What Buyers Actually Pay For: Mark-To-Market Explained
In-place rent is a fact. Market rent is an opinion. The gap between them is what a buyer is actually pricing.
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In-place rent is a fact: it is what the current tenants are paying today. Market rent is an estimate of what a new tenant would pay for the same unit right now. Mark-to-market is the gap between the two, and it is one of the biggest drivers of a buyer's offer.
Why the gap matters more than the current NOI
A facility with rents 15% below market is not fairly priced at a cap rate applied to its current NOI. A buyer who can close that gap over 12 to 24 months is effectively buying future income the seller has not yet realized. That upside gets priced into the offer, often as the single largest swing factor.
How the gap gets measured
Comparable properties, weighted by distance and quality, establish what a unit of similar size and climate control actually rents for nearby today. Subtract in-place rent from that number, unit type by unit type, and you have the mark-to-market estimate.
Where sellers and buyers disagree
Sellers tend to anchor on trailing revenue. Buyers anchor on what the revenue could be once rents catch up to the market. Both sides are technically looking at real numbers; they are just looking at different points in time.
A worked example: gross gap is not value
Assume 400 occupied units average $115 per month while a distance- and quality-weighted comp set supports $128. The visible gap is $13 per unit, but a buyer should not capitalize all of it immediately. Apply a capture rate for concessions, churn, and the time required to re-rate the tenant base.
| Step | Calculation | Annual result |
|---|---|---|
| Gross rent gap | 400 × $13 × 12 | $62,400 |
| Realistic capture | $62,400 × 85% | $53,040 |
| Incremental cost | $53,040 × 15% | ($7,956) |
| Potential NOI lift | $53,040 − $7,956 | $45,084 |
At an illustrative 6.50% cap rate, that NOI lift implies roughly $694,000 of value. That is a scenario, not a promise. Re-run it with slower capture, more churn, and a weaker comp set. The range is more useful than the headline case.
Evidence to keep with the calculation
Save the observation date, unit dimensions, climate-control status, promotion, and availability for every rate shop. For expense escalation context, compare the operator's actual contracts with the U.S. Bureau of Labor Statistics inflation series; a broad index is a cross-check, not a substitute for property-specific bids.
What a defensible mark-to-market case needs
- Current, distance-weighted comps, not a stale rate sheet.
- A realistic timeline for closing the gap, not an instant re-rate.
- An honest accounting of the vacancy or turnover cost of raising rents.
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