PGI, EGI & Vacancy
~11 min read · Build the income statement top: potential gross, vacancy/collection, effective gross.
The income approach's statement starts at the top: potential gross income at market rent, minus vacancy and collection loss, plus other income — effective gross income. Get the top three lines right and NOI follows; the exam tests the definitions and the market-vs-contract rent distinction.
PGI: the full-occupancy fiction
Potential gross income assumes every unit rented all year: units × market rent × 12 (for fee-simple valuation; leased-fee analysis runs contract rent on leases in place with market rent on vacancies and rollover). Market rent comes from comparable rentals, adjusted like sales comps. The market/contract distinction is the interest-appraised question again: fee simple wants the market's rent; the leased fee wants the leases'.
- PGI = full occupancy at the applicable rent
- Fee simple → market rent; leased fee → contract rent + rollover
- Rent comps support the rate
Vacancy, collection, and other income
Vacancy and collection loss deducts as a percentage of PGI — supported by the subject's history, competing-property vacancy, and market surveys; even a currently full building carries a STABILIZED allowance (tenants turn over; some don't pay). Other income — laundry, parking, storage, fees — adds after the vacancy line (or with its own allowance). The result: effective gross income, the income the property realistically collects.
- V&C % of PGI, market-supported, applied even when full today
- Other income: ancillary streams, added in
- EGI = PGI − V&C + other income
Stabilization discipline
The pro forma states a stabilized year — typical, sustainable performance — not last year's anomaly (the flood vacancy) nor the optimist's brochure. One-time events are normalized out; above/below-market leases are flagged for the leased-fee analysis. Every line ties to support: rent rolls, leases, expense statements, market surveys — the workfile's income section.
Worked example
A 12-unit building: 8 units leased at $1,400 (older leases), 4 leased at $1,600; market rent for all units is $1,650. Market vacancy for the class: 6%. Laundry and parking net $6,600/year. Compute PGI and EGI for a FEE SIMPLE assignment — then note what changes for the leased fee.
Fee simple runs market rent: PGI = 12 × 1,650 × 12 = $237,600. V&C: 6% × 237,600 = 14,256 → 223,344. Other income: +6,600 → EGI = $229,944. Leased fee instead honors the leases: contract PGI = (8 × 1,400 + 4 × 1,600) × 12 = (11,200 + 6,400) × 12 = $211,200 until rollover — the $26,400 annual shortfall versus market is the leasehold's value living in the tenants' pockets. Same building, two EGIs, because two different interests. The stabilized 6% applies in both — today's full occupancy doesn't erase turnover reality.
Common exam pitfalls
Skipping vacancy because the building is full.
Stabilized analysis carries a market-supported allowance regardless of today's rent roll.
Mixing contract and market rent without naming the interest.
Fee simple = market rent; leased fee = contract rent with rollover — the interest decides the line.
Building the pro forma on an anomalous year.
Stabilize: normalize one-time events toward sustainable performance.
Full house at the right rent, minus the empty and the unpaid, plus the laundry — that's EGI.
Recap
- PGI: full occupancy at market (fee simple) or contract (leased fee) rent
- V&C loss: stabilized percentage of PGI, always
- Other income joins after
- EGI = PGI − V&C + other
- Contract-vs-market gaps price the leasehold
- Stabilized year, supported lines
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