The income a property is expected to produce after subtracting an allowance for vacancy and for rent that will not be collected.
The OCC handbook defines effective gross income as the expected revenue generated by a property after a vacancy rate and deductions for expected credit losses. It is the first subtotal in a lender’s income analysis.
The steps run in order. Start with gross income as if the building were fully leased, including other income such as parking, laundry and vending. Subtract a vacancy factor and a credit loss allowance. The result is effective gross income. Subtract operating expenses, including a reserve for replacements, and you have net operating income.
Example: a building with $500,000 of potential rent and $20,000 of other income, underwritten at 7 percent vacancy and credit loss on the rent, has effective gross income of $485,000.
The vacancy factor is the lender’s, not yours. The handbook says it may be higher or lower than actual vacancy and should reflect what the property is expected to experience over time, considering comparable properties in the same market. A fully leased building will still be underwritten with some vacancy. Several expense lines are sized from this figure too: the handbook notes management fees for office and retail are typically underwritten at 3 to 5 percent of effective gross income.
How it shows up in the data here
Not a field here. No public filing on this site reports a property's income. Bank call reports give loan balances by category and HMDA gives loan terms. Use the DSCR calculator to carry your own effective gross income down to net operating income and coverage, then see who lends on the property type under investor CRE lenders.
Go further
- DSCR calculator: From income and expenses to coverage.
- Investor CRE lenders: Banks and credit unions holding loans on rented commercial property.
- DSCR calculator: Cash flow over debt service. Type the cash flow and the loan terms, see the ratio and the cushion before it falls to 1.00x.
- Debt yield calculator: Cash flow over the loan. The one ratio that ignores the rate, the amortization and the cap rate.
- How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
- Investor commercial real estate loan checklist: On an investor property the rent pays the loan. The package is the evidence for the rent: who pays it, for how long, what it costs to collect, and who stands behind the borrower if it stops.
Related terms
- Net operating income (NOI): A property's annual income minus its operating expenses, before loan payments, income taxes and depreciation. It is the top number in DSCR and debt yield.
- Rent roll: A list of every unit or space in a property showing the tenant, the rent, the lease dates and what is vacant, as of a stated date.
- T-12 (trailing 12 months): A property's income and expense statement for the most recent twelve months, usually shown month by month.
- Replacement reserves: Money set aside, or an expense assumed by the lender, for periodic replacement of capital items such as roofs, heating and cooling systems and parking lots.
- Debt service coverage ratio (DSCR): Net operating income, or business cash flow, divided by the loan payments due in a year. It shows how many dollars come in for each dollar of debt service.
- Capitalization rate (cap rate): A property's stabilized net operating income divided by its price or value. Divide income by the cap rate and you get an estimate of value.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.