A retail property generates $200,000 in gross rental income annually. Operating expenses are $75,000, and debt service is $90,000. What is the Net Operating Income (NOI)?

Q: What is the correct answer to: A retail property generates $200,000 in gross rental income annually. Operating expenses are $75,000, and debt service is $90,000. What is the Net Operating Income (NOI)?

The correct answer is $125,000. Option B ($125,000) is correct because NOI is calculated as Gross Rental Income minus Operating Expenses only. The formula is: NOI = Gross Income - Operating Expenses. Therefore: $200,000 - $75,000 = $125,000. Debt service ($90,000) is specifically excluded from NOI calculations because it represents financing costs, not operational costs. This principle is fundamental in commercial real estate analysis and aligns with standard appraisal practices recognized under Canadian real estate regulations.

Q: What background knowledge is needed for this Commercial Real Estate question?

Net Operating Income (NOI) is the income remaining after deducting operating expenses from gross rental income, but before deducting debt service, depreciation, and income taxes. Operating expenses include property taxes, insurance, maintenance, utilities, management fees, and repairs. Debt service (mortgage payments) is excluded because NOI measures the property's operational performance independent of financing. This standardization allows comparison between properties with different financing structures. NOI is used in the income approach to valuation, calculating cap rates (NOI ÷ Property Value), and determining investment returns. Canadian appraisal standards and commercial real estate practices follow this universal NOI definition.

Q: What is a good way to remember the answer to this Commercial Real Estate question?

Remember GONE: Gross income minus Operating expenses = NOI. Debt service is GONE from the calculation! Think of NOI as measuring what the property earns from operations alone, before any financing decisions come into play. The debt is 'gone' from this calculation because it's about financing, not operations. When you see NOI questions, immediately think 'GONE' - debt service is gone from the calculation. Only subtract operating expenses from gross income. If you see debt service mentioned, remember it's excluded from NOI but used in cash flow calculations.

Q: What exam tip applies to this Commercial Real Estate question?

For NOI questions, use the simple formula: Gross Income - Operating Expenses = NOI. Never include debt service, depreciation, or taxes in NOI calculations. These are 'below the line' items used for different financial metrics.

Q: How does this Commercial Real Estate concept apply in real world practice?

A commercial real estate agent is preparing a market analysis for a client considering purchasing an office building. The property generates $500,000 annually with $180,000 in operating expenses and $220,000 in debt service. To properly evaluate the investment opportunity and compare it with other properties, the agent calculates NOI as $320,000 ($500,000 - $180,000), excluding debt service. This NOI figure allows the client to determine the cap rate, compare with similar properties regardless of financing, and make informed investment decisions based on the property's operational performance.

Question

Commercial Real EstateInvestment AnalysisABMEDIUM

A retail property generates $200,000 in gross rental income annually. Operating expenses are $75,000, and debt service is $90,000. What is the Net Operating Income (NOI)?

Answer Options

A

$35,000

B

$125,000

C

$165,000

D

$275,000