Editor's note: The original document included a sample projections/proforma screenshot illustrating the LTL line item. That image has not been reproduced here and may be added later.
Loss to lease is one of the many terms included in the investor packets. Loss to lease is defined by the difference between the market rent and the current rent. It is often a percentage of the gross potential rent (GPR). This loss is not an actual loss, but rather a paper loss. It shows how much opportunity is lost due to the existing rents being lower than market rents.
It's usually shown on the page with the projections or proformas.
The LTL may vary depending on the type of deal it may be (Core, Core Plus, Value-Add or Opportunistic). For example, if the LTL is 1.5%-3% then the property is stabilized and it is likely a core deal. If the LTL is 25%, then it is likely a value-add deal with significant renovations needed to reach market rents. In value-add deals, one thing to look out for is how quickly the LTL becomes stabilized.
Can the Total LTL Ever Be 0%?
Ideally, the total LTL should not be 0%. If it is, then the projections are aggressive. There is hardly a time when all units at the complex are priced at market rent. Also, rents increase each year. When a newly renovated unit is able to achieve market rent, within six months it is already behind the current market rents. For example, let's say a unit is at market rent on January 1st. Assuming a 3% annual rent increase, by July 1st it is already behind by 1.5%.
What to Consider as an Investor
As an investor, some of the things to consider when looking at LTL are:
- Verify the market rent is feasible. Some projections can have rents that are too high and not feasible. This may give the impression that there is more opportunity to increase the NOI than the market will allow.
- Unrealistic timeline for reductions in LTL. In value-add deals, NOI is increased through renovations and increasing rents one unit at a time. As this occurs, the overall LTL will decrease. However, this is a continual process and it takes time to implement. Verify the assumptions in how many months it takes to decrease the LTL. If the LTL goes from 25% to 1.5% in 12 months, that may be a cause for concern.
- No increase in LTL for units under construction. The LTL is at its highest when vacant units undergo renovations. Renovations take longer than turns for classic units. There could be additional time needed due to the increased renovation scope and leasing at market rents. The LTL should reflect this additional time for vacant units.