What Is Effective Gross Income
Effective Gross Income (EGI) is the potential rental income a property could generate, minus expected vacancy losses and uncollectible rent. Assessors use this figure to determine property value through the income approach to appraisal, which is the most common valuation method for multi-family and commercial properties in tax assessment appeals.
For a rental property generating $100,000 in potential annual rent with a 5% vacancy rate and 2% collection loss, the EGI would be $93,000 ($100,000 minus $7,000). This number becomes the foundation for calculating Net Operating Income and ultimately the assessed value of your property.
Why It Matters in Assessments
Assessors frequently overstate EGI, which directly inflates your property's assessed value and your tax bill. Common mistakes include using market rents instead of actual collected rents, applying unrealistic vacancy rates below your area's typical rate, and ignoring bad debt. If your actual vacancy rate is 8% but the assessor used 4%, that 4-point difference could increase your assessed value by 5 to 10%.
At a board of review hearing, challenging the EGI calculation is often your strongest argument. You have documented evidence (lease agreements, rent rolls, bank statements) that directly contradicts the assessor's assumptions. This makes EGI disputes more winnable than abstract value disagreements.
How Assessors Calculate It
Most assessors start with the subject property's actual rent roll for the past 12 months, though some rely on comparable sales data from similar properties in your market. The calculation follows this formula:
- Potential Gross Income: Total annual rent if all units were occupied and all tenants paid on time.
- Vacancy adjustment: Subtract expected vacancy based on market conditions. Most assessors use 4-7% for residential, 5-10% for commercial depending on local market conditions.
- Collection loss: Subtract uncollectible rent, typically 1-3% for residential properties.
- Other income: Add parking fees, laundry revenue, or pet fees if applicable.
The resulting EGI feeds into the income approach formula: EGI minus operating expenses equals Net Operating Income, which is then capitalized using a cap rate to determine value.
Challenging EGI in Your Appeal
To successfully contest EGI at a board of review hearing, bring three types of evidence:
- Actual rent rolls: Show current lease rates for each unit, move-in dates, and current tenants. If the assessor used outdated market rents higher than your actual rents, this proves overvaluation.
- Bank deposit records: Demonstrate actual cash collected over the past 24 months. A property with 10% vacancy and 5% collection loss in reality (15% total reduction) cannot justify a 5% reduction used by the assessor.
- Comparable property data: If your market's vacancy rate is 9%, show that the assessor's 5% assumption contradicts market conditions. Industry databases like CoStar, REIS, or CBRE reports provide regional vacancy benchmarks.
Document any capital improvements, deferred maintenance, or property management issues that affect actual performance. A building with recent major repairs may command market rents, while one with roof or HVAC problems may achieve only 85% of market rent.
Common Questions
Should I use actual rents or market rents when challenging EGI?
Use actual rents from your current leases and bank deposits. Assessors sometimes argue they should use market rents because the income approach values based on market conditions. However, if your actual rents are meaningfully below market (whether due to long-term leases, tenant issues, or property condition), you have the burden of proof. Present lease documentation and comparable property rent schedules. If market rents are $1,200 per unit but your leases show $1,100, showing the leases often wins because they're documented fact.
What vacancy rate should I use?
Use your area's actual market vacancy rate, not a national average. A single-family rental market with 3% vacancy behaves differently than one with 12% vacancy. Gather data from your local multiple listing service, property management associations, or market reports from commercial real estate firms. If your property itself runs higher vacancy due to management issues or deferred maintenance, separate that from market conditions when presenting to the board.
Does EGI calculation differ for commercial vs. residential properties?
Yes. Commercial properties include more income sources (percentage rent, common area maintenance charges, triple-net reimbursements) and assessors apply higher operating expense ratios. Residential typically uses simpler calculations. Regardless of property type, the same principle applies: actual performance beats theoretical assumptions.