Operating Cash Flow in Commercial Real Estate

What Is Operating Cash Flow in Commercial Real Estate?

Operating cash flow is the cash a property generates from operations, before debt service, taxes, and capital expenditures.

Operating cash flow (OCF) is the cash a property generates from its core operations after collecting rent and paying operating costs, but before debt service, taxes, or capital expenditures.

A property can show strong accounting profits and still leave you short on cash if the timing of collections and expenses doesn't line up. OCF cuts through the accounting and shows you what's actually landing in your account.

How does commercial real estate generate operating cash flow?

In commercial real estate, operating cash inflow largely comes from tenants. Base rent, percentage rent from retail properties, and reimbursements for shared costs are all sources of income. Cash outflows come from operating expenses such as property management fees, insurance, utilities, and maintenance.

OCF excludes mortgage payments, depreciation, and capital expenditures. Those belong elsewhere in the financial picture. OCF only works when costs are classified correctly, so investors must understand capex vs. opex before calculating.

OCF vs. NOI

OCF and net operating income (NOI) seem similar on their face, but they're different tools with distinct uses. Understanding how they differ clarifies what operating cash flow does and doesn't measure, and helps investors decide when to use which metric.

NOI real estate metrics are accrual-based, meaning they focus on when income and expenses occur, not when cash enters or leaves your bank account.

OCF, on the other hand, accounts for those timing differences. That gives you a clearer picture of actual cash generation.

NOI vs. OCF comparison table

A strong NOI doesn't always guarantee strong cash flow. For example, say you buy a multifamily property with $120,000 in NOI, but find that multiple tenants are consistently 30-45 days late on rent. The NOI for the property is accurate, but the timing of when money actually hits your account is a very different story.

The gap between the two is where problems often hide, and where experienced investors focus their due diligence.

How Do You Calculate Operating Cash Flow for a Commercial Property?

There are two ways to calculate operating cash flow in CRE: the indirect method and the direct method.

Both the indirect and direct methods arrive at the same number. The difference is where they start. Getting OCF wrong during underwriting is an expensive mistake that can leave you saddled with an asset that only performs on paper.

What is the indirect method for calculating property OCF?

The indirect method starts with NOI and adjusts for timing differences between when income and expenses are recorded versus when cash actually moves.

In general accounting, the standard indirect method formula is:

In CRE, this formula is adapted because NOI already excludes depreciation and financing costs, so there’s no need to add it back.

The CRE-adapted formula looks like this:

Not all analysts deduct capital reserves at this stage, but lenders and conservative underwriters typically do to get a more realistic cash flow figure.

Starting with NOI means working capital changes matter because they correct for the difference between what NOI records and when your cash actually moves. Because NOI is accrual based, it counts rent as income the moment it's earned and records expenses the moment they're incurred, not when cash actually enters or leaves your account.

OCF adjusts for that discrepancy in three ways:

• Tenant receivables reduce OCF below NOI. NOI already counted that rent as income, but if the cash hasn't arrived yet, you have to subtract it to reflect actual cash on hand.
• Unpaid vendor invoices temporarily keep OCF higher than it will ultimately be. The expense has been incurred and deducted from NOI, but the cash hasn't left yet. Once the invoice is paid, OCF drops accordingly.
• Security deposits sit outside the calculation entirely. They are liabilities held on behalf of tenants, not operating income, so they don't factor into OCF.

Because the indirect method starts with NOI, it connects naturally to cap rate based valuations, and makes it easier to see how actual cash generation compares to reported operating performance.

What is the direct method for calculating property OCF?

The direct method builds OCF from the ground up using actual cash transactions, without starting from NOI.

The formula is straightforward:

Cash inflows include collected rent and any charges, like common area maintenance (CAM) charges, reimbursed by tenants for shared costs. Cash outflows include expenses such as property management fees, insurance, utilities, and routine maintenance.

The direct method is more time-intensive, but it's also less prone to inaccuracies because it only deals in actual dollars collected and spent.

For example, say you buy a shopping center for sale and lease to three tenants. Over one quarter, you collect $42,000 in base rent, $3,200 in CAM fees, and $1,800 in percentage rent. Operating expenses for the same period total $18,500.

OCF = $47,000 collected - $18,500 paid = $28,500

How Do You Use OCF and NOI to Evaluate a Property?

Look for divergence between OCF and NOI as a diagnostic signal.

A consistent difference between NOI and OCF can indicate that something isn't lining up between the property's reported performance and its actual cash generation. In acquisition packages, NOI numbers are often based on stabilized or pro forma income, while OCF reflects the money that actually made it into the owner's bank account.

When those two figures diverge, vacancy and credit loss are common culprits. A property running at 85% occupancy with two slow-paying tenants can show a healthy NOI while bringing in meaningfully less cash.

That gap isn't a flaw in the NOI calculation, but it does mean that NOI isn't reflecting the asset's real-world performance. OCF is the metric that tells you what the property is actually putting into your account.

