In commercial real estate (CRE) financing, few metrics carry more weight than net operating income, or NOI. Lenders use it to size loans, assess risk, and determine value. Get it right and you can unlock millions in proceeds. Get it wrong and the deal may never reach closing.
Whether you are preparing a refinance, pursuing an acquisition loan, or evaluating a property’s value, NOI is one of the first figures lenders and investors analyze.
So how exactly does NOI shape loan terms and valuation? Here is where it has the greatest impact.
What Is NOI?
NOI, or net operating income, measures how much income a property generates after operating expenses but before debt service or capital expenditures. In other words, it is rent, parking, and reimbursement income minus the expenses required to operate the property, such as management fees, insurance, taxes, and maintenance.
Here is the basic formula:
NOI = Gross Income – Operating Expenses
For lenders, NOI is the foundation of underwriting because it shows how much cash flow the property generates before any loan payments. For borrowers, it serves as the starting point for understanding how much financing the property can support.
How Lenders Use NOI
Lenders rely heavily on NOI because it shows whether a property can support its own debt. If the NOI is too low, the property may not be able to cover its loan payments, even if the borrower has a strong profile.
NOI also directly affects the following two core underwriting ratios.
Debt Service Coverage Ratio (DSCR)
The Debt Service Coverage Ratio is one of the most widely used, and arguably most important, ratios in CRE financing.
Here is the DSCR formula:
DSCR = NOI / Total Debt Service*
* The Total Debt Service is the sum of the principal and interest payments expected over the period measured, generally a year.
Most lenders require a minimum DSCR, typically around 1.25x. That means the NOI must be at least 25% greater than the annual loan payments.
Example: If a property generates $625,000 in NOI and the DSCR requirement is 1.25x, the max annual debt service allowed is $500,000. That figure will determine the maximum loan amount.
Debt Yield
Debt yield is another ratio used to assess risk. It is calculated by dividing NOI by the loan amount. Here is the debt yield formula:
Debt Yield = NOI ÷ Loan Amount
Lenders often set a minimum debt yield threshold, such as 8% or 9%, as a floor for loan sizing. A higher NOI can help you qualify for more leverage under both debt yield and DSCR tests.
How NOI Impacts Valuation
Property valuation in commercial real estate financing is often driven by the income approach, where value is calculated using NOI and the market capitalization rate (cap rate):
Value = NOI ÷ Cap Rate
Even small changes in NOI can move value dramatically, especially when cap rates are low.
Example: At a 6% cap rate, a $50,000 increase in NOI raises the property’s value by roughly $830,000.
For borrowers, that higher valuation can translate into more refinance proceeds, stronger loan terms, or additional equity at sale. Understanding the connection between NOI and valuation helps you see how every dollar of income impacts your leverage.
Why NOI Quality Matters
Not all NOI is created equal. Lenders and appraisers look beyond the number to its quality and stability. They want to know whether the income is consistent, supportable, and likely to continue.
They will typically review questions such as:
- Is the rent roll diversified or dependent on a single tenant?
- Are rents aligned with current market levels?
- Are major leases expiring soon?
- Are operating expenses reasonable and recurring?
If the income looks inflated, temporary, or unsupported by documentation, lenders will adjust or “normalize” the NOI downward during underwriting, which can reduce your loan amount or valuation.
Final Thoughts
NOI is more than a number. It is the backbone of commercial real estate financing. It shapes valuation, loan size, leverage, lender confidence, and interest rate. It is one of the first things underwriters review when assessing a deal.
For borrowers, a stronger and more predictable NOI means better terms, higher proceeds, and greater flexibility. Understanding how lenders view your property’s cash flow can help you position your financing request more effectively and avoid surprises during underwriting.
Whether you are preparing for a refinance, acquisition, or sale, understanding how your NOI drives loan decisions can make a meaningful difference in results.