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Lease up Allowance
How should an investor make a lease-up allowance for vacancy in a property they wish to purchase?
 
The text book approach is to apply a market rental to the vacant area then make allowance for the time that would be required to attract a tenant.  The allowance including loss of income, plus provision for advertising and agents commission.
 
This is an appropriate starting point, however depending on factors such as:
  • the quality of the available space;
  • demand for that particular category of property;
  • investor demand and attitude; and 
  • likely buyer profile;
we consider an additional allowance is often required for the risk that the space will not be filled at the assessed market rental or within the nominated time frame.
 
This risk factor can be provisioned for by adjustment to the capitalisation rate or an adjustment of the market rental back to a rate that would virtually guarantee a tenant could be found within the nominated time frame. 
 
Herron Todd White's policy is to adjust the capitalisation rate to provide for the risk, however each property is assessed on its merits.
 
 
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