What is the formula for EGI (effective gross income) in relation to PGI (potential gross income)?

• A. EGI = PGI minus vacancy and credit losses plus other income
• B. EGI = PGI minus all operating expenses
• C. EGI = debt service plus operating expenses minus interest
• D. EGI = net income plus depreciation and amortization

Answer: (A)

The key idea is how effective gross income is derived from potential gross income by accounting for real-world revenue changes. Potential gross income assumes full, on-time rent for all units at market rates. In practice, some units sit vacant and some tenants may miss payments, which reduces income—these are vacancy and credit losses. At the same time, properties can bring in money beyond rent, such as fees or services, known as other income. So, to get the actual cash flow from operations before expenses, you take the potential gross income, subtract vacancy and credit losses, and add other income. This gives the standard formula: EGI = PGI − vacancy and credit losses + other income. The other options mix in operating expenses or financing items, which belong in NOI or cash-flow calculations later, so they don’t reflect how EGI is determined.