Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Operating Expenses and Net Operating Income

When you subtract from adjusted gross income the expenses of running the property you are left with net operating income (NOI). For example:

Gross Income	$1,440,000
Vacancy and Collection Loss	(72,000)
Adjusted Gross Income	$1,368,000
Operating Expenses	(450,000)
Net Operating Income	$918,000

Please note NOI is calculated before debt service. This is because, as a cost of capital, interest is not an operating expense incurred for the care and maintenance of the property. The analysis used to calculate NOI is conducted as if the property is owned free and clear of any mortgage, or as if the property is being purchased for all cash.

Also, when calculating NOI, the standard is not to reduce the cash flow by depreciation. Depreciation is a non-cash deduction that is used for income tax purposes, but is not deducted from adjusted gross income (AGI) to determine NOI. Again, depreciation, like interest, is not related to property operations.

Furthermore, please note that both state and federal income taxes are not included in Operating Expenses and hence do not reduce AGI when calculating NOI.

From these basic numbers you can derive certain conclusions. First of all, if the Diamond Medical Center is 60,000 square feet and the gross income is $1,440,000, then the tenants are paying on average $24 per square foot on an annual basis or $2 per square foot on a monthly basis.

Also, on a per-square-foot basis, the operating expenses ...