General Vacancy Deductions

Do you apply a flat general vacancy factor (say 10%) to gross potential income? Or, do you deduct absorption & turnover vacancy from the general vacancy calculation so you don't double count? Do you deduct free rent too or anything else? What is your preferred approach?

Comments (26)

Jul 5, 2019

not sure what you mean by deduct turnover/absorption vacancy...

only turnover costs that are typical in an income statement are on the expense side, and are often for costs of turning the unit for new renters (new paint, fixed appliances, etc.). If one renter moves out and you have someone back filling it immediately, but has to wait a week maybe tops to get into that unit, running a vacancy impact for those 7 days is a bit ridiculous and definitely doesnt represent the average occupancy of the asset.

I always apply the KISS principle, but to me general vacancy is exactly that, general empty units. meaning, when im looking at an income statement, I want to see the number of online units, and the number of units that are purely empty. empty/online = general vacancy. IMO, general vacancy should only include units that are empty that have the opportunity to be filled by a renter to product income to the asset.

HOWEVER, there are other line items that arent other income, that get docked from potential revenue on the rev side of the income statement. some of these are:
- model/employee units: occupied by employees or only used as a showroom model, these will never be revenue producing units, and thus must be docked from GPR. one could argue the GPR should only be based on revenue producing units, but for simplicity its easy to say what are the total number of units at the property, and then deduct the money that would otherwise be earned by units occupied by employees or model units. Note that employee units often just get a discount, not complete abatement.
- loss to lease: one of the most contested and murky calculations in resi real estate. IMO, LTL should represent the discount to currently charged market rent units at the asset. let's say you have 100 rentable units for 1,000 a pop / month. if one of those units has a discount of $10 each month that isnt a concession...my GPR would say 100*1,000 assuming 100% occupancy, then deduct the $10 for loss to lease...aka the loss of potential income due to the in place lease. Loss to lease does have the option to roll into a new market lease at expiration. that is up to the property management team
- concessions: used to provide incentive to prospective tenants. typically are deductions to 1st months rent. Again, to use the above example...let's say you have 100 units all being charged 1,000 /mo. One of those units this month has a one-time concession of 50. Your GPR would still be 100,000 for the month, your vacancy deduction would be 0, your loss to lease would be 0, but you'd deduct $50 in the concession line item. next month all these GPR deductions would be $0 as the concession has burned off.

NOW, to your other point...do you lump some items together? Short answer, it depends on the anaylsis. If I am seriously underwriting an asset, I want all those line items broken out separately. Mainly because they all tell me different things, thus should be in different line items. However, when doing valuation exercises, budget vs actual reports, etc etc...it IS common practice to see groups lump general vacancy and loss to lease and even bad debt together...and title it "loss to vacancy". Concessions is almost always broken out separately.

Jul 5, 2019
Post hoc ergo propter hoc:

not sure what you mean by deduct turnover/absorption vacancy...

You obviously are working in multifamily, which means you don't use Argus, which means you wouldn't run into this calculation. In Argus, there are two types of vacancy. General vacancy, which is just a deduction based on a static percentage, and turnover/absorption vacancy, which is vacancy caused by tenants rolling to market and vacating the space. In Argus, you can choose to deduct from general vacancy by the amount of turnover/absorption vacancy in a period.

Using simple math, lets say you have Potential Base Rent of $1000, a 5% general vacancy factor, with no absorption/turnover. That would mean that your EGI would be $950 if you have 100% occupancy.

Using the same numbers, lets say you have $20 in absorption/turnover, and you are deducting from your general vacancy. $50 in GV minus $20 of absorption/turnover means that you'd still have $30 in general vacancy. EGI is still $950.

Using the same numbers again, lets say you are NOT deducting from your general vacancy. $50 in GV plus $20 of absorption/turnover equals $70 of vacancy. EGI is now $930.

To answer OP's original question, I always deduct absorption & turnover vacancy. I also always override in place tenants to 0% general vacancy until the expiration of their base term. The general vacancy assumption I use is going to vary depending on the property/location, but it is usually 2%-5%. With that said, I work in industrial and would probably not apply these same assumptions to office or retail.

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Jul 5, 2019

ive never understood Argus' use of that line item..and find that the large majority of acq I've gone through with Argus, other parties leave it blank as well.

I think what commonly confuses everyone, is when one says "vacancy caused by turnover". Interpreting that literally, lets say you have 90% occupancy, and next year a tenant occupying 5% of the GLA is vacating or "rolling, turning over, etc etc". Next year comes, are you supposed to model it as 10% general vacancy and then in a separate line have a 5% rollover vacancy? It can't have anything to do with releasing downtime as that is baked into the tenant inputs...So I think a lot of people just ignore that aspect and choose to say, in this scenario when the tenant vacates, that the general vacancy is now 15%.

Jul 5, 2019

also, what do you mean by the $20 in absorption / turnover deduction, simply?

Jul 8, 2019

Does anyone hear override general vacancy for office during holding periods to account for free rent concessions, while applying a vacancy rate to the reversion?

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Jul 8, 2019

I haven't. I think free rent should only be accounted for in the MLAs and have an impact on cashflows when tenants roll to market.

Jul 5, 2019

Just for the sake of discussion, I opened my Argus Enterprise training manual to the general vacancy section, and here is what it says:

Gross Up Revenue by Absorption & Turnover

This option provides the ability to add back the Absorption & Turnover prior to calculating the General Vacancy amount. Absorption & Turnover is the projected loss in rental revenue associated with the speculative lease up of currently vacant space, as well as the downtime between lease terms associated with tenants moving in and out of the building

By adding back the Absorption & Turnover to the projected revenue before calculating the General Vacancy loss, this option results in General Vacancy being calculated on the potential revenue of the building as if it is 100% occupied

Reduce General Vacancy Result by Absorption & Turnover

This option is checked by default and will deduct Absorption and Turnover from the vacancy allowance calculation. This Cash Flow will show vacancy allowance as zero if Absorption and Turnover vacancy is greater than the vacancy allowance.

If the box is unchecked, AE will not deduct Absorption and Turnover from the vacancy allowance calculation. The Cash Flow will separate vacancy allowance and Absorption and Turnover line items.

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Jul 12, 2019
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