How to Calculate NOI in Commercial Real Estate: Formula, Example & Ontario Considerations

To calculate NOI in commercial real estate, take a property’s effective gross income and subtract its operating expenses. Net operating income is the number that sits underneath almost every pricing decision in income-producing real estate: a buyer capitalizes it to arrive at value, a lender tests it against debt service, and a seller’s asking price is only as credible as the NOI behind it. This guide is for owners preparing to sell, investors comparing acquisitions, and business owners weighing an owner-user purchase. It walks through the calculation line by line, what belongs in it and what does not, how lease structure changes the answer, and where Ontario-specific items such as property tax and HST fit in.

What NOI Actually Measures

Net operating income (NOI) is the annual income a property generates from operations, after operating expenses but before financing and income tax. It answers a narrow question: what does this asset earn on its own, regardless of who owns it or how they paid for it? That is why two buyers with completely different mortgages can use the same NOI to value the same building.

NOI is not cash flow. Debt service, income tax, depreciation and most capital spending sit below the NOI line. An owner can have a strong NOI and still have thin cash flow if the property carries heavy debt, and the reverse is also true. Keeping the two concepts separate is the first discipline in commercial underwriting.

The NOI Formula, Step by Step

The calculation follows a fixed sequence. Each step is a place where a seller’s pro forma and a buyer’s underwriting can diverge, so it helps to understand what each line is supposed to capture.

1. Potential Gross Income

Potential gross income (PGI) is the rent the property would produce if every rentable square foot or unit were leased at current rents for the full year. For a multi-tenant building this comes from the rent roll: each tenant’s base rent, plus any scheduled increases that take effect during the year. Vacant space is included at market rent to show the property’s full potential.

2. Vacancy and Credit Loss

Subtract the income you do not expect to collect: rent lost to vacant space, downtime between tenants, and rent that is billed but not paid. Use the property’s actual vacancy history and the realistic re-leasing time for the space, rather than assuming full occupancy. A building that is 100% leased today may still carry a vacancy allowance if several leases expire within the hold period.

3. Other Income

Add income that arises from the property itself: recoveries billed to tenants for taxes, insurance and common area maintenance, parking, signage, storage, laundry, telecom or antenna rentals, and percentage rent where a lease provides for it. Potential gross income plus other income, less vacancy and credit loss, gives effective gross income (EGI).

4. Operating Expenses

Operating expenses are the recurring costs of running the property. Typical lines include:

• Realty taxes
• Insurance
• Utilities not paid directly by tenants
• Repairs and maintenance
• Snow removal, landscaping and cleaning
• Property management fees
• Administration, licences and professional fees
• A capital or replacement reserve, where the buyer’s underwriting includes one

5. The Result

NOI = Effective Gross Income − Operating Expenses. That figure, stated on an annual basis, is what gets capitalized into value.

A Worked Example

The figures below are illustrative only. They are round numbers chosen to show the mechanics and are not market data for any property or submarket.

If a buyer values the property at a 6.5% capitalization rate, the implied value is NOI divided by the cap rate: $429,300 ÷ 0.065, or roughly $6.6 million. At 7.0% the same NOI supports about $6.1 million. The NOI did not change; the buyer’s required return did. Our guide to what a cap rate is and how it is applied covers that second half of the equation.

What Belongs in NOI and What Does Not

Disputes over NOI usually come down to classification. The conventional treatment is:

Excluded from operating expenses

• Mortgage principal and interest. NOI is calculated before financing.
• Income tax. It depends on the owner’s own tax position.
• Depreciation and amortization. These are non-cash accounting items.
• Major capital expenditures. A new roof, a repaved parking lot or a replaced HVAC system is normally treated as capital, not as an operating cost.
• Owner-specific costs. Personal expenses, unusual legal fees and one-time items that a new owner would not incur.

Reserves for replacement

Because capital items are excluded, sophisticated buyers often deduct an annual reserve to reflect the long-run cost of roofs, paving and mechanical systems. Whether the figure quoted to you is before or after reserves is one of the most important questions to ask. Two NOIs that look identical can differ by tens of thousands of dollars once one of them includes a reserve.

Management fee

Owners who self-manage sometimes show no management expense. A buyer will normally underwrite a market management fee whether or not the current owner charges one, because the work has a cost even when it is done in-house. Adding an allowance is not a criticism of the seller; it is how comparable properties are put on the same footing.

How Lease Structure Changes the Calculation

The same building can produce very different NOI depending on who pays the operating costs.

• Gross or full-service leases: the landlord pays most operating costs out of the rent. Expenses are high and recoveries are low.
• Net and triple-net (NNN) leases: tenants reimburse their share of realty taxes, insurance and common area costs. Recoveries appear as income, and the landlord’s net exposure is smaller.
• Modified gross leases: costs are split. Read the lease, since the wording of the split is what matters.

