Friday, June 15, 2018

How Does Your Bank Calculate NOI?

When analyzing commercial real estate, most banks present columns with NOI listed for historical periods along with a column of pro forma or "underwriting" NOI.  Pro forma NOI is often calculated using “Potential Gross Income” (representing gross rents as if the property were 100% leased) less a vacancy factor.

In pro forma analyses, appraisers and banks often apply replacement reserve factors as well.  Recent appraisals may contain an appropriate vacancy factors, management fees, and replacement reserve assumptions to use in your analysis.


Your bank’s loan policy may also dictate standard amounts to use for vacancy, bad debt, replacement reserves, and management fees in the pro forma analyses.  If your bank has a policy on how to calculate pro forma or "underwriting" NOI, then I'd like to hear about it.  Feel free to leave a comment about how you make the calculation and which expenses are included and excluded.

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