Calculate true loss.

[HAMSTER INSPECTOR]

I have a situation which I will simplify to make it easier to understand. It is in a commercial property which was in renovation. Due to litigation the renovation was put on hold, and the property was not rented out for 5 years ( 60 months ).

If the mortgage on the property was $1000 per month and no rent was paid in this time. ( $1000 x 60 months = $60,000 Money from savings were used to pay the mortgage in this time. Is the loss merely $60,000 or is it $60,000 + the $60,000 ( $120,000 ) from savings that was used to pay the mortgage? What is the true loss. Are there other factors like loss interest from money from savings?

 

[essguy_]

I have a situation which I will simplify to make it easier to understand. It is in a commercial property which was in renovation. Due to litigation the renovation was put on hold, and the property was not rented out for 5 years ( 60 months ).

If the mortgage on the property was $1000 per month and no rent was paid in this time. ( $1000 x 60 months = $60,000 Money from savings were used to pay the mortgage in this time. Is the loss merely $60,000 or is it $60,000 + the $60,000 ( $120,000 ) from savings that was used to pay the mortgage? What is the true loss. Are there other factors like loss interest from money from savings?

Others will likely wade in with more detailed answers - but here's my quick take. If you own the property, then paying the mortgage has two components - the interest paid to the mortgage holder, and the principal payment which builds your equity in the property. So to look at is as a strict "loss" is incorrect. Eg: perhaps the property has gone up in value in the past 5 years. So if you were to sell, you may recoup more than your interest payments (as well as lost interest from the savings) on the sale of the property. What you have lost is the foregone rent revenue. i.e. the property sat unproductive for 5 years. If the litigation went in your favour - maybe you have recourse to recover some of this, but that may involve more legal fees.

 

[sempel]

I assume the rental rate is greater than the mortgage rate. You lost out on the difference + any interest of the difference, less any additional payouts (property taxes, repairs, etc.). If the rent = mortgage and no payouts, obviously no interest. So calculate FV with PV=0, n=60, pmt = rent-mortgage, I = interest rate. This gives you the income lost.
You also lost out on the interest you would have earned on the $60k out of your own pocket. You can calculate the FV with PV = 60k, pmt = -1k, n=60, I=interest rate. This will give you the interest lost.
So in total you lost the sum of $60k + these two.

 

[out4fun]

The loss is simply the loss of revenue along with the costs associated with any missed opportunity that the revenue may have provided or any additional costs that may have occurred from the lack of revenue. It is not necessary to weigh in on costs that exist regardless of whether the property is rented or not.

 

[VERYBADBOY]

True loss ? I believe you would be referring to economic loss as opposed to any accounting or tax losses given there was an expectation of income.

First you need to know the interest and principal portion of each payment. The principal would not be considered a loss but equity, accounting decreases loan amount. If the property gained in value that would be added to equity although accounting methods prevents this and historical costs would be used for land and building, however depreciation would have to be factored in, CCA for taxes.

Then of course there are property taxes, utilities etc. plus the lawyer fees you mentioned.

Now here is the problem ... the rent which was lost ... you are adding it to the mortgage payments to increase your losses... thinking that maybe it's an opportunity cost lost but really that would be applied if you spent your money elsewhere or kept it in the bank for example. Actual revenue decreases your costs which are going to be there regardless, think sunk v variable costs in this setting, if you don't get the revenue for one month you don't add it to your costs do you?

The main school of thought is you can't add an unexpected revenue to increase your losses in many finance/economic models especially in real estate or project finance models.

There is a lot of theory and law behind this that I am leaving out to simplify methods of coming up with what you are looking for ... economic, accounting, tax, law, finance ... that will provide different answers.

VBB

 

[Annalise Lane]

Why do I get 'wood' when I'm around 75 cent words that have money attached to them?

 

[bucky88]

Damages you can recover in a lawsuit = mortgage interest paid + lost rent - rent you could have received if you had taken reasonable steps to try to rent out the property