Physical vs. Economic Occupancy: What Freddie Mac Actually Counts

We learned this the hard way during a 41-unit refinance. Our property manager had been reporting "economic occupancy" (who paid) instead of "physical occupancy" (who has keys). The difference? A 7% swing in our reported occupancy rate—enough to trigger additional underwriting scrutiny.

Why This Distinction Matters

Lenders care about physical occupancy because it measures demand for your units. A tenant who hasn't paid rent is a collections problem. An empty unit is a market problem. These are different risks.

Consider this scenario from our November rent roll:

Unit 38 paid zero dollars. But Tayshe Keys still has keys—she's delinquent, not gone. That unit counts as occupied.

Unit 8 also shows $0, but Robert moved out on the 21st. That unit counts as vacant for November.

The Employee Unit Exception

Here's where it gets nuanced. Karen Godsey in Unit 101 is our on-site resident manager. She pays reduced rent ($745) as part of her compensation. Is this unit occupied?

Yes. Lenders consider this a "Non-Revenue Unit," but it is physically occupied. You report it as occupied, with a note explaining the arrangement. The lender will likely exclude it from their revenue calculations, but it counts toward your occupancy percentage.

The End-of-Month Rule

Since T-12 occupancy is reported monthly, use the end-of-month status. If someone moved out on the 5th, they're vacant for that entire month's column. If someone moved in on the 28th, they're occupied.

This matters because lenders want to see trends, not noise. A mid-month move-out that gets filled by month-end should show as occupied—because by the time the report is generated, you've already solved the vacancy.

The Math: How We Calculated November

Here's our actual calculation for November 2025:

If we had used economic occupancy (units that paid), we would have reported 85%—because Unit 38 (Tayshe) and Unit 36 (rent credit applied) showed $0 payments. That 5% difference changes how the lender views your property.

Common Mistakes

1. Counting Delinquent Tenants as Vacant

If the tenant hasn't surrendered possession, they're occupied. Period. The fact that they haven't paid is a separate issue that shows up in your Aged Receivables Report, not your occupancy calculation.

2. Ignoring Employee/Non-Revenue Units

On-site managers, maintenance staff housing, or model units are physically occupied. Report them as such. Add a note. Let the lender adjust revenue calculations—but don't artificially deflate your occupancy.

3. Using Move-Out Date Instead of End-of-Month

If Maria moved out on 11/5, don't call her "occupied for 5 days." For monthly reporting purposes, that unit is vacant for November. The nuance goes in your notes, not your percentage.

4. Mixing Economic and Physical in the Same Report

Pick one methodology and stick with it for all 12 months. Lenders will spot inconsistencies. If January uses physical occupancy and March uses economic, you'll get a stip asking you to reconcile.

What to Report to Your Lender

Your T-12 Physical Occupancy report should include:

The Conversation That Clarified Everything

When we asked our broker about this, the response was immediate:

"For the T-12 Occupancy form that Freddie Mac uses, use Physical Occupancy. They want to know how many keys are handed out, not who paid rent."

That single sentence saved us from reporting an 85% occupancy rate when our actual physical occupancy was 90%. In Freddie Mac underwriting, that difference can affect your DSCR calculation and, ultimately, your loan proceeds.