How much room before trouble.
Break-even occupancy tells a lender how much a property can lose before it cannot cover its expenses and loan. Enter the expenses, the debt service, and the gross potential income to see the cushion.
The downside view
Break-even occupancy is operating expenses plus debt service, divided by gross potential income. A break-even of 75% means the property can lose a quarter of its income before it stops covering its obligations.
It complements DSCR by expressing coverage as an occupancy threshold rather than a ratio, which is often easier to reason about for a multi-tenant property.
Using it in underwriting
A low break-even occupancy is a comfortable cushion; a high one is a warning. Lenders weigh it against the property's actual occupancy and the durability of its tenancy.
For properties with lease rollover risk, break-even occupancy paired with a rollover schedule tells a fuller downside story.
A worked example
A property's gross potential income is $2,000,000. Operating expenses are $700,000 and annual debt service is $900,000. Break-even occupancy is $1,600,000 divided by $2,000,000, or 80 percent. Occupancy could fall from full to 80 percent before the property stops covering both.
Add debt and the cushion shrinks. With $1,100,000 of debt service, break-even rises to 90 percent, which leaves very little room for a tenant to leave.
Questions lenders ask
- What is a good break-even occupancy?
- Lower is safer. A break-even around 75% to 85% leaves meaningful cushion; closer to actual occupancy means little room before the property cannot cover its loan.
- How is break-even occupancy calculated?
- Add operating expenses and annual debt service, then divide by gross potential income. The tool above computes it and guards against a zero income input.
- Why does break-even occupancy include debt service?
- Because the question is whether the property can pay its expenses and its loan. Excluding debt service gives an operating break-even, which is useful but says nothing about the loan's safety.
- How does leverage change break-even occupancy?
- More debt means higher debt service, so the property needs more occupancy to cover it. Break-even rises as leverage rises.
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