Legal Definitions - net operating income

Net operating income (NOI) is a financial metric used to evaluate the profitability of income-generating properties or businesses. It represents the revenue generated by an asset or operation after deducting all necessary operating expenses, but before accounting for taxes, interest payments on debt, depreciation of assets, or amortization of intangible assets. Essentially, NOI shows the income a property or business generates purely from its core operations, without the influence of financing decisions or non-cash accounting adjustments.

Here are some examples to illustrate net operating income:

• Example 1: A Residential Rental Property

  Imagine an individual owns a duplex and rents out both units. Over a year, they collect $36,000 in rent. During that same year, their operating expenses include $3,000 for property management fees, $2,500 for property taxes, $1,200 for insurance, and $800 for routine maintenance and utilities for common areas. To calculate the net operating income, they would subtract these operating expenses from the total rent collected: $36,000 (gross rental income) - ($3,000 + $2,500 + $1,200 + $800) = $28,500. This $28,500 is the NOI, representing the income generated by the property's operations before considering any mortgage interest payments or income taxes.

• Example 2: A Small Retail Business

  Consider a local bookstore. In a given quarter, the bookstore generates $75,000 in sales from books and merchandise. Its operating expenses for that quarter include $25,000 for the cost of goods sold (what they paid for the books), $15,000 for employee wages, $5,000 for rent on the retail space, $1,500 for utilities, and $500 for marketing. The net operating income for the bookstore would be $75,000 (total sales) - ($25,000 + $15,000 + $5,000 + $1,500 + $500) = $28,000. This figure indicates the profitability of the bookstore's core selling activities, excluding any interest payments on business loans or corporate income taxes.

• Example 3: A Commercial Office Building

  A real estate investment firm owns a multi-story office building with several tenant businesses. Annually, the firm collects $1.2 million in rental income from all the offices. Their operating expenses for the year include $150,000 for property management, $80,000 for property taxes, $20,000 for building insurance, $50,000 for common area utilities and maintenance, and $30,000 for janitorial services. The net operating income for the office building would be $1,200,000 (total rental income) - ($150,000 + $80,000 + $20,000 + $50,000 + $30,000) = $870,000. This NOI reflects the building's operational profitability, separate from the firm's financing costs (like mortgage interest) or corporate tax obligations.