Vacancy allowance is a line item on a real estate pro forma that accounts for expected vacancy of the property. The specific allowance is dependant on the property type and supply and demand factors of the underlying market. The vacancy allowance applied during underwriting may be greater or less than the current actual vacancy rate the property is experiencing.
For example, a banker may apply a 7.0% vacancy rate to a property that is only 4.0% vacant for the purposes of establishing loan proceeds. This may be the case if the market or submarket in which the property is located has an overall vacancy rate of 7.0%, based on the premise that the property will perform inline with the market over time. However, there many factors in which the vacancy allowance may deviate from the actual rate or market average including credit strength of a property’s tenants, physical condition and appearance of a property compared to the market, specific location of a property or historical performance of the asset.
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Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment.
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