Loss to lease, economic occupancy and the gap between them

Physical occupancy is the share of units with somebody living in them. It is the number that appears in the listing and it is the least informative of the set. Economic occupancy is the share of gross potential rent actually collected. The gap between the two is made of specific, nameable things: loss to lease, concessions, vacancy, bad debt and non-revenue units. Loss to lease is the largest and the least discussed. It is the difference between what a unit could rent for today and what the sitting tenant is paying under a lease signed earlier. In a market that has moved, a full building can carry a substantial loss to lease — and that is simultaneously a drag on today's income and the clearest upside case for a buyer, because it converts as leases roll. Concessions are the ones that hide in plain sight. A month free on an annual lease is a discount of roughly a twelfth of the rent, but the rent roll may show the face rent with the concession booked elsewhere. Ask for a concession report, not a summary. Non-revenue units — the model, the office, the unit the manager lives in — are occupied and produce nothing. Bad debt is the tenant who is in place and not paying, which physical occupancy counts as occupied and the bank account does not. Underwrite economic occupancy. Then ask how much of the gap is structural and how much converts on lease renewal, because only the second half is a plan. This article is general information, not legal, tax or financial advice. Rules change and every deal is different — check your own case with a licensed professional. Alberto Zaltzberg — Adonait · adonait.com