An office building has 50,000 square feet of rentable space with current rents averaging $25 per square foot annually. The building operates at 85% occupancy with annual operating expenses of $400,000. What is the property's NOI?

Q: What is the correct answer to: An office building has 50,000 square feet of rentable space with current rents averaging $25 per square foot annually. The building operates at 85% occupancy with annual operating expenses of $400,000. What is the property's NOI?

The correct answer is $662,500. Option A correctly calculates NOI by first determining effective gross income: 50,000 sq ft × $25/sq ft × 85% occupancy = $1,062,500. Then subtracting operating expenses: $1,062,500 - $400,000 = $662,500. This follows the standard NOI formula where vacancy losses are factored into gross income before deducting operating expenses, providing the true net operating income available to service debt and provide returns to investors.

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

Net Operating Income (NOI) is calculated as Effective Gross Income minus Operating Expenses. Effective Gross Income equals Gross Potential Income adjusted for vacancy and collection losses. Operating expenses include property taxes, insurance, maintenance, utilities, and management fees, but exclude debt service, depreciation, and capital improvements. NOI is used in income capitalization valuation methods and debt service coverage ratio calculations for commercial lending. Under provincial real estate legislation, licensees must understand these calculations when advising clients on commercial investments and providing comparative market analyses.

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

Remember VENOM: Vacancy first, Expenses Next, Operating income Matters. Like venom flowing through a system, you must first account for vacancy losses (the poison that reduces income), then subtract operating expenses (the antidote costs), to get the pure NOI (what survives). When you see NOI questions, think VENOM: first calculate effective income after Vacancy, then subtract Expenses to get Net Operating income that Matters for valuation.

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

Always calculate NOI in two steps: (1) Gross rent × occupancy rate = effective gross income, (2) Effective gross income - operating expenses = NOI. Never use gross potential income without adjusting for vacancy first.

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

A commercial real estate agent represents a client considering purchasing an office building. The seller provides rent rolls showing $1.2M gross potential income, but the agent must calculate actual NOI considering 12% vacancy and $350K operating expenses. The correct NOI of $708K (vs. incorrect $850K) significantly impacts the property's value using cap rate analysis, potentially saving the client from overpaying by hundreds of thousands of dollars.

Question

Commercial Real EstateInvestment AnalysisHARD

An office building has 50,000 square feet of rentable space with current rents averaging $25 per square foot annually. The building operates at 85% occupancy with annual operating expenses of $400,000. What is the property's NOI?

Answer Options

A

$662,500

B

$850,000

C

$1,062,500

D

$1,250,000