Owner education · Chicagoland commercial and industrial
How is net operating income calculated for commercial property?
NOI is a property operating measure, not the cash left in your bank account. For a Chicagoland industrial building, start with the leases and collections, then show every expense and recovery on a consistent annual basis.
What is NOI, and what is included?
Net operating income = effective gross income (EGI) minus operating expenses. Gross potential rent represents scheduled rent at full occupancy on your chosen lease or market-rent basis. Subtract vacancy, free rent and collection losses; add other property income and tenant expense recoveries to reach EGI. Reconcile to the rent roll, signed amendments, receivables and general ledger.
Typical operating expenses include real estate taxes, building insurance, owner-paid utilities, repairs, maintenance, contracted services and property management. Include a supported management allowance even if an owner manages personally when comparing professionally managed investments. Owner business revenue, tenant sales, refundable deposits and loan proceeds are not property rental income.
NOI usually excludes mortgage principal and interest, depreciation, owner income taxes, acquisition costs, tenant improvements, leasing commissions and major capital replacements. Replacement reserves may be presented below NOI or included in a lender's adjusted measure. State your convention and reconcile it rather than comparing incompatible numbers.
NOI calculation: a worked rent-to-income example
Illustration only, not market rent, expense benchmarks or an actual transaction. All figures are assumed annual dollars for a hypothetical leased building; no property size or market performance is implied.
| Step | Amount | Treatment |
|---|---|---|
| Gross potential base rent | $400,000 | Full scheduled rent on the stated basis |
| Vacancy and credit loss | ($20,000) | One combined illustrative allowance, not double-counted |
| Expense recoveries | $80,000 | Collectible reimbursements under leases |
| Other property income | $5,000 | Documented ancillary charges |
| Effective gross income | $465,000 | $400,000 - $20,000 + $80,000 + $5,000 |
| Operating expenses | ($145,000) | Taxes $75,000; insurance $15,000; utilities $10,000; repairs/services $30,000; management $15,000 |
| NOI | $320,000 | $465,000 - $145,000 |
If annual debt service is $180,000 and separate capital spending is $40,000, cash after those two items is $100,000, not $320,000. That cash figure still excludes income taxes, leasing costs and other owner cash needs. Use the existing cap-rate and debt-service calculators to test your own assumptions.
How do NNN, modified-gross and gross leases change NOI?
In a triple-net lease, show recoverable taxes, insurance and maintenance as expenses and the collectible tenant reimbursement as income. Deduct the owner's unrecovered share. "NNN" alone does not establish which repairs, capital items, administration charges or reassessment increases are allowed.
Gross leases leave more expense risk with the owner. Modified-gross leases may use a base year, expense stop or negotiated split. For each tenant, read exclusions, caps, gross-up clauses, audit rights and reconciliation deadlines. Never assume a vacant suite reimburses its share. See lease expense allocation and CAM reconciliation and cost controls.
How do buyers and lenders re-underwrite NOI?
Separate trailing-12-month results from a forward annual estimate and a stabilized scenario. A buyer may remove one-time income, replace related-party service costs with supported costs, normalize maintenance, adjust management fees, budget insurance renewal and test future Illinois taxes. No one adjustment is automatically correct; retain its evidence and effective date.
Rents after a lease expiration require downtime, tenant improvements and commissions. A stabilized NOI that assumes full occupancy is not currently collected income. The DCF guide follows those costs through a hold period; the Illinois tax guide explains reassessment and appeals.
Common mistakes that inflate NOI
- Counting expense recoveries without the matching operating expense.
- Ignoring free rent, arrears, nonrecoverable CAM or an approaching vacancy.
- Calling a major roof replacement routine maintenance to improve the presentation.
- Using a low historical tax bill as a guaranteed future bill.
- Mixing cash and accrual reporting or different area denominators without a reconciliation.
What is a good NOI, and how does it affect value?
There is no universal "good" dollar NOI or NOI margin. Compare the same property type, condition, lease structure, occupancy and reporting convention. An owner of a 10,000-SF gross-leased building cannot fairly benchmark against a 100,000-SF net-leased warehouse just by total expense or income.
Direct capitalization uses value = NOI divided by a supported cap rate. Higher durable NOI can increase indicated value, but vacancy risk, lease term, building functionality and capital needs influence the rate and buyer adjustments. A dollar of owner-paid energy savings fully reimbursed by a tenant may reduce the tenant's cost without adding a dollar of owner NOI. Improve budget discipline and reserves rather than promising a fixed value uplift.
Owner questions and answers
Does NOI include mortgage payments?
No. Principal and interest are financing cash flows below ordinary property NOI. A lender may apply its own adjusted income measure when sizing debt.
Is a roof replacement deducted from NOI?
A major replacement is generally a capital cash need presented separately from NOI; routine repair treatment depends on the work and accounting convention. Tax classification is a separate CPA review.
What is a good NOI for a commercial property?
There is no universal figure. Compare documented income and expenses on the same period, occupancy, lease and reserve basis, then consider condition and future leasing costs.
Primary sources and scope
Official references checked 2026-10-06. Program terms, policy contracts, laws and local deadlines can change; use the linked office's current documents before acting. Examples on this page are educational assumptions, not local market data.