The chart below shows how OCF can decline even while NOI remains constant in certain scenarios. A stable asset with 100% occupancy and tenants who pay on time shows strong OCF and NOI. But in a stress scenario where occupancy drops to 85% with two slow-paying and in a distress scenario with 75% occupancy with significant collection loss, OCF falls even faster than NOI.

OCF declines faster than NOI as vacancy compounds with collection loss and expense timing gaps.

Expense timing creates a second category of NOI/OCF divergence

Some operating costs hit OCF in large, irregular amounts that NOI spreads out more evenly over time. Property tax true-ups, insurance renewals, and deferred maintenance bills can lower OCF in a single period without signaling a deeper issue.

Keep this in mind when you're deciding whether to capitalize vs. expense a cost. A capitalized improvement stays off the operating statement and out of OCF, while an expensed repair hits OCF directly in the period it's paid.

Use the NOI/OCF gap as a screening tool

When you're evaluating a commercial property for sale, compare the seller's NOI to the actual cash collected over the previous 12 months. Ask for the trailing 12-month (T-12) operating statement, or request rent rolls and an accounts receivable aging report.

Start your comparison by reviewing properties for sale in your market.

A consistent gap between NOI and OCF is a signal to dig into rent rolls, collection history, or expense timing before proceeding with the purchase.

Once you purchase your property, track the gap between NOI and OCF over time for a clear indication of any operational drift, which is a gradual decline in property performance that isn't tied to a single identifiable cause. A widening gap that isn't explained by known one-time expenses is an early indicator that something needs attention before deferred maintenance or tenant loss forces a below-market sale.

How Do You Use OCF to Make Better Investment Decisions?

Use OCF to find relative value and identify underperforming assets.

OCF is most valuable as a comparative and predictive tool, not just a snapshot of current performance.

When you're comparing commercial properties for sale, OCF per square foot gives you a more complete operational picture than NOI alone.

Two properties with identical NOI can have meaningfully different OCF depending on tenant quality, lease structure, and expense timing. The one with stronger OCF is generating more actual cash, which directly affects your ability to calculate cash on cash return and model realistic distributions.

For investors prioritizing stable, predictable income, NNN-leased properties typically show the tightest alignment between NOI and OCF, making them easier to underwrite and monitor.

After you purchase, track OCF quarterly against NOI. An unexplained and widening gap over three or more consecutive periods is an early sign of operational drift, tenant deterioration, or deferred maintenance compounding into larger costs.

The chart below shows how an unaddressed gap compounds over a five-year hold period.

NOI grows modestly over five years while OCF can decline if collection issues compound and deferred maintenance accumulates. A gap that looks manageable in year one can erode returns significantly by year five if left unaddressed.

Catching that gap early gives you time to intervene and fix the underlying issue before it forces an untimely sale or erodes your returns.

Build OCF into acquisition underwriting from the start

Before closing, build a conservative OCF projection that accounts for realistic vacancy, collection loss, and capital reserve deductions. Then, stress-test your projections at 10% and 20% vacancy to validate your commercial real estate IRR expectations before you commit capital.

As a general rule, many experienced investors look for properties that maintain positive OCF at 20% vacancy as a baseline indicator of resilience, though acceptable thresholds vary by market, property type, and leverage level.

Frequently Asked Questions

How can I improve my property's operating cash flow without raising rents?

Improving OCF without raising rents comes down to two levers: reducing cash outflows and improving collection efficiency. On the expense side, renegotiate service contracts annually, implement preventative maintenance to avoid emergency repair costs, and review your property management fees against market rates. On the income side, tighten tenant screening to reduce collection losses, enforce payment terms consistently, and where lease structures allow, shift expenses like utilities directly to tenants.

How do I accurately forecast operating cash flow when evaluating a potential property acquisition?

Start with the property's trailing 12-month (T-12) operating statement and rent roll. Assess each tenant's lease expiration dates, payment history, and financial health. Build vacancy and collection loss assumptions from submarket data rather than broad averages. Develop expense projections from historical costs, then run conservative, moderate, and aggressive scenarios against different occupancy levels and rent growth rates. The scenario that keeps OCF positive under conservative assumptions is the one worth trusting.

How does lease structure affect a property's operating cash flow?

Lease structure affects both the amount and predictability of OCF. In a gross lease, the landlord covers most operating expenses, which increases cash outflows and compresses OCF relative to rent collected. In a triple net lease (NNN), tenants pay property taxes, insurance, and maintenance in addition to base rent, reducing the landlord's expense burden and producing more stable, predictable OCF.

Lease term length matters too. Longer leases with fixed rent escalations give you a more forecastable OCF trajectory. Short-term leases or below-market rents create rollover risk that can disrupt cash flow at expiration. For multi-tenant properties, staggered lease expirations smooth OCF over time by avoiding large simultaneous vacancy exposure.