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We at Lee & Associates Orange are leading experts in the commercial real estate industry. Some terms in the commercial real estate industry, like NOI, are easier to understand than others. If their determination is that a property will operate at a loss, the application is more likely to be rejected. If the lender or creditor finds the property can generate income, they are more likely to approve the application. Whether or not they will approve a mortgage application from an owner or investor depends on what this potential income is. In commercial real estate, lenders and creditors use a property’s NOI to help them determine the income that could be generated from its proposed use. The total operating costs are subtracted from the total revenue in order to determine the property’s NOI. Operating costs for a commercial property can include building and grounds maintenance, janitorial fees, utilities, insurance, and property management or legal fees. In commercial real estate, revenues most often come from sources including rent, parking fees, and other service fees. How Net Operating Income is Calculated in Commercial Real Estate?
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The NAIOP Commercial Real Estate Association defines it as “the income generated after deducting operating costs but before deducting taxes and financing expenses.” Financing expenses include capital expenditures, both principal and interest payments on loans, amortization, and depreciation. Net operating income (NOI) is not a complicated term to understand. Let’s define what NOI is, how it is calculated, and the role that NOI plays in the commercial real estate industry. One of the most essential terms to understand in commercial real estate transactions – especially investment commercial real estate transactions is net operating income (NOI). What is Net Operating Income (NOI) in Commercial Real Estate?