In commercial real estate, a "down unit" and a "vacant unit" refer to different situations regarding the occupancy status of a property.
Down Unit: A down unit typically refers to a unit within a multi-unit commercial property that is temporarily unavailable for occupancy due to maintenance, renovations, or repairs. It means that the unit is not currently generating rental income but is expected to become operational again in the future.
Vacant Unit: A vacant unit refers to a unit within a commercial property that is unoccupied and available for lease. It indicates that the unit is not generating rental income at the moment, and there is no immediate plan for the unit to be occupied.
When lenders underwrite a commercial property, they assess various factors to evaluate the property's financial viability and risk. The treatment of down units and vacant units can differ in the underwriting process:
Down Units: Lenders generally view down units more favorably compared to vacant units. While a down unit temporarily affects the property's income potential, lenders consider it as a short-term issue that can be resolved once the unit is back in service. Lenders may account for the lost income during the downtime but still consider the overall income potential of the property.
Vacant Units: Vacant units are often considered a higher risk by lenders. A property with multiple vacant units may indicate weak demand, high tenant turnover, or ineffective leasing strategies, which can impact the property's cash flow and potential for generating rental income. Lenders may be more cautious when underwriting a property with significant vacant units and might require additional assurances or scrutinize the property's marketability and leasing history more closely.
Overall, lenders prefer properties with down units over properties with vacant units. However, both scenarios can affect the underwriting process, and lenders may adjust their loan terms, interest rates, or require additional collateral or documentation based on the specific circumstances.
If you have any questions about this article or would like to discuss a scenario of your own with our team, please feel free to contact Colin Dubel at colin@harborwestcommercial.com or 949-735-6415.