Final answer:
Debt service is deducted from potential gross income when calculating net operating income.
Step-by-step explanation:
Debt service is deducted from potential gross income when calculating net operating income.
Net operating income (NOI) is calculated by subtracting debt service from potential gross income. Debt service refers to the regular payments made to repay the principal and interest on a loan used to finance the property. By deducting debt service from potential gross income, the resulting amount is the net operating income.
For example, if a commercial property has a potential gross income of $100,000 per year and an annual debt service of $20,000, the net operating income would be $80,000 ($100,000 - $20,000).