Which statement describes the vacancy allowance in NOI?

Which statement describes the vacancy allowance in NOI?

• A. An amount added to potential gross income to account for vacancies.
• B. An amount deducted from effective gross income to account for vacancies.
• C. An amount deducted from potential gross income to account for vacancies.
• D. A tax deduction unrelated to occupancy.

Answer: (C)

Vacancy allowance represents the income that is expected to be lost because units are not occupied. It is applied at the start of the income calculation by reducing potential gross income. In NOI terms, you take potential gross income and subtract the vacancy allowance (and any credit losses) to arrive at the effective gross income, before subtracting operating expenses. It’s not a tax deduction or something you subtract from operating income; it’s an adjustment to reflect vacancies. That’s why the correct statement is that it’s an amount deducted from potential gross income to account for vacancies.

Vacancy allowance represents the income that is expected to be lost because units are not occupied. It is applied at the start of the income calculation by reducing potential gross income. In NOI terms, you take potential gross income and subtract the vacancy allowance (and any credit losses) to arrive at the effective gross income, before subtracting operating expenses. It’s not a tax deduction or something you subtract from operating income; it’s an adjustment to reflect vacancies. That’s why the correct statement is that it’s an amount deducted from potential gross income to account for vacancies.