What is NOI and how does it differ from net income?

• A. NOI = operating income minus operating expenses; excludes taxes, financing, depreciation.
• B. NOI = net income after all expenses.
• C. NOI = cash flow after debt service.
• D. NOI = operating income minus operating expenses; excludes taxes, financing, depreciation.

Answer: (D)

NOI measures how much money a property generates from its operations, ignoring the financing and tax side of the business. It is calculated by taking the income the property actually earns from operations (gross operating income) and subtracting the operating expenses that keep the property running. Importantly, it excludes taxes, financing costs (like interest on loans), and non-cash items such as depreciation and amortization. This focuses on the cash-generating ability of the property itself, before any debt service or tax considerations are taken into account.

Net income, by contrast, is the bottom-line profitability after all expenses have been deducted. That includes operating costs plus financing costs, taxes, depreciation, amortization, and any other non-operating items. So NOI isolates operating performance, while net income reflects overall profitability influenced by financing choices and tax situation.

For example, if a property grosses 100,000 and has 30,000 in operating expenses, NOI is 70,000. If debt service and taxes bring additional costs, net income would be lower (depending on how much is subtracted for interest, depreciation, and taxes), illustrating how NOI and net income capture different aspects of financial performance.