Gross Potential Rent (GPR) (2024)

How to Calculate Gross Potential Rent (GPR)

In commercial real estate (CRE), gross potential rent (GPR) refers to the total rental income that a property investment can generate based on three implicit assumptions:

1. 100% Occupancy Rate → The units available for rent in the property are all occupied by a tenant. Therefore, there are no idle vacant units (i.e. vacancy rate of 0%) in the property that are not producing income.
2. Market Rent→ The rental pricing of each unit is at the market rate, i.e. the periodic rent charged to tenants is near or equivalent to that of comparable properties at present.
3. No Credit Losses (Collection) → The tenants of the property fulfill their payment obligations on time, with no issues regarding the collection of rent such as late payments or defaults.

With that said, the gross potential rent (GPR) is a pro forma metric because the actual rent collected by the landlord (or real estate investor) will deviate from the implied income value.

Therefore, the use-case of the gross potential rent (GPR) metric is to quantify the upper parameter of obtainable income.

A landlord strives to generate earnings near this full capacity – however, this is practically unattainable in reality.

Why? The revenue model of managing rental properties is affected by unpredictable variables outside of the owner’s control.

For instance, incurring vacancy and credit losses is inherent to the business model, irrespective of the time and effort spent to mitigate the risk of unoccupied units and collection issues.

The steps to calculate the gross potential rent (GPR) are as follows.

1. Determine the Number of Units Available for Rent (i.e. Rentable Units)
2. Estimate the Market Rent Based on Historical Data and Market Data on Comparable Properties
3. Multiply the Number of Rentable Units by the Market Rent Per Unit
4. Convert the Monthly Gross Potential Rent (GPR) into an Annualized-Figure

Gross Potential Rent Formula (GPR)

The formula to calculate the gross potential rent (GPR) is as follows.

Gross Potential Rent (GPR) =(Number of Units Available for Rent×Annualized Market Rent)

Where:

• Number of Units→ The total number of units in the rental property that are available to be leased to a tenant to produce rental income.
• Market Rent→ The pricing rate of rent based on analyzing the prices charged by comparable properties in terms of property features, location, and more.

The market rent is ordinarily expressed on a monthly basis. Therefore, the monthly GPR must be multiplied by 12 to annualize the output.

The ancillary income of a property – the income earned on the side from non-rent sources, such as charging tenants for amenities access – can also be added to the total.

However, the inclusion of ancillary income means non-rental income is part of the metric – thus, the metric should be referred to as “Gross Scheduled Income (GSI)” or “Potential Gross Income (PGI)” instead, as GPR focuses on rental income.

Gross Potential Rent (GPR) vs. Effective Gross Income (EGI): What is the Difference?

The three assumptions that underpin the calculation of the gross potential rent (GPR) are unrealistic, as mentioned earlier.

Hence, determining the effective gross income (EGI) is the next step after calculating the gross potential rent (GPR).

In short, the effective gross income (EGI) is the gross potential rent (GPR) adjusted for vacancy and credit losses.

Effective Gross Income (EGI) =Gross Potential Rent (GPR)–Vacancy and Credit Losses

The vacancy loss is the estimated income that is not collected because of unoccupied units.

Conversely, credit losses are the estimated income lost from issues with collecting rental payments from tenants.

Since the effective gross income (EGI) factors in vacancy and credit losses, the gross potential rent (GPR) metric will be greater in value.

Gross Potential Rent Calculator (GPR)

We’ll now move on to a modeling exercise, which you can access by filling out the form below.

1. Commercial Real Estate (CRE) Building Assumptions

Suppose a NYC-based commercial real estate (CRE) investment firm is considering the acquisition of an office building at the end of 2023.

The commercial office building is located in Manhattan, New York and is expected to be stabilized by the start of 2024.

There are a total of 20 units available for rent in the commercial office building and the market rent is $10k.

• Units Available for Rent = 20 Units
• Market Rent, Monthly-Basis = $10k

The market rent was determined based on historical pricing data – with the trailing (TTM) data contributing the most weight – as well as the prices / rates charged by comparable properties at nearby locations.

2. Gross Potential Rent Calculation Example (GPR)

The market rent on a monthly basis is $10k, which we must annualize by multiplying by 12.

• Market Rent, Annualized-Basis = $10k × 12 Months = $120k

Since there are a total of 20 units available for rent, the next step is to multiply the rentable units by the annual market rent of $120k.

• Gross Potential Rent (GPR) = 20 Units × $120k = $2.4 million

Briefly, we’ll add two more assumptions into our exercise to illustrate the relationship between the gross potential rent (GPR) and effective gross income (EGI).

• Vacancy Loss = 5.0% of GPR
• Credit Loss = 2.5% of GPR

The vacancy loss is $120k and credit loss is $60k, so the total vacancy and credit losses amount to $180k.

• Vacancy Loss = 5.0% × $2.4 million = ($120k)
• Credit Loss = 2.5% × $2.4 million = ($60k)
• Vacancy and Credit Losses = ($120k) + ($60k) = ($180k)

In conclusion, the effective gross income (EGI) of our hypothetical commercial building is expected to be approximately $2.2 million, which we determined by adjusting the gross potential rent (GPR) by the vacancy and credit losses.

• Effective Gross Income (EGI) = $2.4 million – $180k = $2.2 million