Apartment Budgeting
Apartment Budgets: Loss to Lease
Welcome back for another installment of the Apartment Budget series. Today we are going to talk about Loss to Lease. Interesting side note, I did a piece on this a number of years ago and to this day it remains the number one read article on this blog.
Before we get started, I wanted to post a note of clarity as it relates to my last entry – Apartment Budgets: Rental Income. Where I refer to Rental Income in that post – I am really talking about Gross Potential Rent as being the top line. You may also hear it referred to as GPR. In any event, I wanted to head off any confusion.
LTL
Now unless you have a brand new community in lease up, you will have in place leases that are very likely below the GPR. The primary reason being rent increases. Any time you increase rents you create a margin between the in place leases and the new increased GPR. This can occur in reverse and the impact to the LTL can go in reverse. That is to suggest that you can decrease the GPR and the margin or LTL becomes positive. Not a scenario you see to often as rents generally rise over time in lieu of decline over time.
Loss to Lease – New Move In
To put it simply; if you lease an apartment below the GPR, the discount is captured in a Loss to Lease – New Move In line item. To put some math to it; if your apartment’s GPR is $500 and you lease it for $450, the $50 reduction in rent is capture in the Loss to Lease – New Move In line item as a -$50 charge. And, it will exist for the life of the lease.
Loss to Lease – Renewals
When leases come up for renewal and they are under the GPR number – the margin is by default in the current Loss to Lease line item. When the lease renews, if it is still under the GPR that new number gets captured in the Loss to Lease – Renewal line item. Putting some math to it. Suppose your apartment’s GPR is $500 and the current in place lease is $450 – you renew it at $475. The $25 margin is captured in Loss to Lease – Renewals.
Total Effective Rent
Once you have accounted for your losses related to in place, new and renewed leases under the current Gross Rent Potential – you come up with a Total Effective Rent. That is where we will pick up next week.
We have purposefully left out the analysis piece this week because I think it will fuel some crazy cool discussion. Hope to see you in the comment section below.
Your – lovin’ budgets – multifamily maniac,
M
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Apartment Budgets: Rental Income
The Numbers
It all comes down to the numbers. Be it an operational spend or a big capital spend, it all comes back to a math problem to be considered and or solved. At that and the prompting of one of our accounting team members at Mills Properties, I will be dedicating Tuesday to the numbers.
Walking Through an Apartment Budget Top to Bottom
We are going to take apart one of our budgets by defining each and every line item, one at a time, over the next year or so. Yes, we really have that many line items. The thought is that over time we will, as a group, gain a very deep and thoughtful understanding of the line item definitions, relationships and things that drive each. We will learn tips and strategies to move income and expenses in the right directions.
Speaking Greek
Full admission – numbers are not my favorite part of the multifamily business. I can do it. I understand the relationships. And, I know how to move them in the right directions. But, as much as I try, I am just not the analytic left brain thinker. I am as far from pragmatic and methodical as you can get. I am a right brain thinker, creative in nature and never like to do the same thing the same way twice. Numbers are the work side for me.
I say all that to say this, this will be as much an education for me as it will hopefully be for you. So, comment away. Call me on the carpet when I am off. Add to the conversation when you see fit. Do it under the premise that you will be helping tons of people get a confident understanding of our financial game plans.
Apartment Rental Income
Item of note: I am working from a non-revenue management model.
This is the top line. This is where it all starts. Some call it market rent, others call in the pixie dust sprinklers as the line is really meaningless.
Rental Income can be defined as the maximum rents at 100% occupancy. It’s the number you would collect if every single unit were physically occupied and everyone paid their rent at the full value of the lease.
Where do we derive the number? It really is made up. In all fairness it is predicated on your comps in the market place. We like to think of our comps as the three to five communities that you lose the most leases to. I like to think we make the market and the comps predicate their tops lines accordingly. Whatever the case, it’s a market generated number.
When does it change? It can move down but more often than not it moves up. It is predicated on a good number of factors to include broader things like the economy, jobs and household formations. Or more minutely on the classic supply and demand factors set inside of seasonality. And, it is down on a unit type basis. If you are very highly occupied in a specific unit type then you should raise. If you have tons of inventory with little to no demand – you keep the rents neutral. That last sentence might drive you to think you should lower rent. And, in some management companies that would be a true statement. For us, we leave it in place and compete with concession – which we will discuss in a future post.
What is the fastest way to move this line item up-up-up? By being remarkable.
Perspectives
I have left a number of perpectives out of this post and maybe treaded on others – please keep the discussion going in the comments section below. My accounting friends will love you for it and I will thank you for the education.
Your, digging into apartment budgets, multifamily maniac,
M
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#apartmentbudgeting: Shop the Comps
Just another quick tip before you kick off another season of multifamily budgeting
Shop your comps – not for the reason of selling to meet their level of product or service but rather as a way of discovering ways to sell beyond their offerings.
Your budget should reflect not what it takes to compete but rather what it takes to crush. Or, what it takes to create a completely different experience for people to fall in love with.
Happy budgeting…
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#apartmentbudgeting: Think Value
Short and sweet budget tip for 2012…
When thinking about your marketing spends in 2012 think in terms of what will bring value to your ideal resident in lieu of what your absolute spends will be on print, internet, social media and the like.
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