Glossary
Vacancy and Credit Loss
Vacancy and credit loss is the deduction from gross potential rent for income a property will not collect because units are empty or tenants fail to pay. Underwriters express it as a percentage of potential rent and set it based on property history, market conditions and lender minimums to arrive at effective gross income.
Formula
Example
A property has gross potential rent of $2,000,000. Current vacancy is 3%, but submarket vacancy runs 6% and the property's bad debt history is about 1%. A lender underwriting 6% vacancy plus 1% credit loss deducts 7%, or $140,000. If the seller's pro forma uses 3% total ($60,000), the $80,000 difference in NOI is worth about $1,333,000 of value at a 6.0% cap rate.
How it is used in underwriting
This line converts a theoretical rent figure into realistic income. Lenders usually underwrite the higher of actual vacancy, market vacancy and a policy minimum, because current occupancy can drop when leases expire, a property is sold or the market softens. Credit loss captures tenants who occupy space but do not pay. For apartments, underwriters review delinquency reports and write-offs; for commercial properties, they evaluate the credit quality of major tenants and the lease expiration schedule. Since NOI and therefore value and loan size flow from this assumption, a few percentage points can change proceeds materially.
Common mistakes include applying the current occupancy rate to a property about to lose a large tenant, ignoring concessions that function as hidden vacancy, and assuming the same vacancy for a single-tenant building as for a multi-tenant one. For single-tenant net lease properties, vacancy is binary, so underwriters focus on tenant credit and the time and cost to re-lease rather than a percentage. During lease-up or after renovations, vacancy should reflect a realistic absorption schedule. Equity buyers may underwrite lower vacancy based on a business plan, but lenders generally underwrite what the property has demonstrated.
Typical benchmarks
Many lenders apply a minimum vacancy and credit loss factor of roughly 5% even to fully occupied multifamily properties, and often higher floors for commercial properties with significant lease rollover.
Run the numbers: NOI Calculator
Frequently asked questions
What vacancy rate should I use for underwriting?
Use the higher of the property's actual vacancy, the submarket vacancy for comparable properties and the lender's minimum. Many lenders use a floor around 5% for stabilized apartments. For commercial properties, consider upcoming lease expirations, tenant credit and the time needed to re-lease space.
What is the difference between vacancy and credit loss?
Vacancy is income lost because space is not leased or occupied. Credit loss is income lost because a tenant occupies the space but does not pay rent in full. Both reduce collected income, so underwriters often combine them into a single deduction from gross potential rent.
Why do lenders use vacancy even when a property is 100% occupied?
Full occupancy today does not guarantee full occupancy over the loan term. Tenants move out, leases expire and markets change. Applying a minimum vacancy factor gives lenders a cushion so the loan remains supportable when normal turnover occurs, rather than sizing the loan on a best-case snapshot.
Related terms
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