The quick read: NOI for a commercial real estate loan is effective gross income, meaning rent plus recurring other income minus vacancy and credit loss, less the recurring cost of operating the building, including a management fee and, under the OCC handbook's definition, a replacement reserve, even when you pay neither in cash. Interest, principal, depreciation, capital improvements and income taxes stay out. The NOI you calculate is your opening position; the NOI the lender calculates sizes your loan.
How do you calculate NOI for a commercial real estate loan?
You calculate NOI for a commercial real estate loan by starting with gross potential rent, subtracting vacancy, concessions and bad debt, adding stable other income to reach effective gross income, and then subtracting every recurring operating expense, including a market management fee and, under the OCC handbook's definition, a replacement reserve. Debt service never enters the calculation.
The Office of the Comptroller of the Currency (OCC), which examines national banks, defines NOI in its Comptroller's Handbook on Commercial Real Estate Lending (Version 2.0, March 2022) as annual gross income less operating expenses. Beyond rent, gross income can include other income such as parking, laundry and vending, and tenant reimbursements if the reimbursed expenses are also counted as operating expenses. Operating expenses exclude interest, principal, income taxes, depreciation and capital items, but include a replacement reserve that is imputed for underwriting whether or not it is funded. For the one-line definition, see the NOI glossary entry.
Gross potential rent: in-place rent on occupied units plus market rent on vacant units, annualized
Less vacancy, concessions and bad debt: equals net rental income
Plus stable other income: equals effective gross income (EGI)
Less operating expenses at underwritten levels, including a management fee: equals NOI
Less replacement reserve: equals net cash flow (NCF) on Fannie Mae's worksheet
What income counts toward NOI?
Income that counts toward NOI is the rent a property collects from occupied space, market rent on vacant units that is then removed again as vacancy, and other income that recurs from operations, such as parking, laundry, vending and fee income, while one-time receipts and financing items are left out. Lenders test each line against the property's history.
Fannie Mae's Multifamily Guide, Section 203.01 (read October 30, 2026), starts with in-place rents for occupied units plus market rents for vacant units from a current rent roll, multiplied by 12. It then deducts physical vacancy, concessions and bad debt, which together must equal the greater of the gap between trailing 3-month collections (annualized) and gross potential rent, or 5% of gross potential rent. A full building collecting every dollar still carries a 5% loss.
Other income must be stable, common in the market, free of one-time items and supported by prior years. Late fees, pet fees, storage, parking, laundry and vending can count; interest income, insurance proceeds, gain on sale, security deposits collected and straight-line lease income cannot. Commercial space in an apartment deal is haircut as well.
Vacancy, concessions and bad debt floor (Fannie Mae Guide 203.01): 5% of gross potential rent
Commercial income deduction (Fannie Mae Guide 203.01): 10% of actual commercial income
Commercial income cap (Fannie Mae Guide 203.01): 20% of EGI
On office, retail or industrial property, tenant expense reimbursements can be a large share of income. The OCC handbook says they may be included in gross income if the reimbursed expenses are also counted in operating expenses, so the two move together.
Which expenses come off before you reach NOI?
The expenses that come off before NOI are the recurring costs of running the property: real estate taxes, insurance, utilities, water and sewer, repairs and maintenance, payroll, marketing, professional fees, general and administrative costs, ground rent and a management fee, with each line stabilized to a normal year rather than copied from one statement.
Fannie Mae's guide defines stabilized expenses as those of normal ongoing operations, unaffected by a lease-up or rehabilitation, and excludes non-recurring, extraordinary costs. Underwriters check history, the appraiser's expense analysis, contracts, utility bills, tax assessments and insurance policies.
On Fannie Mae's worksheet, two lines get hard floors. Outside California, real estate taxes are the greater of the actual future bill for a full calendar year or the prior year's taxes multiplied by 103%, and an abatement expiring within 36 months after origination is replaced with fully assessed taxes. Insurance is the quote for a new 12-month policy, or 110% of the current expense when less than 6 months remain on the policy and 105% when 6 to 12 months remain.
The same section keeps amortization, depreciation, financing fees, interest, life insurance, owner's draw, partnership fees and principal payments out of operating expenses. Capital items stay out too: the OCC handbook says recurring capital work, such as replacing heating and air conditioning systems, roofs and parking lots, is captured in a replacement reserve, and that tax returns may not show those costs.
For apartments, the handbook gives a reasonableness check: multifamily operating expenses usually run 35 to 45 percent of revenue, with older buildings and landlord-paid utilities at the upper end.
For office and retail leases, the handbook says leasing commissions are typically underwritten at 4 percent of total lease payments for new leases and 2 percent for renewals. Its office guidance adds that re-leasing costs, meaning leasing commissions and tenant improvements, are not always counted as an operating expense in NOI but still matter to cash flow.
Does NOI include debt service?
No, NOI does not include debt service: interest and principal on the mortgage are paid out of NOI, not deducted to reach it, which is why a lender can divide NOI or net cash flow by the annual payment to measure coverage before it decides how much to lend. Depreciation and income tax sit below the line too.
