Loss-to-Lease

Loss-to-Lease is defined as the difference between the current rent amount paid by existing tenants and the potential rent amount that could be paid by future tenants. Loss-to-Lease is most often calculated by subtracting 10% (average) from the gross rent that could be achieved under full occupancy. The best pro-forma investment analyses will account for vacancy rates and discounts separately so the investor may better understand the cause and effect of incentives as a marketing strategy to reduce vacancy rates and increase profitability over time. Vacancy rates are calculated as a percentage of occupants during a period versus total units or square feet capacity of rental space. Discounts are offered to prospective tenants to acquire lease agreements or current tenants to retain them. In this case the discounts are subtracted from the potential gross income. If that sum is divided by the potential gross income and multiplied by one hundred, the result will be a percentage of discounts to potential gross income. Vacancy rates may be the result of inability to attract enough tenants to fill the units or square footage available for lease. Vacancy may also occur as a unit is being prepared for the next tenant during one or more periods. Many investors also measure these two vacancy rates separately. The most detailed Loss-to-Lease analysis is divided into the following: discounts offered to prospective tenants as a marketing incentive, discounts offered to current tenants necessary to retain them, vacancy rates created by a short fall in lease agreements, and vacancy needed to prepare lease property.