What is false regarding net operating income (NOI)?

Net Operating Income (NOI) is a crucial metric in real estate that helps investors determine the profitability of income-generating properties. To clarify why the assertion that it includes leasing and capital costs is false, it is important to understand what NOI represents.

NOI is calculated by taking the total revenue generated by property operations, primarily coming from rental income, and then subtracting all operating expenses that are necessary to maintain the property. Operating expenses include costs such as property management fees, repairs and maintenance, property taxes, insurance, and utilities. However, it does not account for capital expenses or leasing costs associated with the property that would occur over time, such as costs for large renovations or improvements that extend the property's lifespan.

Leasing costs could encompass leasing commissions and tenant improvements but are not factored into the NOI calculation, as it focuses specifically on the operational aspect of the property on an ongoing basis, without the one-time expenditures related to acquiring tenants or enhancing the property's infrastructure.

Understanding this distinction is vital for real estate investors and professionals, as it impacts investment analysis and financial modeling, allowing for clearer insights into a property's performance under normal operational conditions, independent of financial structuring decisions or long-term capital improvements.