Early Lease Termination Fees in Apartments: How Much Income to Underwrite
On this page
When a resident leaves before the lease ends, the lease often sets a fee for breaking it, sometimes a fixed amount and sometimes a number of months' rent. On a rent roll, that fee can look like a steady source of income. In practice, many residents pay part of it, some pay none, and some leases limit it for certain residents. A sponsor who underwrites the full billed amount overstates the building's income.
This guide explains how to count early termination fees, how to stress the collection rate and how the fee relates to the rent lost while the unit sits empty. It is not legal advice on lease breaks. State and local law limit some fees and set rights for some residents, and a local attorney should review the lease language.
Raising for an apartment deal? Start free
Why is the billed fee not the income?
A fee billed on a lease break is a claim against the resident. The building collects it only if the resident pays, and the collection process can take months. Some residents pay in full, some pay in part, and some never pay. The building can write off the balance as bad debt. The collected amount is the number that belongs in the operating budget.
This is the same logic as other receivables. The rent delinquency guide shows how collections affect the income statement, and the same discipline applies to termination fees.
Hypothetical example
These figures are made up for illustration. Use the building's own move-out records and the aged receivables report before you rely on any collection rate.
A 120-unit building has 10 early move-outs a year. The lease fee is $1,000 for each. If every fee were paid, the building would bill $10,000 a year. The building's records show it collects about 60 percent of billed termination fees, which is $6,000 a year. The downside case uses a 30 percent collection rate, which is $3,000 a year.
| Case | Billed | Collection rate | Income underwritten |
|---|---|---|---|
| Billed at face value (not used) | $10,000 | 100% | Not used |
| Base case from records | $10,000 | 60% | $6,000 |
| Downside case | $10,000 | 30% | $3,000 |
The plan uses $6,000 in the base case and shows $3,000 in the downside. The $4,000 difference between the base and the face value is the part that the building does not collect. Showing that gap gives investors a clearer view than a single number.
What does the fee not cover?
The fee does not replace the rent. If a resident leaves early and the unit is empty for two months at $1,500 a month, the building loses $3,000 of rent. A $1,000 fee covers a third of that loss. The vacancy, the turnover work and the marketing cost remain. The plan should show the vacancy as a separate line, so the fee is not presented as a full offset. The vacancy and credit loss guide explains how to count vacancy in the base case.
Who can end a lease early without the fee?
Some residents have a right to end a lease early under federal or state law, such as service members who receive certain orders, and some states limit fees for survivors of domestic violence and for other residents. The rules differ by state and city, and the lease must follow them. A fee that the law does not allow should not be in the underwriting, and the sponsor should ask the local property manager which cases the building has handled.
What should you check before you underwrite it?
- Two years of move-out records: the number of early move-outs, the fee billed and the fee collected.
- The aged receivables report for termination fees, with the write-offs.
- The lease language on early termination, including any exceptions and how the fee is calculated.
- The state and city rules on fees and early termination, from a local attorney.
- Whether the property manager sends collection notices and how long that takes.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5 or more units under Rule 506(b) or 506(c). The deal's operating budget shows the collected fee and the stressed collection rate, so investors see the range. DoorRaise does not collect fees from residents or give legal advice on leases. Setup is $1,500 (non-refundable), and the administration fee is $5,000 a year from closing.
Start with a sponsor page or see the fees.
FAQ
Should I count the full termination fee as income?
No. Count what the building collects, from its own records, and show a lower case in the plan.
Does a termination fee make a lease break profitable for the building?
Not usually. The fee may cover part of the lost rent, but the vacancy and turnover cost remain, so a lease break still costs the building money.
Can the building charge a fee to every resident who leaves early?
Not always. Federal and state law can limit the fee or give some residents the right to leave without it. Check with a local attorney before you rely on the fee.
Where does the termination fee go in the budget?
It goes in other income as a collected amount, after bad debt. The vacancy and turnover costs go in the operating budget.
Sources
- Rent delinquency and collections in apartment syndications, for how receivables are collected and written off.
- Vacancy and credit loss in apartment underwriting, for the vacancy line.
- Apartment other income in underwriting, for how to count fees that recur.
- Example figures are hypothetical. No state fee limit or legal citation is included here. Check the lease and local rules with a local attorney.
This article is general information, not legal, tax or investment advice. Talk to a local attorney about lease terms and fee limits, a CPA about the income treatment and a securities attorney about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.