Definition: A guideline that suggests the minimum required vacancy and collection loss reserve for the proposed loan. Usually lenders base this guideline on numerous factors including property type, loan amount, proposed loan to value and debt service coverage, and numerous physical, financial and tenancy factors identified in the proposed loan. Vacancy and Collection Loss is the percentage of all units or space that is unoccupied, not rented or from which there is no rental income. On a normalized or pro-forma income statement a projected vacancy rate is used to estimate the vacancy allowance (both physical and economic), which is deducted from potential gross income to derive effective gross income; also, an estimated amount reflecting probable vacancy, non-payment of rent by tenants, and any other income loss. These funds are set aside to cover either expected or unanticipated income losses.
