Loss to lease is one of the most essential metrics in multifamily real estate, and can be defined as the difference between actual rent and market rent. In general, this income is lost by offering incentives to encourage tenants to sign a lease. For accounting purposes, loss to lease is generally recorded as a separate line on an accounting balance sheet.
In most commercial leases, rents are set to increase over time. How often, and by how much they increase is specified in a lease contract’s rent escalation clause. Rent escalation clauses are essential for commercial landlords, since, if rents did not increase, landlords would not be able to keep pace with inflation. In practice, this means they likely be unable to continue renting their properties due increase maintenance and operating costs.
Net effective rent is a calculation of average monthly rental cost that incorporates landlord rental concessions, typically a free month of rent. For example, if an apartment was being advertised with a net effective rent of $1500/month for a 12-month lease with one month of free rent, it might actually have a monthly rent of $1625. However, if you take the entire rent paid over the 13-month period, it actually has an average, or “net effective” rent of $1500/month.
A lease assignment occurs when a tenant fully transfers their lease to another party. This is particularly important for tenants who wish to get out of their leases early due to financial issues, especially if a landlord does not allow subleases. In general, the landlord must agree to the lease transfer, and usually records their consent to it via a document called a “license to assign.”