Effective Gross Income (EGI)

How effective gross income works

Effective gross income (EGI) answers a question every lender asks before any other: of the rent this property could produce on paper, how much will actually reach the bank account? It starts with the most the building could collect and then subtracts what normally gets lost along the way.

EGI = Potential Gross Income + Other Income − Vacancy − Credit Loss (− Concessions)

• Potential gross income (PGI) — every unit or suite leased at its scheduled rent, 100% occupied, 100% paid. Multifamily underwriters call the rent part gross potential rent.
• Other income — recurring income that is not base rent: parking, laundry, storage, signage, pet and application fees, and, in commercial leases, expense reimbursements.
• Vacancy loss — rent not collected because space is empty, including the weeks between tenants.
• Credit loss (bad debt) — rent billed but never collected.
• Concessions — free-rent months and move-in specials. Some statements show them as their own line; others fold them into vacancy.

EGI is not a profit figure. It is the revenue line that sits directly above operating expenses, and it is the denominator of the operating expense ratio (expenses ÷ EGI). Subtract expenses and you reach net operating income, which is the number cap rates, debt yield and DSCR are all built on.

Worked example: a 40-unit apartment building

The building has 40 units at $1,350 a month, plus $3,000 a month of laundry, parking and fee income. Operating expenses are $209,000 a year (taxes $62,000, insurance $21,000, management $30,000, maintenance $48,000, utilities $36,000, reserves $12,000). The figures in this first example were run through our NOI calculator.

Line	Seller’s version (3% vacancy)	Lender’s version (7% vacancy)
Gross potential rent (40 × $1,350 × 12)	$648,000	$648,000
Other income ($3,000 × 12)	$36,000	$36,000
Potential gross income	$684,000	$684,000
Vacancy and credit loss	−$20,520	−$47,880
Effective gross income	$663,480	$636,120
Operating expenses	$209,000	$209,000
NOI	$454,480	$427,120
Expense ratio (expenses ÷ EGI)	31.5%	32.9%

Four points of vacancy moved EGI by $27,360, and because expenses did not change, NOI moved by exactly the same $27,360. That small-looking difference carries through every ratio that follows:

• Value at a 6.5% cap rate: $454,480 ÷ 0.065 ≈ $6,992,000 versus $427,120 ÷ 0.065 ≈ $6,571,000 — about $421,000 of price resting on the vacancy assumption alone. See cap rate.
• Maximum loan at a 9% debt yield floor: $454,480 ÷ 0.09 ≈ $5,050,000 versus $427,120 ÷ 0.09 ≈ $4,746,000 — roughly $304,000 less loan.

The 9% floor and the 6.5% cap rate are illustrative inputs, not quotes.

EGI versus the terms people confuse it with

• Gross potential income is the ceiling. EGI is the ceiling minus losses.
• Gross rent multiplier uses gross rent, not EGI, and ignores expenses entirely. See GRM.
• NOI is EGI minus operating expenses. EGI is revenue; NOI is what the property earns.
• Pro forma EGI is a projection, usually built on stabilized occupancy and future rent. T-12 EGI is what actually happened. Lenders weigh the second heavily. See pro forma and trailing 12 months.

Commercial leases: reimbursements and how EGI differs by property type

In a multifamily building, rent is the main line and vacancy is the main deduction. In an office, retail or industrial property the top line has more moving parts. Tenants on net leases reimburse taxes, insurance and common-area costs, and those reimbursements count as income in EGI while the matching costs sit in expenses. Underwriters often apply the vacancy factor to reimbursements too, since an empty suite reimburses nothing.

Anchor tenants, rollover dates, and leases signed but not yet paying (free-rent periods) all affect which dollars belong in EGI today. Rent that has not started is not income yet; rent from a tenant who has left is not income anymore. The rent roll is how a lender checks each lease line against the income statement.

Second example: a retail center with reimbursements

A 20,000 sq ft neighborhood retail center has five tenants. Scheduled base rent is $300,000 a year ($15.00 per sq ft). Tenants reimburse $48,000 of taxes, insurance and common-area costs when fully occupied, and signage and percentage rent add $6,000. One 2,000 sq ft suite (10% of the space) sits empty. Signage and percentage rent are assumed unaffected by the vacancy.

• Potential gross income: $300,000 + $48,000 + $6,000 = $354,000
• Vacant suite: 10% of base rent and reimbursements = −$34,800 (the lender assumes the empty suite also reimburses nothing)
• Credit loss allowance of 1% of the remainder: −$3,192
• EGI = $354,000 − $34,800 − $3,192 = $316,008

Notice what moved. If the borrower had taken only the vacant suite’s base rent out of EGI and left its reimbursements in, EGI would have been about $4,800 too high — a small mistake in dollars, but one that a lender treats as a sign the rest of the statement may be loosely built. The vacancy percentage and the 1% credit allowance here are illustrative assumptions for the example.

