right, NOI feeds directly into cap rate, debt sizing, and discounted cash flow analysis — which is why it belongs in a spreadsheet you can trace from the rent roll forward, not a static number pasted into a summary tab. Our free Starter Pro Forma walks through this exact NOI build — GPR down to NOI — on a simplified three-tab template, so you can see the mechanics before committing to a full underwriting file.

For a complete commercial deal, The Commercial Sheet carries this NOI logic through a full lease-by-lease rent roll, reimbursement structures by lease type, and a 10-year cash flow — fully unlocked, so you can see and adjust every formula rather than trusting a black-box output. If your underwriting involves rolling multiple leases with staggered expirations and varied reimbursement terms, the commercial lease underwriting model builds that lease-level detail out explicitly.