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Loss to Lease and Concessions: What's the Difference?

October 21, 2014 | Suzanne Hausknecht

You may argue that there is no difference between loss to lease and concessions, since both come out of rental income in the end. However, many owners and managers prefer to account for this gap between market and actual rents in a specific manner.

Unless you are managing a brand-new community lease up, you most likely have below-markets rents at your properties. This occurs due to market rents rising while contract rents remain locked in at a certain figure.


Accounting for the Gap

Some account for this gap in a distinct loss to lease line item, deducting the difference from gross potential income right off the top. In other cases, it’s recorded as a concession.

To make matters even more complex, some prefer to treat new lease discounts as loss to lease while recording renewal discounts as concessions.


An Opportunity

Even if you record new lease discounts and renewal discounts in the same manner, there is value to having separate line items for these deductions to help with budgeting and forecasting into the future.

Examining your historical operating budgets and this loss to lease or concession figure can help you determine where you have the largest gaps between what you are getting in rents versus what the market will bear. In this sense, loss to lease should be seen as an opportunity—a starting point for figuring out how to close these gaps.


Percentage of Total Income

As you know, loss to lease can add up quickly.

If the market will bear $1,200 for a one-bedroom apartment unit, and the current lease term on this unit is $1,000, this $200 monthly difference or $2,400 annual difference is the loss to lease. Multiply that by 100 units at the property that have this discount and you’ve got a $240,000 loss.

So what, then, is an acceptable loss to lease figure?

Many owners and manager try keep the loss to lease number at 2-3% of gross potential income, although in some cases it can go as high as 10% of GPI.

How do you account for this gap between market and contract rents at your properties? What is an acceptable loss to lease figure? Post your thoughts in the Comments section below.

For more on loss to lease, check out the IREM on-demand course: Understanding Loss to Lease.

About the Author
Suzanne Hausknecht is a Senior Curriculum Developer at IREM Headquarters in Chicago. She works with IREM members to develop classroom and online courses.

Photo Credit: Mitchell J. Goldstein via Compfight cc

Comments

02 Jan 2019 | Alice Devine
I enjoyed this article. As a note, when interacting with the brokerage community, property managers should be aware that the vernacular "loss to lease" oftentimes refers to the downtime (and the resulting loss of potential income) of a vacant suite while "concessions" refer to the compromises contained within a lease to a tenant (free rent, rights to extend, etc.). In order to best communicate within local communities, property managers should be aware of how terms are commonly used...and they differ depending on geography. www.devinerealestateguide.com
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21 Oct 2014 | Kathleen Silver
Acceptable depends upon the market conditions. If the MSA is currently experiencing growth in rents then, financials should reflect a closing gap between both act/bud and lesser % of LTL in GPI. Concessions and discounts would be relegated to a certain % of vacancy loss (loss leaders). The inverse applies for market conditions which are unfavorable to rent growth. There are also extenuating circumstances such as mismanaged properties, or neighborhoods which are undesirable.
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