Listen to this post if you prefer
Here are definitions of two sometimes misunderstood adjustment line items between Gross Potential Rent and Effective Gross Income for apartment/multi-family properties:
Loss to Lease: a charge taken against Gross Potential Rent (GPR) for leases signed on apartment units after their initial lease-up term has expired to simulate when the leases are either renewed, or a new tenant moves in (in either case, leased), at a rent below the then-Gross Potential Rent. Loss To Lease is calculated by applying an assumed loss % to the GPR. The resulting dollar value is deducted from the GPR.
Example: your apartment, currently leased at $1,000/month, is coming up for renewal in 3 months, and the landlord sends you a letter with the new rent of $1,125/month for the new lease term if you renew. After considering it, you decide not to renew and notify them as such. A month later, the landlord emails you saying that they would be willing to renew your lease at your current rent of $1,000/month. You accept.
Assuming that the $1,125 is what the market would otherwise bear for your apartment unit when the current lease term ends, the $125.00 difference between your current rent and their $1,125 rent offer is the monthly Loss to Lease, which would be incurred by the landlord as of the commencement of the new lease term.
Downtime: a charge taken against GPR associated with gaps in income due to non-contiguous apartment lease terms. The gap in rental income will stem, at a minimum, from time needed to turn the unit over (cleaning, minor repairs, painting), and could additionally include time spent re-marketing the unit. The two variables for calculating Downtime are: 1) number of months of Downtime assumed (this can be less than one month, represented as a decimal such as 0.25), and 2) assumed % probability of lease renewal.
The formula for Downtime is: # of months down/12 * (1 – renewal probability %) * GPR.
The resulting dollar value is deducted from the GPR.
Know these to be defined differently? Please share below.