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This might be splitting hairs, but do you see concession percentages being driven off of [Market Rent – Loss to Lease – Actual Vacancy (If applicable)]? Would this paint a more accurate picture as to what portion of actual revenue goes to concessions (I.E. if average concessions are 1-mo free rent, the percentage would come out to 1/12 = 8.33%. The percentage can then be more easily interpreted in this way)? Thanks!
You are splitting hairs, and that’s a good thing. In acquisitions they call that sharpening the pencil, and it’s often the difference between winning or losing a deal.
In practice, a lot more goes into underwriting concessions than my simple method here. I go more in depth on underwriting multifamily concessions in our Income Statements – Multifamily course
But the question you’re ultimately asking with direct cap underwriting is, what is likely to be the average concessions at the property over the long-term (remember the into perpetuity concept)? In multifamily that number is usually close to zero but I threw something into this exercise so I could introduce the concept.
So back to sharpening our pencils. In a back-of-the-envelope pass at a deal, if I believe there will be concessions long-term, I might use some simple/conservative methodology (e.g. % of rent). As the deal becomes more real, I’ll spend more time digging into concessions.
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