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?
Correct Answer
B) $662,500
Gross rental income = 50,000 sq ft × $25 × 85% occupancy = $1,062,500. NOI = Gross rental income minus operating expenses = $1,062,500 - $400,000 = $662,500. Occupancy rate must be factored into gross income calculations.
Why This Is the Correct Answer
Option B 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.
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An office building generates $200,000 in gross rental income with operating expenses of $75,000. If the property was purchased for $1,250,000, what is the capitalization rate?
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