Which value does NOT affect the calculation of Net Operating Income?

Net Operating Income (NOI) is a key metric in real estate that reflects the income generated by a property after deducting all operating expenses, but before deducting interest and taxes. To understand why depreciation does not affect the calculation of NOI, it's important to distinguish between operational performance and accounting practices.

NOI focuses solely on a property's income-generating capability from its operations. This means it considers revenue from tenant rent payments and reduces that by the costs of running the property, such as operating expenses and vacancy rates.

Vacancy rates are vital because they directly impact the rental income; if a property has a high vacancy rate, it will bring in less revenue. Operating expenses are also critical as they represent costs associated with maintaining the property—these are deducted from total income to determine NOI. Tenant rent payments are the primary source of income for the calculation, so they clearly influence the resulting NOI figure.

Depreciation, while a significant accounting concept that impacts a property’s overall financial reporting and tax obligations, is a non-cash expense. It does not involve a cash outlay and thus does not directly affect the cash flow from operations, which is what NOI is concerned with. Because NOI is about operational performance, depreciation is intentionally excluded from this calculation