If you’re unlucky enough to have rented property to a tenant who didn’t pay you or who destroyed the property, there’s a formula for calculating your actual losses. In fact, there are a number of handy formulas for the damages suffered by property owners due to the loss of rental income. These formulas can be applied whether the losses result from high vacancy rates, market forces, rent collectability problems, or physical property damage. While not perfectly scientific, the formulas provide expedient shortcuts for estimating damages due to lost rental income.
Quick Rental Loss Formula
The quick rental loss formula (QRL) is a handy device for estimating damages caused by nonpayment of rents and vacant office suites or apartment units. Determining the quick rental loss requires the NOI, the anticipated rent increase (RI), the estimated vacancy rate (EVR), and the estimated rental default rate (ERD). The formula is:
QRL = NOI x RI x (EVR + ERD)
Suppose an environmental catastrophe causes 20% of the tenants in an apartment building to cancel their leases or to opt out of renewing their leases. Another 10% of the available units are unrentable because of the stigma created by the nearby environmental calamity. The apartment therefore has an EVR of 30%. Let’s also assume that another 10% of the tenants simply stop paying their rents: thus, an estimated ERD of 10%. Let’s also say that, in this case, the NOI for the apartment building was $65,000. The anticipated RI for the upcoming year is 4%. Let’s apply the formula:
QRL = NOI x RI x (EVR + ERD)
QRL = $65,000 x 1.04 (.30 +.10)
QRL = $65,000 x 1.04 x .40
QRL = $27,040
So, based on the figures provided, the anticipated rental loss for the upcoming year will be $27,040. While the QRL formula is not scientifically precise, and in fact is only as valid as the estimates used in the formula (RI, EVR, ERD), it provides a convenient shorthand for calculating damages in a case in which the loss of rental income is the primary setback.
Property Damage Loss Formula
The property damage loss (PDL) formula tells you how much money will be lost as a result of the physical destruction of rental premises by an undesirable tenant or by an external source. The formula essentially calculates the net costs of repairing the premises plus the net market loss. It requires the following pieces of information: the amount of any unpaid rent (UR); the departing tenant’s security deposit being held on account (SD); the total cost of repairs (TR);; the budgeted (anticipated) rent charge for the next rental period (BR); and the actual reduced amount of rent which the market will bear (RR). The difference between the BR and the RR represents the market loss (ML). The formula for calculating the property damage loss is:
PDL= UR + TR + ML – SD
Let’s plug in some hypothetical numbers. Assume that an uncooperative tenant defaults on the lease and destroys his rental unit prior to his abandoning the property. He has left unpaid rent due of $5,000. The costs for repairing the premises are as follows:
Junk Removal $450
Key Replacement $10
New Carpets $1,850
Window Repairs $260
Plumbing Repairs $380
Refurbishing Woodwork and Other Repairs $545
Assume that the tenant left a security deposit of $7,500 on account. Based on market trends, and assuming that there was no diminution in the value of the rental unit, the unit would be budgeted in the next rental period (or would have an anticipated rental charge of) $3,000 per month, or $36,000 per year (BR). However, because of the diminished quality of the premises, despite the many repairs, the market will only bear a reduced rental price of $2,300 per month, or $27,600 per year (RR). The market loss (ML) is the difference between the BR and RR.
ML = BR – RR
ML = $36,000 -$27,600
ML = $8,400
Let’s put the entire PDL formula together now.
PDL = UR + TR = ML – SD
PDL = $5,000 + $6,595 + $8,400 – $7,500
PDL = $12,495
Therefore, the damages arising out of the tenant’s property damage total $12,495, after applying the tenant’s security deposit to his unpaid rent and to the total repair costs. The outcome of the PDL formula will vary, of course, when all of the components of the formula are not present.
Eviction Loss Formula
When a tenant is evicted, the landlord suffers the value of his lost rent. This loss, however, must be augmented by any costs associated with the eviction process, and then reduced by any rental payments received from a replacement tenant. The easy formula for an eviction loss is:
EL = ALR – PR + LF – RTR
where EL is the eviction loss, ALR is the annual rent charge according to the lease (annual lease rent), PR is the rent actually paid by the tenant (paid rent), LF is the legal fees incurred and court costs associated with the eviction process, and RTS is the replacement tenant payments received.
For example, assume that Christopher signs a lease with Condor Commons, an apartment lessor, to pay $1,500 per month in rent for a one-year lease running from January 1 through December 31. Christopher dutifully pays rent for January through April; then he stops paying. It takes three months to give Christopher notice of the eviction process, and to install a replacement tenant at the same monthly rental amount. The new tenant takes up occupancy of the premises on August 1. Condor’s lawyer charges $450 for handling the eviction case and advancing the court filing and service fees. Let’s do the math:
ALR = $18,000, based on $1,500 per month for 12 months.
PR = $6,000, equaling four monthly payments of $1,500 (January through April)
LF = $450, as the legal fee and court costs
RTR = $7,500, the total of five monthly payments of $1,500 paid by the replacement tenant (August through December).
The EL is calculated as follows:
EL = ALR – PR = LF – RTR
EL = $18,000 – $6,00 + $450 – $7,500
EL = $4,950
So, the loss attributed to the nonpayment of rent by, and subsequent eviction of, the first tenant totals $4,950.
The EL formula can be modified in cases of property damage by adding to the formula the cost of repairs (TR). Thus, for example, if Christopher ruined the carpets because of an untrained dog, and if carpet replacement was estimated at $1,600, the revised formula would look like this:
EL = ALR – PR + LF – RTR + TR
EL = $18,000 – $6,000 + $450 – $7,500 + $1,600
EL = $6,550
If a security deposit (SD) could be claimed by the landlord, then the amount claimed would be subtracted, extending the formula further. Assume, the court permitted the landlord to claim an SD equal to one month’s rent of $1,500.
EL = ALR – PR + LF – RTR + TR – SD
EL = $18,000 – $6,000 + $450 – $7,500 + $1,600 – $1,500
EL = $5,050
Special provisions contained in a lease may also permit the landlord to claim other losses in the event of an eviction. Any such additional losses should be added to the formula.