Basic Question- vacant space recoveries/rent
Why do we include "vacant space rent" and "vacant space recoveries" when we calculate our income?
Our underwriting model at work has those two line items before we get to vacancy loss and EGI. But if we are strictly looking at in place numbers, then if a space is vacant, why do we include hypothetical recoveries and rent we could get for that space. Why dont we just include recoveries and rent from the leased spaces? Appreciate the help!
I'm assuming its so you have a sense for what your "as-stabilized" value is.
Your actual rent is in place, and actual recoveries are based on those in place recoveries. Then if you have vacant space rent and vacant space recoveries broken out, you're basically saying if this was leased up, this is what market rent would be for this space and this is what market recoveries would be.
Then you have your fully stabilized gross potential rent and then from there you'd haircut your vacancy & collection loss to build out the rest of your proforma to eventually get to an "as-stabilized" NOI.
Agreed.
Thank you! and one more question, to calculate vacant recoveries, the formula in our model is
Occupied recoveries/(% occupied X % vacant).
Do you have any idea on the reasoning or math behind this formula. Is this how you calculate vacant recoveries too? Thank you!
Think the formula should is actually.. [ (occupied recoveries) / % occupancy ] × the vacancy rate = vacant recoveries.
The first part in brackets grosses up recoveries to 100% potential recoveries. The second part applies the vacancy factor.
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