Understanding Net Operating Income (NOI): Ensuring Accurate Valuations in Real Estate Transactions

Jul 04, 2024

Net Operating Income (NOI) is a critical metric in real estate, often used to determine a property's value. Ensuring an accurate NOI is essential for both sellers and buyers to achieve a fair and transparent transaction. Here’s how both parties can approach NOI to avoid potential discrepancies and ensure a mutually beneficial deal.

#### How NOI Can Be Misrepresented

1. **Controllable Expenses**: Sometimes, the reported controllable expenses, such as maintenance, repairs, and management fees, may not fully reflect the actual costs. This can result in a higher NOI, making the property appear more valuable than it is.

2. **Vacancy Allowance**: The projected vacancy rate might be lower than the market average, suggesting higher potential rental income and, consequently, an inflated NOI.

#### The Importance of Accurate NOI

Both sellers and buyers have a shared interest in ensuring that the NOI accurately reflects the property’s performance. A realistic NOI helps in setting a fair market value and facilitates a transparent transaction process.

#### Steps for Buyers and Sellers

1. **Review Controllable Expenses**:
   - **Sellers**: Provide detailed and accurate reports of all operating expenses to give a clear picture of the property’s financials.
   - **Buyers**: Carefully review these expense reports and compare them with market benchmarks. Request additional information if needed to understand the full scope of operating costs.

2. **Assess Vacancy Allowance**:
   - **Sellers**: Offer realistic vacancy projections based on market data to set transparent expectations.
   - **Buyers**: Conduct your market analysis to verify the provided vacancy rates. Ensuring these projections are in line with market trends will help you assess the property’s true income potential.

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#### Conclusion

Accurate NOI calculations are crucial for fair and transparent real estate transactions. By thoroughly understanding and reviewing controllable expenses and vacancy allowances, both buyers and sellers can ensure that the property valuation is realistic and mutually beneficial. This approach fosters trust and facilitates smoother transactions, ultimately leading to better investment decisions for all parties involved.

For expert guidance and support in your commercial real estate transactions, contact Atlantic Commercial Lending, your trusted partner in commercial mortgage brokerage.


Atlantic Commercial Lending is a Licensed Commercial Mortgage Brokerage with an NMLS ID #2429887.