NOI: definition, traps and quality

NOI = effective gross income − operating expenses. EGI starts at potential rent, subtracts vacancy and credit loss, adds recoveries and other income. Operating expenses include taxes, insurance, utilities, R&M, management, payroll, professional and admin — but exclude debt service, capital expenditures, depreciation and income taxes. Those exclusions are what make NOI comparable across owners and financings.

Traps: management fees left out by owner-operators (imputed ~3–4% belongs in), capital disguised as repairs (or repairs disguised as capital), above/below-market owner arrangements, and one-time items left unadjusted. "In-place" NOI (contracts today) differs from "stabilized" NOI (normalized occupancy) — know which one a number claims to be.

Quality matters as much as quantity: NOI from ten tenants with staggered terms is worth more per dollar than the same NOI from one tenant expiring next year. Durability is the hidden variable cap rates try to price.