Loss to lease is the difference between what a property's units would rent for at today's market rates and what tenants pay under their current leases. It's the rent an owner gives up by having leases signed below market. If tenants pay more than market, the figure turns negative and is called gain to lease.
Formula
Loss to lease = (Market rent − In-place rent) × Number of units × 12
As a percentage: Loss to lease / Gross potential rent at market
Worked example
A 120-unit apartment property has an average in-place rent of $1,500 a month. The broker's offering memorandum says market rent is $1,650.
Loss to lease = ($1,650 − $1,500) × 120 × 12 = $216,000 a year
Gross potential rent at market is $2,376,000, so loss to lease is 9.1% of it.
What it means in practice
On a T12, some operators state gross potential rent at market and show loss to lease as a deduction on the next line. Others state GPR at in-place rents and leave loss to lease off the statement. Check which convention the seller uses before you compare two deals.
In an OM, loss to lease is usually sold as upside: "rents are 9% below market and will reset as leases turn." Two questions decide whether that's true. First, is the market rent real? Check it against lease comps of the same vintage and finish; broker comps often come from newer buildings. Second, how fast can the gap close? Apartment leases run about 12 months, so roughly a twelfth of units come up each month, and renewing tenants rarely accept the full increase. A pro forma that captures all $216,000 in year 1 is assuming every lease turns at once.
Pull the in-place rents from the rent roll, unit by unit, before you accept the average.