NOI (Net Operating Income)
A property's annual income after deducting operating expenses but before debt service, capital expenditures, and income taxes. NOI is calculated as Effective Gross Income minus Operating Expenses. It is the fundamental metric used to value commercial real estate and determine borrowing capacity.
Related Terms
DSCR (Debt Service Coverage Ratio)
A measure of a property's ability to cover its debt obligations, calculated by dividing Net Operating Income (NOI) by annual debt service. Lenders typically require a minimum DSCR of 1.20x to 1.35x, meaning the property generates 20-35% more income than needed to pay the mortgage. Higher DSCRs indicate lower risk and may qualify for better loan terms.
Cap Rate (Capitalization Rate)
A rate used to estimate the value of income-producing properties, calculated by dividing NOI by the property's market value or purchase price. A property with $500,000 NOI and a 5% cap rate would be valued at $10 million. Lower cap rates indicate higher values and are typical in primary markets; higher cap rates suggest higher risk or secondary/tertiary markets.
Debt Yield
A risk metric calculated by dividing Net Operating Income by the total loan amount, expressed as a percentage. For example, $1 million NOI on a $10 million loan equals a 10% debt yield. Unlike LTV and DSCR, debt yield is independent of interest rates and cap rates, making it a pure measure of loan risk. Most lenders require minimum debt yields of 8-10%.
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