Commercial and Investment Property for the New York Exam

How do gross income, NOI and cash flow differ?

Potential gross income assumes the stated occupancy and rental conditions. Adjust it for the stated vacancy and collection loss, then add other income as directed to find effective gross income. Subtract operating expenses to arrive at NOI.

Do not subtract mortgage payments in that NOI step. Debt service enters the owner's cash-flow calculation afterward. Nor should personal income tax or accounting depreciation be slipped into a property operating-expense total merely because both appear elsewhere in the problem. Replacement reserves and capital items should follow the exercise's stated convention; do not silently mix conventions.

The DOS curriculum, Subject 16, Property Analysis and Terminology separates NOI, before-tax cash flow and after-tax cash flow. Keeping those measures distinct is more useful than memorizing one unlabeled "profit" formula.

New York example: income is not the owner's take-home cash

A small investment building has $120,000 of potential annual rent, $6,000 of stated vacancy and collection loss, and $42,000 of operating expenses. Assume no other income or reserve adjustment. Its NOI is:

$120,000 - $6,000 - $42,000 = $72,000

Annual debt service is $48,000. Under the simplified assumptions, before-tax cash flow after that debt service is:

$72,000 - $48,000 = $24,000

If the investor supplied $300,000 of cash equity and the problem asks for the simple cash-on-cash return:

($24,000 / $300,000) * 100 = 8%

The 8% is not a capitalization rate. It uses the investor's cash and the stated before-tax cash flow. A property cap rate instead relates NOI to property value. Similar-looking percentages can measure different things.

At a stated 6% capitalization rate, the same $72,000 NOI indicates:

$72,000 / 0.06 = $1,200,000

Those rates and values are exercise inputs, not a recommendation about today's New York market.

What do commercial lease labels tell you?

A gross lease generally places more operating-expense responsibility on the landlord. A net lease allocates specified expenses to the tenant in addition to rent. A triple-net label commonly concerns taxes, insurance and maintenance, but the written allocation, exclusions and capital responsibilities still matter. A percentage lease adds a rent component based on the defined sales measure, often above a breakpoint.

For office space, distinguish usable space from rentable space. Common-area allocations can increase the area on which rent is based without increasing the tenant's exclusive usable area. Read the supplied load or add-on convention before calculating.

Escalation clauses can allocate increases through a base year, expense stop, index or fixed adjustment. "Net" and "gross" alone do not answer every escalation question. The contract lessons provide the wider lease context.

Reading is the first step

Can you apply this rule when the facts change?

Try the free Commercial and Investment Properties practice on this website. In the Pass New York app, you can keep missed questions together and return to them in later sessions. The free app includes unlimited License Law practice; full access opens the question bank across every subject.

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How do leverage, liquidity and due diligence fit?

Leverage means using borrowed funds. It can increase the owner's return when performance exceeds borrowing costs, but can also amplify losses or strain cash flow. It is not automatically beneficial. A property's limited liquidity also means an owner may not be able to sell quickly at a desired price.

Review the rent roll, leases, expense records, physical condition, permitted use and environmental issues. A seller's projection is not proof that the building will achieve it. Distinguish current performance from a pro forma forecast and identify the assumptions behind any forecast.

For zoning questions, DOS land-use guidance explains the public-control context. For tax expense and depreciation concepts, IRS Publication 527 provides a separate tax framework. A taxable-income calculation should not replace the NOI used in an appraisal exercise.

Common traps to avoid

• Capitalizing gross rent when the problem supplies NOI.
• Treating debt service as a property operating expense.
• Equating cash-on-cash return with a cap rate.
• Assuming a lease label resolves every expense allocation.
• Describing projected returns or leverage as risk-free.

Read the commercial and investment lessons, then try free topic practice. Recalculate the example after changing debt service: NOI stays the same under those facts, but cash flow changes.

Frequently asked questions

Does NOI subtract mortgage payments?

No. NOI is before debt service. Mortgage payments affect the financing and owner cash-flow stage.

Is an 8% cash-on-cash return an 8% cap rate?

Not necessarily. Cash-on-cash return uses cash equity and the stated cash flow. A cap rate uses property NOI and value.

Does triple net mean the tenant pays every imaginable cost?

No. The label suggests a common allocation, but the lease governs particular expenses, exclusions and responsibilities.

Official source map

• DOS 77-hour curriculum: Subject 16, investment characteristics, income measures and commercial leases.
• DOS land-use handbook: permitted-use and approval context for property due diligence.
• IRS Publication 527: rental-property tax expenses and depreciation, a different analysis from property NOI.

Sources and verification notes

The building and figures are fictional. Actual investment decisions require verified records and appropriate legal, tax, lending, valuation and technical advice.