Case: Multifamily acquisition with concessions hidden in headline rent

Hypothetical acquisition laboratory. No property, tenant arrangement or lender offer in this example is real. The buyer is considering a $10 million apartment purchase with $250,000 of closing costs and initial reserves. Its maximum committed equity is $4 million, including those uses. The question is whether the price remains financeable after the rent evidence is corrected.

Start with the income the buyer thought it was buying

Fifty apartments have face rent of $2,000 per month: $1.2 million annually. The seller’s projection deducts $60,000 of vacancy and $12,000 of collection loss, adds $24,000 of recurring other income and deducts $480,000 of operating costs. This produces $672,000 of stated NOI. Assume, solely for this case, that the hypothetical lender’s accepted debt-sizing cash flow equals this NOI after the listed corrections; there is no additional reserve deduction.

The OCC’s income-analysis discussion provides the bank-supervision context for checking lease evidence and supported cash flow. It does not prescribe the assumptions below. The evidence exercise is deliberately separate from whether removing a concession would be lawful or commercially achievable.

The apartment manager supplies the following exception schedule. Unit references represent groups of individually identified leases, not a sample extrapolated to every resident.

The $60,000 vacancy already represents thirty empty unit-months within the third group. It does not include the occupied free months in the first group. The $12,000 collection loss also excludes documented credits. Those distinctions prevent counting the same shortfall as vacancy, concession and bad debt.

Corrected cash flow is $672,000 − $72,000 − $18,000 = $582,000. Bank receipts alone would not establish this bridge: security deposits, prepaid periods and collections of earlier receivables must be identified before the recurring amount is accepted.

Recalculate the constraint instead of subtracting a generic leverage haircut

Assume a 65% maximum LTV on an independently stipulated $10 million value, 1.25× minimum DSCR, and an 8% annual debt-service constant. The constant means $80,000 of annual principal-and-interest payments per $1 million of debt for sizing; it is not an 8% note rate. This exercise holds value unchanged to isolate the income effect. An actual valuation review could also change value.

The $90,000 income correction reduces the DSCR ceiling by $900,000, but the actual loan falls only $680,000. The original request was already capped by value. Calling the full $900,000 an additional equity requirement would miss that constraint switch.

The buyer initially appeared to have $250,000 of headroom against its $4 million equity commitment. It now has a $430,000 funding deficit. Neither an impressive face-rent roll nor $4 million of documented cash closes a $4.43 million equity requirement.

Solve the conditions under which the purchase can proceed

With accepted cash flow unchanged and fixed $250,000 other uses, the highest purchase price supported by $5.82 million of debt and $4 million of equity is $9.57 million. At that price, a conservative 65% purchase-price ceiling would be $6.2205 million, still above the $5.82 million DSCR limit. The price solution therefore remains consistent with both modeled constraints.

Alternatively, keeping the $10 million price requires a $6.25 million loan when equity remains $4 million. That loan needs $625,000 of accepted cash flow at the chosen DSCR and constant. The buyer must establish $43,000 more recurring cash flow than the corrected $582,000, not merely claim that all $90,000 of concessions will disappear.

A negotiated price reduction and verified new equity can be combined. If the seller reduces price by $200,000, another $230,000 of equity is still needed under the unchanged cost allowance. A purchase credit’s actual treatment depends on the transaction documents and lender; this calculation does not authorize treating a credit as borrower cash.

Test the forecast that removes the first-year concessions

The twelve new leases might later renew without free rent, but that is a separate future assumption. Keep the contractual first-year collection schedule in the closing model. For a later forecast, identify renewal dates, likely turnover, new incentives and evidence of achievable net rent. The recurring $18,000 credit does not expire merely because the three-month concessions do.

Removing only the $72,000 first-year concessions would produce $654,000 before other changes. That may improve future capacity, but a lender deciding today’s funding can require demonstrated collections or use another convention. A bridge strategy must fund its higher cost, time and future payoff; it does not transform projected income into present cash automatically.

The investment committee’s decision record

Before spending further nonrefundable diligence funds, require the unit-level concession ledger, signed supporting agreements, receivable reconciliation and a lender response using the corrected file. Record whether $480,000 expenses include the current tax, insurance and management assumptions; unchanged expenses are an analytical control here, not a claim that all costs will remain stable after sale.

The committee can proceed at $9.57 million with the stipulated loan and equity only if all other conditions remain satisfied. At $10 million, it must identify the extra $430,000 or obtain supportable financing changes. If neither exists before the purchase deadline, the model’s answer is a funding failure. The useful result is this conditional decision, not a general observation that concessions reduce NOI.