The practical consequence is that recoveries must be tested against the leases. A pro forma may show full recovery of taxes and common area costs, while individual leases cap increases, exclude certain categories or use a fixed contribution that has not kept pace with actual costs. Any expense the landlord cannot recover reduces NOI dollar for dollar.

Ontario Considerations

Realty taxes and assessment

In Ontario, the Municipal Property Assessment Corporation (MPAC) sets assessed values and municipalities set the tax rates. MPAC has stated that property assessments for the 2026 tax year continue to be based on fully phased-in January 1, 2016 current values, because the province has repeatedly postponed a general reassessment. A buyer should not assume that will last indefinitely. When a new valuation date is eventually introduced, realty taxes on some properties may move materially, and on a net-leased property the effect on landlord NOI depends on how much tax the leases allow to be recovered. Underwriting should test the NOI against a tax scenario, not just the current bill.

HST

Rents on commercial property are generally subject to GST/HST, which in Ontario is charged at the combined 13% rate. For a landlord who is a registrant, the HST collected from tenants is remitted rather than kept, and HST paid on operating costs is generally recoverable through input tax credits. HST is therefore normally left out of both income and expense lines in an NOI statement. Confirm the treatment with your accountant, particularly for mixed-use properties that include residential units, which are treated differently.

Insurance and utilities

Insurance premiums and utility costs have been volatile in recent years for many property owners. Use the most recent actual invoices or a current quote, not a figure carried forward from an old operating statement.

Common NOI Mistakes

• Using the seller’s pro forma instead of trailing actuals. Ask for the trailing twelve months (T-12) of actual income and expenses and reconcile them to the bank deposits and the rent roll.
• Ignoring vacancy on a fully leased building. Assuming zero vacancy overstates NOI, especially when leases expire during the hold.
• Treating in-place rent as market rent. If leases are well below or above market, the NOI will change when they roll. Value should reflect that.
• Leaving out management and reserves. The result looks better on paper and disappears on inspection by the lender.
• Counting non-recurring income. One-time lease termination fees, retroactive recoveries and insurance proceeds should not be capitalized.
• Mixing periods. Some expenses are billed annually or in arrears. Make sure twelve months of expenses are matched with twelve months of income.
• Applying a cap rate to the wrong NOI. A cap rate quoted for stabilized NOI should not be applied to a temporarily depressed or inflated figure.

NOI for Sellers: Presenting It Credibly

Buyers and lenders will rebuild NOI from source documents, so a seller is better served by getting it right first. Before going to market, assemble a current rent roll, a T-12 operating statement, three years of historical statements where available, the leases and amendments, and realty tax and insurance bills. Reconcile them to each other. Identify any income or expense that is not recurring and explain it. A clean, defensible NOI shortens due diligence and reduces the chance of a price reduction late in the process. It is also the foundation of a proper property valuation, which we discuss in how commercial property value is calculated in Ontario.

Frequently Asked Questions

What is NOI in commercial real estate?

NOI, or net operating income, is a property’s annual income after operating expenses and before debt service, income tax and depreciation. It is the standard measure of a property’s operating performance.

Does NOI include mortgage payments?

No. Mortgage principal and interest are financing costs and are excluded. NOI shows what the property earns independent of how it is financed.

Are capital expenditures included in NOI?

Generally not. Large, non-recurring capital items such as a new roof are treated separately, although many buyers deduct an annual replacement reserve when underwriting.

How is NOI different from cash flow?

Cash flow is what remains after debt service and capital spending. NOI is measured before those items, so it is always at least as high as before-tax cash flow.

How do I turn NOI into a property value?

Divide NOI by the capitalization rate. Value = NOI ÷ cap rate. The cap rate reflects the market’s required return for that type of property, location and risk.

Should property management fees be included when the owner manages the property?

Buyers typically include a market-rate management fee even where the owner does the work personally, so that properties can be compared on the same basis.

Is NOI the same for a net-leased and a gross-leased building?

The formula is the same, but the inputs differ. Under net leases, tenants pay many operating costs directly or through recoveries, which changes both income and expense lines.

Where do property taxes fit in NOI?

Realty taxes are an operating expense. Where leases allow the landlord to recover taxes from tenants, the recoveries are shown as income, so the net cost to the landlord may be small or zero.

Conclusion

NOI is simple in concept and unforgiving in detail. The formula is only as reliable as the income and expenses that feed it, and the classification choices, such as reserves, management fees, recoveries and non-recurring items, can move the result by a meaningful amount. Whether you are buying, selling or holding, build the figure from actual documents, test it against the leases, and stress it for vacancy, taxes and rollover. Owners and investors who would like a second set of eyes on the numbers behind a commercial property in the GTA or Southern Ontario can request a property-specific valuation and market strategy to understand their options before entering the market.

Sources and Further Reading

• Municipal Property Assessment Corporation: The Assessment Cycle
• Canada Revenue Agency: GST/HST Memorandum 19-4-1, Commercial Real Property – Sales and Rentals

This article is general information about commercial real estate in Ontario and is not legal, tax or accounting advice. Consult a qualified professional about your specific situation.