Commercial Real Estate in Brooklyn/Understanding Net Operating Income
When investing in Commercial Real Estate, it is essential to have an understanding of Net Operating Income. Net Operating income or NOI is a calculation used to determine the profitability (or lack of) of real estate investments that generate income.
NOI helps to determine how much a property is worth. NOI is used in determining the Capitalization Rate (rate of return on the investment) which helps in calculating a range in value of a property and forecasting cash flows.
NOI takes all revenue from the property, minus all reasonably necessary operating expenses. Keep in mind that NOI is a before tax calculation excluding principle and interest on a loan, capital expenditures, depreciation and amortization or EBITA.
It’s important to note that NOI can be based on current financial statements or forward looking estimates or pro forma.
NOI measures the ability of a property to produce an income stream from operations.
One of the most important components of NOI is the tenants lease as a main source of income and identifies who pays for which expenses. For example with a gross lease the owner pays all of the operating expenses. With a net lease, the tenant pays all of the operating expenses. A third option is a negotiated lease.
The individual components of NOI are:
Potential rental income which is the sum of all rents and the terms of the lease of each individual tenant at 100% occupancy. Market rent is used to project income if not 100% occupied.
Vacancy and credit losses are lost income due to non payment or tenants vacating the property. Comparative property vacancy rates can be used here.
Effective rental income is the income that the owner can reasonably expect to collect.
Gross operating income is the total of all income considering vacancy and credit loss.
Operating expenses are real estate taxes, insurance, management fees, repairs and maintenance, utilities, accounting and legal expenses etc…
It is very important to be aware of the expenses not included in the calculation of NOI. For example, financing costs, depreciation, income taxes specific to the owner, construction costs for tenant improvements, leasing commissions to real estate brokers and agents, reserves for major future maintenance (capital expenditures).
You must keep in mind that each property is unique. Each buyer and seller will have their own methods of calculating expenses. NOI can be subject to interpretation.
Before deciding to purchase a commercial property, it is very important to compare a property’s NOI components with those of competing properties in the same neighborhood. For example, a newer construction building may have real estate taxes triple or quadruple of similar type older buildings in the same neighborhood. This dramatically effects the value of that newer building with excessively high real estate taxes.
If you are interested in selling your property or you know someone who is planning to sell their Brooklyn New York property, whether a single family residential property, an apartment building, a commercial property, mixed use, multi family, coop or condo, vacant land or a development opportunity, call us. You will be very happy that you did.
We always bring our clients the top market price for their property and provide exceptional personalized service from initial consultation to closing.