In the spirit of the upcoming 2012 budget season; I wanted to recycle this post. This is a subject of much debate in our office and I am interested in what the industry thinks.
Loss to Lease
There is a question floating around our office along the lines of, “What do you book in loss to lease line of your budget?” Also, “On a percentage basis, where do you like to see that number trend?” With that question comes a number of schools of thought but no real definitive answer. And, that being said, I am not sure there is a right way or a wrong way to look at it. In the end, it all shakes out in the Rental Income line. That said, there is value in tracking the discount from new vs. renewals and even budgeted rental increases that drive the loss to lease margins.
Our current practice is to book both discounts from new sales and renewals to a single loss to lease line. And, we try keep the loss to lease number at two to three percent of the the gross potential or top line – if you will.
Here are a couple of schools of thought to throw out there:
What gets booked in loss to lease?
1. The only thing that gets booked in the loss to lease line is discounts from market on new leases only. Renewals that maintain any discount from the top line should be booked as a concession.
2. Any discount from market gets booked as an upfront or recurring concession – be it a new lease or a renewal that transacts at a rate lower than the top line.
Where should loss to lease trend as it relates to the top line?
1. The number should be maintain between two to three percent of your top line
2. The number will trend at nearly ten percent of your top line
Is there real value in tracking loss to lease as a line item?
If it all shakes out in the rental income number – is there any real value [up market or down market] to tracking this number?
I’m curious to hear your thoughts. I am really curious to hear from those of you that are utilizing LRO as I think you have done away with the concept of loss to lease – correct?
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Apartment Loss to Lease – How do you book it?: There is a question floating around our office along the lines of, … http://bit.ly/6phi6f
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Our company books to both Loss to Lease and Concession. It depends on how management logs it into the accounting system. I have had Leasing Agents log these incorrectly from company policy and it screws up the whole monthly financial reports because they are so used to having it itemized this way.
Yes, there are 2 camps on this subject and I have worked in both of them. My conclusion: tomato/tomatoe…it's the same thing: rents you are NOT achieving as compared to market rents. Also, as Mindy points out, it can cause a lot of confusion to the onsite teams and cause numerous accounting errors as a result when you book some of your dicsounts to LTL and some to recurring concessions. In order to manage the renewal process at a non-LRO property, you must be able to accurately guage what your residents are paying today on a certain floorplan in order to affectively set your renewal pricing strategy. When rent “differences” are booked both in LTL and concession line items, the water can get really muddy, especially on the operating reports which managers and supervisors use often.