# Case: Multifamily acquisition with concessions hidden in headline rent

Canonical: https://commercialdebtadvisory.com/cases/multifamily-acquisition-with-concessions-hidden-in-headline-rent/
Status: Published
Publisher: Jaken Finance Group

**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](https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/pub-ch-commercial-real-estate.pdf) 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.

| Evidence group | Face schedule treatment | Missing economic effect | Annual correction |
|---|---|---|---:|
| Twelve new leases | Twelve full paid months per lease | Three free months each in the modeled first year | ($72,000) |
| Six renewed leases | $2,000 monthly per lease | Signed recurring $250 monthly credit | ($18,000) |
| Other thirty-two leases | Full face schedule, with existing vacancy/loss deductions | No additional issue assumed after reconciliation | $0 |

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.

| Calculation | Seller projection | Corrected evidence |
|---|---:|---:|
| Accepted annual cash flow | $672,000 | $582,000 |
| DSCR ceiling: cash flow ÷ 1.25 ÷ 8% | $6,720,000 | $5,820,000 |
| LTV ceiling | $6,500,000 | $6,500,000 |
| Lesser ceiling: modeled loan | **$6,500,000** | **$5,820,000** |
| Total purchase/closing uses | $10,250,000 | $10,250,000 |
| Equity required | **$3,750,000** | **$4,430,000** |

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.


## Source references
- [OCC — Commercial Real Estate Lending, version 2.0](https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/pub-ch-commercial-real-estate.pdf) — Income-Generating Capacity of CRE and Debt-Service Coverage Ratio, printed pp.42–43 · Checked 2026-10-21 · Bank supervisory context. March 2022 publication, with March 20, 2025 reputation-risk edits. All case amounts, thresholds and contractual conditions are invented teaching assumptions.