Full Breakdown: Economic Loss

Picture this: A 100-unit apartment complex where every unit is rented for $1,000/month. The complex is also 100% occupied.

Therefore, the gross potential income is $100,000 for that month. However, the chances of collecting every penny of that $100,000 is low.

Economic loss is comprised of several line items that deduct money away from the gross potential income.

Here is a full breakdown of economic loss:


Loss to Lease
The difference between the current market rent and the rent being paid by a tenant according to the lease agreement.

In other words, if a property is leased to a tenant at a rent lower than the current market rate for similar properties in the area, the landlord experiences a loss to lease.


Non Revenue Units
These are any units that are not generating income. A variety of reasons can cause this such as a model unit, a unit being used as storage, or a unit that is not in a condition to be rented.


Concessions
This refers to incentives or discounts offered by landlords or property managers to attract tenants to rent an apartment. These concessions are temporary incentives designed to make a rental property more appealing to prospective tenants.


Physical Vacancy
Expressed as a percentage, this represents the number of units that are vacant over a specific time period. When a borrower applies for a commercial mortgage, lenders will typically use a physical vacancy rate of at least 5% when underwriting a loan.


Collection Loss
Collection loss refers to the percentage of the tenants that default on rent. Any amount of rent that is not collected is known as delinquent rent.


*Renovation Vacancy (Bonus)


This is the rent that is lost due to a unit undergoing renovation. While the unit is down (offline) for a renovation, it is generating $0 in income. This is the monthly rent for that unit, multiplied by the number of units being renovated in a given month.

At NLFM, we like to refer to this as renovation vacancy. In the Next Level Value-Add Model, renovation vacancy is used for our total economic loss calculations. Not all underwriting models do this, but this is much more accurate than just using an arbitrary X% for physical vacancy during your renovation period.