Cap Rate Analysis
Calculating NOI the Right Way: The Inputs That Actually Matter
Net Operating Income drives every commercial real estate valuation. The line items most owners underestimate, the ones brokers overstate, and how to build a defensible NOI you can underwrite against.
Start With Gross Potential, Not Collected Rent
Gross Potential Rent (GPR) is what the property would produce at 100% occupancy at current contract rents. From GPR you subtract vacancy, concessions, bad debt, and loss-to-lease to arrive at Effective Gross Income (EGI).
Brokers often skip GPR and present collected income as a fait accompli. Rebuilding from GPR exposes how much economic occupancy a property is actually achieving versus the headline physical occupancy.
Reimbursements and Other Income
Triple-net and modified-gross leases include tenant reimbursements for taxes, insurance, and common area maintenance. These belong in income, but only at the amount actually collectible under the leases, not the gross expense.
Other income (laundry, parking, pet rent, late fees, vending, storage, antenna leases) is real money and can be 2 to 6% of EGI in multifamily. It is also the line item most likely to be overstated when a seller is dressing the property.
Operating Expenses: Re-Underwrite Every Line
Property taxes will likely re-assess at sale. In Florida, model post-sale taxes at the local millage applied to the purchase price, then adjust for Save Our Homes and other portability rules where they apply.
Insurance has moved dramatically in coastal Florida. Use a fresh quote, not the seller's expiring policy. Repairs and maintenance should reflect the age and condition of the asset, not a percentage rule of thumb. Management should be modeled at market: typically 2.5 to 4% for multifamily and 3 to 5% for commercial, even if the property is self-managed.
Capital Reserves Are Not Optional
True NOI deducts a recurring reserve for capital replacements: roofs, HVAC, parking lots, unit interiors, common areas. Skipping reserves inflates NOI and inflates apparent value.
Reasonable reserves: $250 to $400 per unit per year for stabilized multifamily, $0.15 to $0.40 per square foot for industrial and office, and higher for older or heavier-use assets.
What Underwritten NOI Really Means
Underwritten NOI is the buyer's best estimate of forward-twelve-months income under their ownership, on a normalized basis. It almost always differs from the seller's trailing-twelve-month NOI. That is not bad faith. It is the work of underwriting.
Sellers who understand this gap negotiate more effectively. Brokers who present both the in-place and the buyer-adjusted NOI close more deals.
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