What is the primary distinction, for appraisal purposes, between 'vacancy loss' and 'collection loss'?
Correct Answer
C) Vacancy loss is for unoccupied space; collection loss is for occupied space where rent is not collected.
Vacancy loss concerns income not earned because rentable space is unoccupied. Collection or credit loss concerns amounts due from occupied space that are not collected. Estimate the bases consistently; neither is an operating expense deduction automatically applied to a different denominator.
Why This Is the Correct Answer
Option C is correct because vacancy loss reflects income not earned on unoccupied rentable space, while collection (credit) loss reflects rent owed by occupying tenants that is not collected. Together they form the allowance for reductions in potential income due to vacancies, turnover and nonpayment of rent.
Why the Other Options Are Wrong
Option A: Vacancy loss applies to residential properties; collection loss applies to commercial.
Option A wrongly ties vacancy loss to residential property and collection loss to commercial property. Both types of loss can occur in any income-producing property, residential or commercial.
Option B: Vacancy loss is a future projection; collection loss is based on historical data only.
Option B claims vacancy loss is a future projection while collection loss rests only on historical data. Both are estimated in the same way, using historical, competing-property and market evidence to forecast expected losses.
Option D: Vacancy loss is deducted from potential gross income; collection loss is deducted from operating expenses.
Option D says collection loss is deducted from operating expenses. Like vacancy loss, collection loss is deducted from potential gross income to arrive at effective gross income; it is not an operating expense adjustment.
Empty space versus unpaid space
Vacancy means nobody is there; collection loss means somebody is there but did not pay. Both come off potential gross income.
How to use: Use the empty-versus-unpaid picture to classify any lost-income item in an exam question.
Exam Tip
When options split the two losses by property type or data source, look instead for the option that separates them by occupancy.
Common Mistakes to Avoid
- -Treating collection loss as an operating expense
- -Assuming vacancy loss applies only to residential property
- -Counting rent arrears from occupied units as vacancy
Concept Deep Dive
Analysis
This question tests the difference between the two components of the vacancy and collection loss allowance. Vacancy loss arises from space that is empty, while collection loss arises from space that is occupied but whose rent is not paid. Both reduce potential gross income; neither depends on property type or on whether the data are historical.
Background Knowledge
The vacancy and collection loss allowance accounts for reductions in potential income from vacancies, tenant turnover and nonpayment of rent. It is subtracted from potential gross income to reach effective gross income. Appraisers estimate it consistently with how the comparable data were measured.
Real-World Application
An appraiser analyzing a 40-unit apartment complex finds two units empty and one occupied tenant three months behind on rent. The empty units feed the vacancy estimate, while the unpaid rent informs the collection loss estimate, and both are deducted from potential gross income.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
An appraiser is updating a prior appraisal of a triplex with potential gross income of $60,000 and no other income. The prior appraisal used vacancy and credit loss of 5% of PGI, and a new survey of competing rentals indicates 8%. The operating expenses of $24,000 are property taxes, insurance and contract services that do not vary with occupancy, and the market overall rate remains 7.5%. By what percentages do effective gross income and indicated value decrease?
Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
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Previous Question
The subject property is a 50-unit apartment building with 40,000 rentable and 44,000 gross square feet. Potential rent is $400,000 with 8% vacancy and collection loss. Expenses are property taxes of $30,000 a year, insurance of $0.50 per rentable square foot a year, maintenance of $600 per unit a year, a trash contract of $900 per month and management at 5% of effective gross income. The overall rate is 8%. What is the indicated value by direct capitalization?
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In a model separating base rent from ancillary real-estate receipts, which listed item belongs in the ancillary other-income line?