Collection Losses

Hi Josh,

Great question. I would not say that Collection Loss (i.e. Credit Loss) is synonymous with vacancy. The drivers of Collection Loss are quite distinct from the drivers of physical vacancy. However, as was the case with 55 Crescent Apartments and The Foles, I usually assume any risk of Collection Loss is captured by my General Vacancy assumption.

So why not separate Collection Loss out from Vacancy in the cases in this course? This really comes down to how much of a reality Collection Loss is at the property. There are certain properties where delinquency is negligible (e.g. luxury class A property), and so it’s easier to just assume that your General Vacancy assumption captures any credit loss that might occur. On the flip side, if you’re underwriting a property with a persistent delinquency issue, it makes sense to break that out into it’s own line item. That way you can assess how much revenue is lost due to delinquency versus physical vacancy.

I would suggest as a rule of thumb, if you have a clear history of Credit Loss that impacts EGR by more than 1% per year, it would make sense to break it out. Otherwise, it’s cleaner to not separate it.

Thanks for the question,

Spencer