Updated · Part of the CRE investment glossary
How loss to lease works
Market rents move faster than leases. A tenant who signed a year ago, or who renewed with a small increase, may pay less than a new tenant would pay for the same unit today. That difference is loss to lease. It is not lost money in the sense of vacancy or bad debt; it is income the property has agreed, by contract, not to collect until the lease turns over.
Loss to lease appears in two places. On a rent roll, comparing each unit’s lease rent with its market rent shows it directly. On an operating statement that books gross potential rent at market, it is a deduction line on the way to effective gross income.
The formula
For a month, across occupied units:
Loss to lease = Σ (market rent − lease rent) for each occupied unit Loss to lease (%) = loss to lease ÷ market rent of occupied units
- Market rent: what the unit would lease for today, from the sponsor’s own recent leases and comparable properties.
- Lease rent: the contract rent in place, before concessions. Concessions are tracked separately.
- Vacant units are excluded; their lost rent is vacancy, not loss to lease. Some reports state the percentage against total gross potential rent instead, so check the denominator.
Worked example: a 100-unit rent roll
A fictional 100-unit property has a market rent of $1,600. Sixty units pay $1,500 under older leases, 32 pay $1,600, and 8 are vacant. Loss to lease is 60 × $100 = $6,000 of rent each month, or $72,000 a year.
Against the market rent of the 92 occupied units ($147,200 a month), that is 4.1%; against gross potential rent of $160,000 a month, 3.75%. If every below-market lease renewed at $1,600 with no added cost, NOI would rise by $72,000; at an illustrative 6.0% cap rate, that is $72,000 ÷ 0.06 = $1,200,000 of value. In practice not every tenant renews at market, which is why underwriters phase it in.
| Units | Lease rent | Market rent | Loss to lease a month |
|---|---|---|---|
| 60 occupied | $1,500 | $1,600 | 60 × $100 = $6,000 |
| 32 occupied | $1,600 | $1,600 | $0 |
| 8 vacant | — | $1,600 | Vacancy, not loss to lease |
| Total (92 occupied) | $141,200 | $147,200 | $6,000 (4.1%) |
Loss to lease, vacancy, concessions and gain to lease
Each line measures a different gap between potential and actual rent, and an operating statement should keep them apart. Vacancy is rent lost on empty units. Concessions are free rent or discounts granted to sign or renew a lease. Credit loss is rent billed and not collected. Loss to lease is the below-market rent agreed in leases that are in place.
When lease rents are above market, for example after market rents fall, the result is negative and is called gain to lease. It is a risk rather than upside: those tenants may renew lower or leave.
What to check before you underwrite it
A large loss to lease is the core of many value-add plans. Test it:
- Market rent: is it supported by the property’s own recent leases and by comparable buildings, or only by a broker’s opinion?
- Lease expirations: how many leases roll each month, and how quickly the gap can close.
- Rent rules: rent control, rent stabilisation or affordability covenants can cap increases.
- Turnover cost: pushing renewals to market raises move-outs, vacancy and make-ready costs.
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.