8/17/2023 0 Comments Pro forma cashflow![]() ![]() This line item corresponds to the “free rent” incentive described above. Simple Calculation: If a tenant is renting 2,000 square feet for $50 per square foot per year, this tenant leaves, and it takes 6 months to find a new tenant, then the Absorption & Turnover Vacancy is 2,000 * $50 * (6 / 12) = $50,000. It’s not a cash expense, but rather a loss of potential revenue. This represents the foregone rental income when a tenant leaves and it takes several months to find a new tenant. Simple Calculation: If the property has 10,000 rentable square feet and the market rate is $50 per square foot per year, the Base Rental Income is $500,000. This one represents the “Potential” Rental Income of the property if it were 100% occupied and all tenants paid market rent. You might also earn income from “expense reimbursements,” i.e., the portion of operating expenses that a tenant is responsible for paying.Įach line item in the Revenue section corresponds to one or more of these points: Base Rental Income.When a new tenant moves in, you may give it “free rent” for a few months as an incentive to agree to a multi-year lease.You will not earn rent in that downtime period. If a tenant’s lease expires and that tenant chooses not to renew it, it will take time to find a new tenant.Not all tenants pay market rates some might be paying lower rates, and some might be paying higher rates.Properties are rarely 100% occupied, and you do not earn rent from vacant space.Then, you make deductions and adjustments because: You always start the pro-forma by showing the “potential” revenue of a property if it were 100% occupied and all tenants paid market rates. Here’s the high-level view ( click the image to see a larger version): Real Estate Pro-Forma: Revenue Line Items We cover more complex examples and cases in our full Real Estate Financial Modeling course. This is a simplified pro-forma for a “ core real estate deal” intended to illustrate the concepts. Pro-Forma – Office/Retail Property (XL).The Real Estate Pro-Forma Excel and Guideīelow, we’ll walk through a pro-forma for an office/retail property with 3 tenants on different lease types (Full Service, Single Net, and Triple Net): It’s just that for financial modeling, valuation, and investment analysis, you almost always skip the full statements and focus on the pro-forma instead. To be clear: properties still have full financial statements. It’s also simpler because Working Capital tends to be less important for properties, and you effectively use Cash Accounting rather than Accrual Accounting in the analysis.Īlso, you usually ignore income taxes because properties tend to be owned by pass-through entities such as Partnerships, S Corporations, and REITs that do not pay corporate income taxes.įinally, “other activities” on companies’ Cash Flow Statements are often minimal for properties, and Debt and Equity Issuances and Debt Service can be handled directly on the pro-forma. Properties are much simpler than large companies, so if it’s feasible to simplify the financial statements like this for companies, it’s even more feasible to simplify them for properties. You don’t need a Balance Sheet because you can track Cash, Debt, and Equity separately below these projections, and you can estimate the Change in Working Capital with a simple percentage.Īnd you don’t need a full Cash Flow Statement because many of the items on it are non-recurring and, therefore, do not factor into the projections. Then, create a “mini-Cash Flow Statement” and include only the key, recurring line items, such as Depreciation, the Change in Working Capital, and CapEx.Project the company’s revenue, expenses, and taxes on its Income Statement.It’s easiest to answer this question by pointing out that it’s possible to do the same thing for companies.įor example, in a DCF, LBO, or merger model, you could skip the full 3-statement projections and do the following instead: Why is it possible to simplify the financial statements of a property and use just a single schedule rather than a full Income Statement, Balance Sheet, and Cash Flow Statement? Simplification 101: Why the Real Estate Pro-Forma? ![]() We’ll discuss the main line items on the real estate pro-forma in this article and give you an Excel template, but let’s start at the beginning with the “why.” While that description is accurate, it’s more useful to think of the pro-forma as a combined and simplified Income Statement and Cash Flow Statement – for a property rather than a company. Many websites and textbooks describe the real estate pro-forma as a “cash flow projection” for a property. If you want to understand a company, look at its financial statements – and if you want to understand a property, look at its pro-forma.
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