How to raise EGI the lender will actually count

Because EGI feeds NOI, and NOI sets value and proceeds, every credible dollar added here is multiplied by the cap rate when a property is valued. Dollars that count are the ones that appear in signed leases and bank deposits:

• Sign leases, not letters of intent. A signed lease with rent commencement is income; an LOI is a hope. See lease-up for how lenders treat space still being absorbed.
• Collect what you bill. Cutting credit loss by enforcing late fees and screening tenants shows up in the T-12, which is the document underwriters trust most.
• Document other income. Parking, storage, laundry and fee income only counts if it is consistently deposited. Keep it in a separate ledger line so it can be traced.
• Re-bill reimbursements correctly. Under-billed common-area charges are lost income, and correcting the billing is often the quickest way to a higher EGI on net-leased property.
• Reduce concessions over time. Free-rent periods are a cost of leasing up. A building that needs them continuously has a lower true EGI than its scheduled rents suggest.

Be careful with the opposite temptation. Pushing a pro forma EGI to a figure the history cannot support does not raise your loan — it raises the chance the lender rebuilds the number from scratch and trusts the rest of your package less.

Building EGI step by step

1. Start with the rent roll and list every unit or suite at its in-place scheduled rent. This is gross potential rent.
2. Add recurring other income and, for commercial leases, expense reimbursements, using the last twelve months of deposits as the check.
3. Subtract vacancy at the higher of actual and market or minimum, including the reimbursements the empty space would have paid.
4. Subtract credit loss and concessions based on what the T-12 shows was billed but not collected.
5. Remove anything non-recurring, then confirm the total against bank deposits.

Loss-to-lease and gross potential rent

Gross potential rent can be stated two ways. At market rent, it assumes every unit is leased at what new tenants would pay today. At in-place rent, it uses what current leases actually say. The difference between the two is loss-to-lease. Lenders underwrite on in-place rent unless a higher rent is under signed lease, so a statement that starts from market rent and shows no loss-to-lease line is overstating EGI from the first row. After EGI, divide operating expenses by it to get the operating expense ratio, and compare that ratio with similar buildings in the same market rather than with a national rule of thumb; a ratio far below local peers usually means an expense line is missing.

Why lenders care

In plain terms, the lender is asking what the building earns in an ordinary year, not in its best month.

EGI is where most of the argument over a loan happens, because it is the most adjustable line on the statement. Expenses are bills with invoices. Income depends on assumptions about the future, and a seller’s broker has every reason to make those assumptions generous.

• Underwriters set their own vacancy. They usually apply the higher of actual vacancy and a market or minimum factor. Freddie Mac’s June 28, 2024 Small Balance Loan update, for instance, directs physical vacancy to be underwritten at the highest of a 5% floor, current actual vacancy, the appraiser’s estimate, or market vacancy data (REIS or a comparable provider). A 100%-occupied building is not underwritten as 100% occupied.
• They verify income against bank deposits and the rent roll. Income that shows on a statement but not in deposits gets removed.
• They strip non-recurring items. Lease-termination fees, insurance proceeds and one-time catch-up payments are not repeatable and do not belong in EGI.
• Lower EGI flows straight to NOI — one-for-one, since expenses are unchanged — and from there to DSCR and debt yield, the tests that cap proceeds.

What to watch for and how to negotiate it

• Build your own EGI first. Use the T-12 and current rent roll, apply a vacancy factor at least as high as the lender will, and see where NOI lands before you commit to a price. If your numbers support the debt, you are negotiating from facts.
• Check for loss-to-lease. If tenants pay below market, a pro forma that assumes market rent on day one overstates EGI. Lenders underwrite in-place rents unless leases are signed.
• Count concessions honestly. A month of free rent on a 12-month lease reduces collected rent by about 8%. If a seller reports “scheduled” rent and leaves concessions off, EGI is overstated.
• Look at a full year. A strong last quarter on a statement can hide a weak first half. Ask for the monthly T-12, not a summary.
• Do not double-count. Reimbursements that appear as income should be matched by the expense they recover. If utility costs are billed back, the billback is other income and the utility bill stays in expenses.
• Reconcile before the appraisal. If the appraiser and the lender land on different EGI, proceeds follow the lower figure. Providing a clean rent roll and operating statement up front shortens that conversation.

When your figures are ready, send the rent roll and T-12 with a commercial real estate loan application and we will show you how the income tests stack up for your property. For the product side, see permanent financing.

Sources: Freddie Mac Small Balance Loan update, June 28, 2024 (mf.freddiemac.com); first worked example computed with the BestLoanUSA NOI calculator, second by hand; cap rate and debt yield floor are illustrative assumptions.