In NOI calculations, what is the vacancy allowance?

In NOI calculations, what is the vacancy allowance?

• A. An amount added to potential gross income to account for vacancies.
• B. An amount deducted from potential gross income to account for vacant units.
• C. A depreciation adjustment.
• D. A tax deduction.

Answer: (B)

In NOI calculations, you start with potential gross income, which is the income you would have if every unit were rented. The vacancy allowance represents the expected loss of income from vacant units, so you subtract this amount from potential gross income to arrive at the effective gross income. From there, operating expenses are subtracted to determine the net operating income. For example, if potential gross income is 100,000 and vacancies are expected to reduce income by 6,000, the effective gross income becomes 94,000 before operating expenses are considered. This isn't added to potential gross income, and it isn't a depreciation adjustment or a tax deduction. It is specifically the deduction for anticipated vacancy losses within the NOI framework.

In NOI calculations, you start with potential gross income, which is the income you would have if every unit were rented. The vacancy allowance represents the expected loss of income from vacant units, so you subtract this amount from potential gross income to arrive at the effective gross income. From there, operating expenses are subtracted to determine the net operating income. For example, if potential gross income is 100,000 and vacancies are expected to reduce income by 6,000, the effective gross income becomes 94,000 before operating expenses are considered.

This isn't added to potential gross income, and it isn't a depreciation adjustment or a tax deduction. It is specifically the deduction for anticipated vacancy losses within the NOI framework.