Break-even occupancy is the minimum occupancy rate at which a property's income exactly covers its operating expenses and debt service, with nothing left over for equity investors. Below that threshold, the property is losing money on a cash flow basis even if it remains technically operational; above it, income begins flowing to ownership.
Lenders and sponsors calculate break-even occupancy by dividing total operating expenses plus annual debt service by gross potential rental income, then comparing the result to a property's actual or projected occupancy rate. A wide cushion between break-even occupancy and expected occupancy suggests a property can absorb some vacancy or rent softness without jeopardizing loan payments or distributions. Properties financed with higher leverage, and therefore heavier debt service obligations, generally carry higher break-even occupancy thresholds, which leaves less room for error if leasing underperforms expectations.
Further reading: Understanding Cap Rates: Context Cycles and the Real Measure of Value
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