Loss to lease
Also called LTL.
Loss to lease is the difference between what a unit could rent for at today's market rate and what the sitting tenant is contractually paying. It appears as a deduction from gross potential rent when the pro forma is stated at market rent.
How it works
It exists because leases are fixed and markets are not. A tenant who signed fourteen months ago is paying fourteen-month-old rent. In a rising market that gap is the single largest source of organic revenue growth a stabilised property has, and it converts to real income only as leases expire and units turn.
That timing is the whole subject, and it works against the model twice. Only the share of units that actually roll can reprice at all, and each one earns the higher rent for the part of the year that remains after it rolls, so a unit repriced in July contributes half of what an annualised calculation credits it with. Net that against the renewal discount offered to keep good tenants and the days the unit sits empty between leases and the first year captures a fraction of the headline. Underwriting the full gap into year one is the most common way a multifamily model gets optimistic without anyone noticing.
Loss to lease can also be negative, which is called gain to lease and is what happens when in-place rents sit above current market. It shows up in softening submarkets and in properties that leased aggressively at the top of a cycle. A pro forma that shows a zero or a blank on this line in a falling market is usually not modelling it at all.
Formula
Loss to lease = (market rent - in-place rent) x units x 12- Market rent is the rent achievable today on a new lease for that unit type, evidenced by recent signings or comparable properties
- In-place rent is contract rent from the rent roll, before concessions
- A negative result is gain to lease
Worked example
220 units, market rent $2,090, in-place average $1,845, 45 percent of leases expire in the next twelve months.
| Gap per unit per month | $245 |
|---|---|
| Annual loss to lease at 100% capture | $646,800 |
| Leases rolling in year one45% of 220 | 99 units |
| Annualised gap on those units245 x 99 x 12 | $291,060 |
| Less renewal discount and downtimeillustrative, 15% haircut | ($43,659) |
| Run rate once all 99 have repriced | $247,401 |
| Collected in year one | $123,701 |
Expirations are spread across the twelve months, so on average a repriced unit earns the increase for only half of year one. Year one collects about 19 percent of the headline gap and leaves the property on a 38 percent run rate. The remainder is real, and it arrives in years two and three as the rest of the leases roll.
Conventions worth knowing
- Loss to lease running above roughly 10 percent of market GPR usually signals either a genuine value-add opportunity or a market rent assumption that is too aggressive. Check which before underwriting it.
- Renewal rent increases are almost always smaller than new-lease increases. Modelling the same bump on both overstates capture.
The common mistake
Capturing the whole gap in year one
The gap is a stock; revenue growth is a flow. Only the units that turn can reprice, and the ones that renew typically take a smaller increase than a new tenant would pay. Underwriting the full loss to lease into year one inflates year-one NOI, and because the exit value is a multiple of a later year's NOI, that error compounds all the way through to the sale price. Model it against the actual lease expiration schedule from the rent roll, not as a single percentage.
Related terms
- Gross potential rentGross potential rent is the rent a property would collect if every unit were occupied for all twelve months at full rent, with no vacancy, no concessions and no delinquency. It is the top line of the pro forma, and everything below it is a deduction.
- Rent rollA rent roll is the unit-by-unit or tenant-by-tenant schedule of who occupies a property, what they pay, and when their lease ends. It is the primary evidence behind every revenue assumption in an underwriting model.
- Economic versus physical occupancyPhysical occupancy is the share of units that are occupied. Economic occupancy is the share of potential rent that is actually collected. The gap between them is everything that stops an occupied unit from paying full rent: loss to lease, concessions, bad debt, employee units and down units.
- Net operating incomeNet operating income is a property's effective gross income less all operating expenses, before debt service, income taxes, depreciation and capital expenditure. It is the figure a cap rate is applied to, the numerator of debt yield and DSCR, and the number a purchase price is ultimately negotiated against.
- Lease rolloverLease rollover is what happens when a lease expires: the tenant renews, or leaves and the space sits empty until a new tenant is found and fitted out. Modelling it means applying a renewal probability, downtime, leasing capital and a new market rent to every expiring lease.
Keep reading
Every figure, traced to its source
Altyst computes these in exact decimal arithmetic, not with a language model, and clicking any number shows the formula behind it.