What is Net Operating Income (NOI) in commercial real estate?

Net Operating Income (NOI) is the annual income a commercial property generates after subtracting all operating expenses, but before deducting mortgage payments (debt service), depreciation, and income taxes. NOI is calculated as: Gross Rental Income minus Vacancy and Credit Loss minus Operating Expenses (property taxes, insurance, maintenance, management fees, utilities) equals NOI. NOI is a fundamental metric because it drives property valuation, cap rate calculations, and DSCR analysis. Inflating NOI by understating expenses or overstating income is a common issue in due diligence. Always verify NOI against actual tax returns and bank statements.