Stabilized NOI
Also called Stabilization, Stabilized net operating income.
Stabilized NOI is the net operating income a property produces once the business plan is finished: renovations delivered, lease-up complete, concessions burned off, rents at plan. It is the income a yield on cost is measured against and the income an exit value is usually built from.
How it works
The distance between year-one NOI and stabilized NOI is the whole difference between a core acquisition and a value-add one. On a stabilized deal the two are nearly the same figure and the going-in cap rate answers the pricing question. On a deal with a renovation program, a lease-up or a rollover to work through, year one is depressed by exactly the problem being bought, and judging that deal on its going-in cap rate is judging a renovation by the before photograph.
Stabilization is a definition rather than an event, and the definition has to be stated. Common ones are physical occupancy at a stated level held for a stated period, ninety percent for three consecutive months being frequent, or simply the first full year after the last renovated unit is delivered. Bridge lenders write their own definition into the loan documents, because reaching it releases holdbacks and triggers the tests that size the takeout.
The reason to insist on naming the year is arithmetic. The same stabilized NOI arriving in year two and in year four produce very different returns on identical dollars, and the slower one usually costs more in carry and in forgone distributions than any plausible difference in the NOI itself. A pro forma that labels a number stabilized without naming its year has skipped an assumption rather than stated one.
Formula
Yield on cost = stabilized NOI / all-in cost, and the spread over the market cap rate is what the plan is worth- All-in cost is the purchase price plus acquisition and financing costs plus every funded dollar of capital
- Stabilized NOI is the first FULL year at the stabilized condition, not the year stabilization is reached
- State the stabilization definition and the year it arrives. Both move the answer
Worked example
The sample property with the 140-unit renovation program funded at closing and the loss to lease captured as leases roll.
| Year-one NOI as acquired | $3,020,000 |
|---|---|
| Loss to lease captured, at the run rate | $247,401 |
| Renovation premium at full delivery | $310,800 |
| Stabilized NOI | $3,578,201 |
| All-in cost including the renovation budget | $59,420,000 |
| Yield on cost, against a 5.40% market cap rate | 6.02% |
Sixty-two basis points of spread. Capitalized at the market rate the stabilized income is worth $66,262,981 against $59,420,000 spent, so the plan creates about $6.8 million of value, and every month it slips is a month that value is not earning.
Conventions worth knowing
- Test the stabilized case against a downside where the rent premium comes in at half of plan. Value-add deals fail on premium far more often than on cost.
- A stabilized NOI and a year-one NOI should never appear in the same sentence without labels. They differ here by $558,201.
The common mistake
Applying the going-in cap rate to stabilized NOI
Dividing a stabilized NOI by the going-in cap rate and calling the answer the property's value credits the plan with a result it has not produced and prices it as though the execution risk did not exist. Stabilized income is worth what the market pays for stabilized income, in the year it actually arrives, discounted for the time and risk of getting there. The honest presentation is the yield on cost against the market cap rate with the year stated, and the going-in cap rate reported separately on the income the property produces today.
Related terms
- Yield on costYield on cost is stabilized net operating income divided by total project cost, including land, hard costs, soft costs, financing costs and carry. It is the development and value-add equivalent of a cap rate, and the spread between it and the market cap rate is where the profit comes from.
- Renovation budgetA renovation budget is the funded capital a value-add plan spends to lift rents: the scope and cost per unit, the pace at which units can be delivered, and the rent premium the finished unit is expected to earn. It belongs in the sources and uses at closing, not in operating expenses.
- Cap rateA cap rate is a property's net operating income divided by its value or price, expressed as a percentage. It is the unlevered first-year yield on the purchase price and the standard shorthand for what a market is paying for a stream of property income.
- Going-in versus exit cap rateThe going-in cap rate is year-one NOI divided by the purchase price. The exit or terminal cap rate is the rate applied to the forward NOI at the end of the hold to estimate the sale price. The spread between them is one of the largest and least evidenced assumptions in any underwriting.
- Net operating incomeNet operating income is a property's effective gross income less all operating expenses, before debt service, income taxes, depreciation and capital expenditure. It is the figure a cap rate is applied to, the numerator of debt yield and DSCR, and the number a purchase price is ultimately negotiated against.
- Loss to leaseLoss to lease is the difference between what a unit could rent for at today's market rate and what the sitting tenant is contractually paying. It appears as a deduction from gross potential rent when the pro forma is stated at market rent.
Every figure, traced to its source
Altyst computes these in exact decimal arithmetic, not with a language model, and clicking any number shows the formula behind it.