How loss-to-lease is calculated
For each occupied unit, subtract the contract rent from the market rent. Add up the differences across the building and you have the total monthly loss-to-lease. Dividing the total by gross potential rent at market expresses it as a percentage.
Market rent is an estimate, usually based on recent leases in the building and rents at comparable properties nearby, so it is worth asking how it was set before relying on the figure.
A worked example
A 20-unit building has market rents of $1,500 per unit, or $30,000 a month at full occupancy. The leases in place average $1,380, or $27,600 a month. The loss-to-lease is $2,400 a month, or $28,800 a year — 8% of market rent.
If that gap can be closed as leases renew, NOI rises by up to $28,800 a year before any change in expenses. At a 6% cap rate, that is potentially about $480,000 of value, which is why buyers look for it.
Why buyers care, and why they discount it
Loss-to-lease is common in buildings with long-term tenants and owners who have not raised rents. For a buyer, it represents upside that does not require renovation: rents can be brought to market over time as leases turn over.
Buyers rarely pay full price for that upside. Closing the gap takes time, some tenants move out when rents rise, turnover adds cost, and rent increases must comply with local law. In rent-regulated markets, part or all of the loss-to-lease may never be recoverable, which is why underwriting in those markets focuses on what the rules actually permit.
Gain-to-lease
The opposite can happen. If market rents have fallen since leases were signed, tenants may be paying above market, creating gain-to-lease. That income may not survive renewals, so buyers treat it as a risk rather than an asset.
