Situation · Owners
My building is losing money
Net operating income (NOI) is rent collected minus operating costs, before the mortgage. Buyers price buildings on it: value is NOI divided by the capitalisation rate (cap rate). At an illustrative 5% cap rate, $10,000 less NOI takes about $200,000 off the value.
For: Owners · Investors
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Plain-English definitions with BC sources, from the encyclopedia:
General information only. This page is not legal, tax, accounting or financial advice, and it isn’t an opinion on your situation. Laws, rates and figures change, and examples are illustrative. Get advice from a lawyer, accountant or other qualified professional before you act. Reading this page doesn’t create an agency or client relationship. Cam Appleton is a Commercial Real Estate Agent licensed by the BC Financial Services Authority (BCFSA RE611549) with Coldwell Banker Prestige Realty. Terms and disclaimer.
Start with NOI, not the bank balance
The mortgage is a financing decision. NOI tells you if the building works.
- Effective gross income
- Potential rent minus vacancy and bad debt.
- Operating expenses
- Taxes, insurance, repairs, utilities and a management fee, even if you manage it yourself, because a buyer will.
- NOI
- Effective gross income minus operating expenses. No mortgage, depreciation or income tax.
- Breakeven occupancy
- (Operating expenses + debt service) ÷ potential rent. Above 100% suggests the building loses money even when full.
Example (illustrative): potential rent $240,000, less 5% vacancy of $12,000, is $228,000. Expenses are $96,000, so NOI is $132,000. Fixing a $20,000 a year leak adds $20,000 ÷ your cap rate to value. Use the cap rate from your own valuation, see cap rates.
Find the leak: vacancy, recoveries or costs
- Vacancy: months empty × rent, plus any free rent or improvements to land the next tenant.
- Recoveries: which costs your leases let you pass on, and whether you’re actually billing them.
- Costs: the property tax trend, insurance renewals and deferred repairs.
- Rents: your rent roll against market.
Fixes that raise NOI
Lease the vacancy
Consider pricing it to lease, and count the cost of another empty year before you hold out for a top rent.
Recover what the leases allow
Bill recoverable costs on time and reconcile each year, as your leases allow. On renewals, consider whether net leases shift operating costs to tenants. Your lawyer can confirm what each lease allows.
Hold, fix or sell
| Path | Time | Cost | Risk |
|---|---|---|---|
| Lease up, then sell | Months to a year or more | Leasing costs and carrying the vacancy | Leasing takes longer than planned |
| Sell now | A few months | A lower price for the vacancy | Leaving value for the buyer |
| Refinance and hold | 1 to 3 months | Lender and legal fees | The income test limits the loan |
If you’re near the edge, read sell or hold and selling under pressure. The cap rate calculator shows what each fix is worth.
How buyers will look at it
- Price follows risk
- Buyers pay for income they trust. Vacancy, short leases and one big tenant can all read as risk, and each one fixed before a sale may come back in the price.
- Not all income is equal
- Rent under a signed lease is usually worth more than month-to-month rent, and several smaller tenants often read as safer than one large one. Locking in terms can be worth more than chasing a higher rent.
- Clean the books before anyone looks
- Personal costs, one-off repairs and owner loans muddy the picture. Buyers tend to compare three years side by side, so it helps to sort odd entries out before they ask.
- Who is it worth the most to?
- A building that loses money as a rental may be worth more to an owner-user, a neighbour or a developer. Value depends on the buyer.
- If the problem is cash, compare all three
- A sale-leaseback and a refinance are recognised financing tools next to a sale. If the building works but cash is tight, it’s worth putting all three side by side.
- Don’t lean on the assessment for value
- Assessed value isn’t market value. A real opinion of value is a better starting point for the decision.
Lean on your accountant for NOI and tax. Recoverable costs depend on what each lease says, so check with a lawyer before you bill new charges.
Cam is a licensed real estate agent, not a lawyer or accountant, so take the legal and tax questions to them.
Common mistakes
- Taking the mortgage off NOI
- Using a cap rate on gross rent instead of NOI
- Forgetting vacancy
- Believing a one-page summary without the leases behind it
Price the rollover, not just today’s net operating income
A building can look fine on this year’s net operating income (NOI) and still lose money when the next lease ends. Model vacancy, leasing costs, and tenant improvements at rollover before you decide to hold, refinance, or sell.
Example only: if a shaky tenant fills most of the income, price the deal as if that space goes dark for six months and needs a new build-out. That stress case is often closer to what a buyer or lender will underwrite than a tidy trailing statement.
Rebuild NOI from the rent roll and leases, then decide. Your accountant and I can help separate a one-year blip from a structural problem.
Questions people ask
What should I do if my building costs more than it earns?
Many owners start by working out NOI and breakeven occupancy, finding whether the problem is vacancy, recoveries or costs, then comparing leasing up, selling and refinancing with their accountant.
Will I get less if I sell with vacancy?
Often, because buyers tend to price on current NOI and the cost of leasing up. Sometimes a buyer who wants the space for their own business values vacancy, so it’s worth testing.
Can I pass more costs on to tenants?
Generally only what your leases allow during their terms, so ask your lawyer. At renewal, net terms may be negotiable.
How do I fill a vacant commercial unit?
Common steps: price it against comparable space, make it presentable, offer sensible terms and market it broadly. Count the cost of each month empty.
In practice
How I help with a building that’s losing money
This page is for you if you own a commercial building whose income no longer covers its costs and debt.
- Happy to review your rent roll against market to see where rents are below what similar space leases for.
- We can look at your operating costs and leases to see which costs you can recover from tenants and which you're absorbing.
- I’ll lay out your options side by side: re-lease, refinance, sell, or reposition.
What to watch for
- Leases with expense stops or caps that leave you carrying cost increases.
- Vacancies that will cost months of rent, tenant improvements and leasing costs to fill.
- Loan covenants or a renewal date that could force a decision.
The steps, in order
- Build a simple twelve-month cash flow.
- Find the biggest gap: vacancy, below-market rent or unrecovered costs.
- Decide whether to fix, refinance or sell.
Good questions to ask
- What is the building's net operating income today?
- Which leases are below market, and when do they roll?
- What would a buyer pay as it stands?
Lease and property law has BC-specific wrinkles, so for anything legal, check with a BC real estate lawyer before you rely on it. This page is general information, not legal, tax or financial advice. Cam Appleton is a licensed real estate representative with Coldwell Banker Prestige Realty.
Next step
Building not paying its way?
Send me the rent roll and last year’s statements. I’ll find where the money is going and what each fix is worth.
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