The OCC handbook excludes interest, principal and income taxes from operating expenses, and NerdWallet's hotel financing guide (updated Mar 31, 2026) describes NOI as calculated pre-tax, without any debt payments, capital expenditures or depreciation. The handbook defines the two ratios built on it.
DSCR (OCC handbook): cash flow or NOI divided by debt service
Debt yield (OCC handbook): NOI divided by the loan amount, as a percent
Typical minimum DSCR (NerdWallet business-loan guide, updated Feb 3, 2026): 1.25 to 1.50 for most lenders, with 2.0 considered very strong
NerdWallet's business-loan DSCR guide adds that there is no universal industry standard. Fannie Mae's Section 203.02 divides Underwritten NCF by annual debt service on a level payment that includes amortization, even when the loan has an interest-only period, so interest-only terms lower your payment without raising coverage on that worksheet.
The OCC handbook also notes that a DSCR covenant in the loan documents may define income and expenses differently from the underwriting DSCR. Read that definition in the term sheet, because the covenant test after closing uses it, not the underwriting formula. You can test coverage on your own figures in the DSCR calculator.
How do lenders adjust the NOI you give them?
Lenders adjust the NOI you give them by replacing actual figures with underwritten ones: a market vacancy factor, a management fee even on a self-managed building, a replacement reserve whether or not it is funded and, on Fannie Mae's worksheet, taxes at the next full bill and insurance at a current quote. That worksheet also floors vacancy and taxes.
The OCC handbook says the NOI analysis may assume market vacancy above or below actual vacancy, and expenses that are not an actual or immediate cash expense, such as management fees and reserves for capital replacements. The goal is a stabilized estimate of income and expenses. Its hotel guidance adds that property taxes should reflect the actual assessment, and be higher if a reassessment is likely, as often happens after a sale or renovation, and that insurance should reflect the actual expense.
Management fees are a common gap between an owner's statement and a lender's. Fannie Mae underwrites the greatest of 3% of EGI, the actual fee or the appraiser's market fee, and lets that floor drop to 2.5% only on loans above $9 million that pass added tests. The OCC handbook puts office and retail fees at 3 to 5 percent of EGI, multifamily at 5 percent of revenues and hotels at 4 to 5 percent of gross revenues.
Replacement reserves are where the two sources place the deduction differently. The OCC handbook deducts the reserve in arriving at NOI. Fannie Mae computes Underwritten NOI first, then subtracts a reserve of at least $200 per unit a year, funded or not, to reach Underwritten NCF, and sizes coverage on NCF. The label differs; the effect on your loan does not. If a lender's figure already came back below your offering memorandum, this breakdown of why the lender's NOI is lower covers which adjustments are worth contesting.
NOI line items, in or out, and the lender adjustment (sources: OCC Comptroller's Handbook, Commercial Real Estate Lending, March 2022; Fannie Mae Multifamily Guide 203.01, read October 30, 2026):
| Line item | In NOI? | Lender adjustment |
|---|---|---|
| Line item Rent, occupied and vacant units | In NOI? In | Lender adjustment Fannie Mae: in-place rent plus market rent on vacant units, times 12 |
| Line item Vacancy, concessions, bad debt | In NOI? Deducted | Lender adjustment Fannie Mae: greater of the 3-month collection gap or 5%; OCC: market factor |
| Line item Parking, laundry, vending, fees | In NOI? In | Lender adjustment Fannie Mae: stable and supported by prior years |
| Line item Commercial space in apartments | In NOI? In, reduced | Lender adjustment Fannie Mae: less 10%, capped at 20% of EGI |
| Line item Real estate taxes | In NOI? Deducted | Lender adjustment Fannie Mae: greater of next full-year bill or prior year times 103% |
| Line item Insurance | In NOI? Deducted | Lender adjustment Fannie Mae: new 12-month quote, or 105% to 110% of current |
| Line item Management fee | In NOI? Deducted, even if self-managed | Lender adjustment Fannie Mae: greatest of 3% of EGI, actual or market; OCC: 3 to 5 percent for office and retail |
| Line item Replacement reserve | In NOI? OCC: in NOI; Fannie Mae: after NOI | Lender adjustment Fannie Mae: at least $200 per unit a year |
| Line item Leasing commissions | In NOI? Not always (OCC, office) | Lender adjustment OCC (office, retail): 4 percent new, 2 percent renewal |
| Line item Interest and principal | In NOI? Out | Lender adjustment Paid from NOI; used in DSCR |
| Line item Depreciation, income tax, capital items | In NOI? Out | Lender adjustment OCC: all three excluded; Fannie Mae 203.01: depreciation excluded |
What does an illustrative NOI calculation look like?
An illustrative calculation, our arithmetic on a hypothetical 24-unit apartment building rather than any real deal, shows an owner's NOI of $252,640 falling to a lender's NOI of $229,780 and a net cash flow of $224,980 once Fannie Mae's vacancy, management fee, tax and reserve floors are applied to the same rent roll.
