Loss to lease calculation
Is Loss to lease percentage a calculation or is it an assumption/input?
In a scenario where you are modeling apartment renovation or acquisition, should loss to lease be provided as an assumption or is it a calculation one makes by using the difference between pro-forma rent and actual rent divided by pro-forma rent.
Thanks.
It can be either, I typically calc it based on difference between proforma market rent and actual. The assumptions/variables are the growth rate in market rent year to year, which will in turn affect your LTL.
Loss to lease is the difference between market rent and in-place gross potential rents (before vacancy, concessions, etc). When a Broker markets a MF deal as "$150 mark-to-market" it is implying in-place rents at the property are $150 below where the comparable properties are currently signing leases on a per unit per month basis. In a market experiencing rental growth, there will almost always be a loss-to-lease since you can't capture 100% of market growth (if you sign a lease today, you won't be able to renew rents at market-rate for 12 months).
When you are projecting the cashflow YoY then how do you calculate the loss to lease number to subtract from Gross Potential Rent? I assume that you have a loss to lease % that you multiply to the Gross Potential Rent? How is that % determined YoY? I understand how the base year will be calculated. How about YoY, how is that % determined?
For simplicity purposes, let's assume your potential gross rent has no rent growth attached to it.
10 unit building, each unit's "market rent" is $1, but their "actual rent" is currently $0.50
At Acq: Potential Gross Rent: $10 (10 units @ $1/unit) Actual Rent: $5 (10 units @ $0.50/unit) Loss to Lease: $5 (PGR-Actual)
Year 1: Potential Gross Rent: $10 Actual Rent: $6 Loss to Lease: $4
Year 2: Potential Gross Rent: $10 Actual Rent: $7 Loss to Lease: $3
What happened from Acq to YR1 to YR2? Well we turned 2 units in YR1 to "market" rent of $1, giving us $6 of actual rent.
(2 units$1)+(8 units$0.50)=$6
Our Gross Potential Rent if all the units were to be turned is $10. So $10-$6=$4 Loss to Lease. Same thing happened from YR1 to YR2, we converted another 2 units to "market".
Your loss to lease is simply a subtraction of your Gross Potential Rent at "market" - Actual Rent (what you are currently receiving). You can project your future cash flows based on how many units you plan on bringing to "market" per year, coupled with how much your rents will grow YOY (your rental growth factor). Keep in mind the "actual rent" you should be using is gross and is prior to any vacancy loss/bad debt/etc.
Hope that helps.
Great explanation by networkyournetworth. Definitely a confusing line item when you first encounter it.
Thanks - that really helped clear my confusion.
Glad I could help
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