Question 1

What is the difference between NOI and cash flow?

Accepted Answer

Distinction: NOI = Effective Gross Income minus Operating Expenses (before debt service). Cash flow = NOI minus Debt Service (mortgage payments). NOI measures the property’s operating performance independent of financing. Cash flow measures the actual cash the owner receives after paying the mortgage. A property can have positive NOI but negative cash flow (if the debt service exceeds the NOI). Investors analyze both: NOI for property performance and valuation, and cash flow for actual return on investment.

Question 2

How is NOI used in Florida property appraisals?

Accepted Answer

Appraisal use: the income approach (one of the three standard appraisal approaches, along with the sales comparison and cost approaches) is based on NOI. The appraiser: estimates the property’s Gross Potential Income (based on market rents for comparable properties), deducts vacancy and credit loss (based on market conditions), deducts operating expenses (based on actual expenses, comparable properties, or industry standards), calculates NOI, and applies a capitalization rate (based on market data from comparable property sales) to determine value. The income approach is typically the most reliable valuation method for income-producing commercial property.

Question 3

What is a pro forma NOI?

Accepted Answer

Pro forma NOI: a projected NOI based on assumed future conditions (rather than actual historical performance). Used in: development analysis (projecting the NOI of a property that has not yet been built), acquisition analysis (projecting how the NOI will change under new ownership or management), and loan underwriting (lenders may use a stabilized pro forma NOI to evaluate loan requests). The pro forma should include: realistic rent assumptions (based on market comparables), reasonable vacancy estimates, and accurate expense projections. Buyers should be cautious of seller pro formas that use overly optimistic assumptions.

Net Operating Income (NOI)

Net Operating Income (NOI) Overview

NOI vs. Cash Flow

Appraisal Use

Pro Forma

Related Terms

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