Everything in this section is illustrative: 24 units at $1,500 a month, 3% actual vacancy and credit loss, $9,600 a year of laundry and parking income, and a self-managed owner whose statement shows no management fee or reserve.
| Line (illustrative, our arithmetic) | Owner's statement | Lender's underwriting |
|---|---|---|
| Line (illustrative, our arithmetic) Gross potential rent | Owner's statement $432,000 | Lender's underwriting $432,000 |
| Line (illustrative, our arithmetic) Vacancy, concessions, bad debt | Owner's statement 3%, minus $12,960 | Lender's underwriting 5% floor, minus $21,600 |
| Line (illustrative, our arithmetic) Laundry and parking | Owner's statement $9,600 | Lender's underwriting $9,600 |
| Line (illustrative, our arithmetic) Effective gross income | Owner's statement $428,640 | Lender's underwriting $420,000 |
| Line (illustrative, our arithmetic) Real estate taxes | Owner's statement $54,000 | Lender's underwriting $55,620 (times 103%) |
| Line (illustrative, our arithmetic) Insurance, utilities, repairs, payroll, administration | Owner's statement $122,000 | Lender's underwriting $122,000 |
| Line (illustrative, our arithmetic) Management fee | Owner's statement None shown | Lender's underwriting $12,600 (3% of EGI) |
| Line (illustrative, our arithmetic) NOI | Owner's statement $252,640 | Lender's underwriting $229,780 |
| Line (illustrative, our arithmetic) Replacement reserve | Owner's statement None shown | Lender's underwriting $4,800 ($200 times 24) |
| Line (illustrative, our arithmetic) Cash flow used for sizing | Owner's statement $252,640 | Lender's underwriting $224,980 |
The vacancy floor removes $8,640 of income and the imputed management fee adds $12,600 of expense. The lender's operating expenses come to 45.3% of EGI against the owner's 41.1%, just above the 35 to 45 percent multifamily range in the OCC handbook, which is the kind of result an underwriter questions in both directions.
Now size a loan on it. A $2,300,000 loan at an illustrative 6.50% rate on a 30-year amortization costs about $174,451 a year, for coverage of 1.45x on the owner's NOI and 1.29x on the lender's net cash flow. At a 1.25x minimum, the owner's figure supports $202,112 of annual debt service, roughly $2.66 million of loan at that rate, and the lender's supports $179,984, roughly $2.37 million. The $27,660 cash flow gap costs about $292,000 of proceeds.
How do you get a commercial real estate loan placed when lenders recalculate your NOI?
The cleanest way to get a commercial real estate loan placed when lenders recalculate your NOI is to rebuild the number their way before the package goes out, then put it in front of many lenders at once through a commercial mortgage brokerage, so quotes compete on rate and structure rather than on whose expense assumptions are kindest.
This matters most for an investor whose loan matures in the next 6 to 12 months. On Fannie Mae's worksheet, for example, vacancy starts from trailing 3-month collections and taxes from the next full-year bill, not last year's pro forma, so find the gap before the payoff date sets the timetable.
Option 1, a commercial mortgage brokerage (our recommendation as the publisher of this guide): YieldStack is an AI-native commercial mortgage brokerage that arranges financing for commercial real estate investors. Three reasons we recommend it first for a deal whose proceeds turn on NOI:
- Breadth: software matches the deal against 20,000+ loan programs and compares the options, so one underwritten NOI is tested across many programs instead of one lender's worksheet.
- Borrower-side structuring: human brokers structure the deal, negotiate on the borrower's side and carry it toward closing, including pushing back on a vacancy or expense assumption the rent roll does not support.
- Speed and clear cost: a median first offer in under an hour, from an institutional lender. It costs Zero upfront to submit a deal and review offers; YieldStack's broker fee is 0.50–1.00% of the loan amount and is paid only at closing.
Every credit decision is made by the lender; YieldStack arranges the introductions and negotiates on the borrower's side, and no loan, rate, or closing is guaranteed.
Option 2, going lender by lender: you send the package to each bank or agency lender yourself, each one rebuilds NOI on its own worksheet, and you reconcile the differences and negotiate every term alone.
Either way, the package that gets clean quotes carries:
- Trailing 12-month operating statement plus the prior full year
- Current rent roll with in-place rents, market rents on vacant units and lease dates
- Trailing 3-month collections, concessions and delinquency
- The latest tax bill and the end date of any abatement
- A quote for a new 12-month insurance policy
- The management agreement, or a market fee if you self-manage
- Capital work completed and planned, for the reserve discussion
When the package is ready, submit the deal and see which loan programs fit.
The bottom line
NOI is effective gross income minus recurring operating expenses, with a market management fee and, under the OCC handbook's definition, a replacement reserve, both charged even when you pay neither. Debt service, depreciation, capital items and income taxes stay out. Build the number the lender's way before you apply, because the lender's NOI, not yours, sets the loan amount.