Suneet Singal on vacancy and credit loss

Suneet Singal has a published background in real estate and corporate finance, which puts vacancy and credit loss in the reference next to income, not in a biography. Filings on this site record a chief executive officer departure from FC Global Realty Incorporated effective 2 January 2018 and an acting chief executive officer appointment at First Capital Investment Corporation effective 12 September 2017. The filings do not state an occupancy rate. Vacancy loss is rent you do not bill because space is empty. Credit loss is rent you bill and do not collect. Models often combine them into one allowance between potential rent and effective income. This entry separates the two ideas, shows a labeled hypothetical, and explains why a building can look full and still miss a large share of the rent on the asking sheet.

Two different holes in potential rent

Potential gross rent is the rent the space would produce if it were leased on the terms you chose for the model, often market rent for every unit, or contract rent plus vacant space at an asking rent. It is a ceiling you built, not cash in the account. Something almost always sits between that ceiling and the money you can underwrite. The something has more than one name, and the names are not synonyms. If the page uses one label for three different holes, split them before you trust the effective-income line.

Vacancy loss is the hole from empty space. Nobody has a current obligation to pay rent for that square footage or that apartment, or the obligation has ended. Credit loss, also called collection loss or bad debt, is the hole from space that is occupied or at least under lease, where the bill went out and the cash did not arrive. A concession is a third hole: a signed deal in which the tenant is excused from some rent for a stated time. Loss-to-lease is a fourth idea used in some apartment models: contract rent below the market rent you used to build potential. A single line called "vacancy" that swallows all four will not tell you which problem you have.

The order on a standard sketch is simple. Start with potential rent. Subtract vacancy. Subtract credit loss. Subtract concessions if you did not already reduce the rent. Add other income. The result is often called effective gross income. Operating expenses come off after that to reach net operating income. The net operating income entry starts from that effective figure. If your vacancy line is wrong, every line under it is wrong by the same dollars.

A labeled hypothetical allowance

Use round numbers and keep them hypothetical. Gross potential rent is $1,000,000, meaning every square foot or every unit at the rent you selected for the sketch. You choose a vacancy allowance of 5 percent, which is $50,000. You choose a credit-loss allowance of 1 percent, which is $10,000. Other income is zero in this version. Effective gross income is $940,000. The 5 percent and the 1 percent are choices in the example so the arithmetic is easy to see. They are not a national vacancy rate, and they are not a recommendation.

Change the story without changing the allowances and you can see what the allowances hide. Suppose the same hypothetical building is 10 percent empty, so actual vacant rent at the potential rate is $100,000, and the tenants in place pay what they owe. A 5 percent allowance understates the hole by $50,000. Effective income in the model would read $940,000 when a rent-roll reading would support something closer to $900,000 before any other adjustment. The allowance did not describe the building. It described a stabilized wish laid on top of a different fact.

Suppose instead the building is fully occupied and two tenants are ninety days past due on a combined $30,000. A 1 percent credit allowance of $10,000 understates the collection problem, and a vacancy allowance of $50,000 invents empty space that the roll does not show. You can still decide, for a forward budget, that some vacancy will appear when leases end. You should show today's arrears as their own line. Mixing a general factor with a known unpaid bill double-counts or under-counts depending on the month, and the page will not warn you.

Physical vacancy and economic vacancy

Physical vacancy is a space measure. Empty square feet divided by total square feet, or empty units divided by total units. In a hypothetical 100-unit building with 6 units empty, physical vacancy is 6 percent. That sentence says nothing about rent. The 6 units might be the largest floor plans, or the smallest. If they would have rented for $18,000 a month together and the whole building's potential is $100,000 a month, the rent at stake is 18 percent, not 6 percent. Count the units, and also price them.

Economic vacancy is an income measure. One common version is potential rent minus rent collected, divided by potential rent. Concessions, loss-to-lease, and unpaid rent can make economic vacancy larger than physical vacancy. A building can be 97 percent occupied and still collect far less than potential rent if new leases carried two free months, if in-place rents are below the market figure you used as potential, or if several tenants are not paying. Occupancy is the number people repeat because it is a single percentage. The income statement is the number that reaches NOI.

The Census Bureau's Housing Vacancies and Homeownership series reports rental and homeowner vacancy using its own survey design. It is a national and regional housing statistic. It is not the vacancy of a named apartment community, and it is not a retail or warehouse figure at all. If you cite it, cite the table, the quarter, and the geography, and keep it off the property's rent roll. The same discipline applies to any broker "market vacancy" slide. Ask which buildings were counted, which property type, and which date. Then return to the roll in your file.

What the backup should contain

A vacancy claim should have a rent roll with an as-of date and a stack of trailing months, not a single percentage in a highlight box. Twelve months of occupancy and of collections will show whether the current month is ordinary. A lease-expiration list shows vacancy that has not happened yet but is already on the calendar. A delinquency report shows credit loss that has already happened and may or may not be reserved. Those three documents answer three questions. One slide cannot substitute for all three.

