What a lender does to your net operating income
A lender does not accept the net operating income on the offering memorandum. It reunderwrites four lines — vacancy, property tax, management fee and replacement reserve — and each one is defensible on its own. Together they routinely move the loan by several hundred thousand dollars on a deal in the one to five million band.
The number you are given is not the number that sizes the loan
Every deal in this band starts the same way. A seller's broker sends an offering memorandum with a net operating income on it. It is usually accurate. It is also usually irrelevant, because a lender will not use it.
The lender reunderwrites four lines. None of the four is unreasonable, and none of them is negotiable in the way an owner hopes. Below is the same 32 unit property, at the same price, computed both ways — with the figures produced live by the same functions we use on a real file.
Watch the gap at the bottom. That is not a rounding difference. That is equity you have to find, with two weeks' notice, if nobody told you in advance.
Common questions
Is the seller's broker lying about the net operating income?
Usually not. The figures on an offering memorandum are generally the true historic figures for the property under its current owner. The problem is that they describe the past under someone else's ownership, and a lender is underwriting the future under yours. A seller who managed the building themselves genuinely had no management fee. You will.
Why does property tax change when I buy?
In many states the assessor reassesses at the sale price, so a seller who held the property for fifteen years has been paying tax on a basis far below what you are about to pay. Their tax bill dies at closing. Forgetting this is the single most common error we see on a deal in this size band, and it can move the loan by six figures on its own.
Why apply a management fee if I manage the property myself?
A lender is pricing the property, not your labour. If the loan goes bad the lender takes the building and has to pay someone to run it, so it underwrites as though someone is being paid. Three to five percent of effective gross income is normal. Your decision to do the work yourself is your profit, not the lender's assumption.
What is a replacement reserve?
An annual allowance for the things that wear out — roofs, boilers, parking surfaces, appliances. A lender deducts it from income whether or not you plan to spend it, usually a few hundred dollars per unit per year on multifamily. It is not a fee and you may never send the money anywhere. It simply reduces the income the loan is sized against.
Can I argue any of it back?
Sometimes, and it is worth trying on the lines with evidence behind them. A vacancy assumption can be argued down with a strong rent roll and a signed lease schedule. A management fee can occasionally be reduced on a large, simple property. Tax reassessment and replacement reserve almost never move. Knowing which line to argue is most of the value of having someone argue for you.
Last checked 2026-08-08. A rate, a spread and a lender's criteria all move within a quarter — if this page is more than a quarter old, ask us for the current number.