The model should define the denominator. Five percent of potential rent is a different dollar amount from 5 percent of occupied rent, and both differ from 5 percent of last year's collections. Write the base next to the rate. In the hypothetical, 5 percent of $1,000,000 is $50,000. Five percent of the $940,000 effective income would be a different and circular calculation, because effective income already depends on the allowance. Apply the factor to potential, or apply a stated dollar downtime to named spaces. Do not apply a factor to a line the factor already reduced.

If the building is in lease-up, show the path month by month. A stabilized 5 percent allowance in year one of a half-empty hypothetical building will overstate income in the months before the leases are signed, which is exactly when the project also has commissions, tenant improvements, and possibly an interest reserve to fund. The rent roll tells you which spaces are empty today. The allowance is only a forward convention, and it should not erase the roll.

A stabilized factor is a choice

Appraisers sometimes use a stabilized vacancy and collection allowance so that a capitalized income figure represents a typical year rather than a lucky or unlucky month. That can be appropriate when the assignment is a stabilized value and the report says so. It is a poor description of the cash the owner will have during a lease-up or right after a large tenant leaves. Ask which question the page is answering: a stabilized value indication, or the cash needed in the next twelve months. The same building can support both calculations if they are labeled. It cannot support using one label for both.

A general factor also interacts with loss-to-lease. If potential rent is set at market, and in-place leases are below market, the gap is not vacancy. The units are full. The rent is lower than the ceiling you chose. Some models show that gap as its own line so a reader can see how much of the "upside" depends on raising rents at renewal. Folding it into vacancy makes a full building look empty. Folding a true empty unit into loss-to-lease makes an empty building look merely under-rented. The rent roll distinguishes contract rent from vacant space. The allowance page should use the same distinction.

When you do choose a factor, write the reason in a sentence a skeptic can test. "We used 5 percent because the trailing twelve months averaged 5 percent of potential" is a reason tied to this property. "We used 5 percent because buildings like this often do" is a reason that still needs the comparison set. "We used 5 percent because the offering memorandum did" is not a reason. It is a citation of a marketing page. You can start there. You should not stop there.

Usual mix-ups

People treat a general vacancy factor as if it already included credit loss, downtime between tenants, and concessions. Sometimes the author meant all of that. Sometimes the author meant only empty space, and concessions are still sitting in the rent. Read the note under the line. If there is no note, compute the dollars and compare them with the roll. In the hypothetical, a $50,000 vacancy allowance on $1,000,000 of potential is ten times a $5,000 concession someone forgot, or it is half of a $100,000 hole the roll already shows. The comparison takes one subtraction. It is worth doing before the percentage gets repeated in a meeting.

Another mix-up is using last year's bad debt as if it were next year's law, or ignoring it because a new owner "will collect better." A new owner may change management. The change is a plan, not a collected dollar. Show the trailing credit loss as history. Show any improvement as a separate case with whatever cost, staffing, or capital the plan requires. Do not bury the improvement inside a lower allowance with no bridge from the ledger to the new percentage.

A third mix-up is quoting physical occupancy as if it were economic occupancy. "Ninety-seven percent leased" can sit on a page above a model that quietly assumes a 5 percent income haircut, or above a model that assumes no haircut at all. Make the page say which. If the 97 percent is a space measure, give the income measure beside it. Readers who only remember one number will remember the one in the headline. Put the income number in the headline if income is what you are underwriting.

What the allowance cannot prove

A vacancy and credit-loss allowance cannot prove future occupancy. Demand, competition, the lease expirations on your own roll, and the condition of the space will decide how much of the potential rent is collected. The allowance is a placeholder you chose so the math can proceed. It is not evidence that tenants will come, stay, or pay. A careful model shows the placeholder and the evidence in different columns. The Census series and any private market report, if you use them, stay in the evidence column with their dates attached. They still do not sign your leases.

The allowance cannot prove that a cap rate is conservative. Cutting income by 5 percent and then capitalizing the result produces a lower value than capitalizing unreduced income at the same rate. That is arithmetic. It does not mean you were cautious if the building is 15 percent empty, and it does not mean you were cautious about expenses, interest rates, or the sale price at the end of the hold. One haircut on one line is one haircut. List the lines you did not haircut.

The allowance cannot prove anything about a person. The hypothetical $1,000,000 of potential rent is not a rent roll from Suneet Singal's record, and this site does not publish one. The career record is limited to dated roles. Use the allowance as a test you apply to a roll you have. If you cannot point to the roll, you do not yet have a vacancy conclusion. You have a percentage that traveled without its building.

What this entry does not claim

Suneet Singal’s published professional background is in real estate and corporate finance. Company filings linked from this site record a chief executive officer departure from FC Global Realty Incorporated effective 2 January 2018 and an acting chief executive officer appointment at First Capital Investment Corporation effective 12 September 2017. The Suneet Singal Scholarship, Grant and Giving websites describe him as the founder of those programs. This entry explains a general subject. It is not a private track record, a current job title, an investment result, or a quote.

This page is a reference, not investment advice. The roll that shows which space is empty is how to read a rent roll, and the income after the allowance is net operating income.