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Watch Out for Common Pitfalls in Pro Formas

Be cautious of constant periodic rent increases, operating expenses versus income growth balance, vacancy losses, and other potential issues in pro formas. Consider factors like tenant improvements and reversion calculations during sale.

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Watch Out for Common Pitfalls in Pro Formas

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  1. PROBLEMS TO WATCH FOR IN PRO FORMAS (SEE MARTIN ARTICLE IN BULKPACK) (1) Constant Periodic Rent Increases (a) signals no lease-by-lease analysis performed (b) the compounding effect becomes large after a few years; leads to very rapidly increasing effective rents. (2) Operating Expense vs. Income Growth (a) expense growth relatively more rapid over time; heightened maintenance needs; (b) see Exhibit 2 in Martin for BOMA figures (3) Constant Periodic Expense Recoveries (a) unlikely at lease renewal time--esp. in today's market

  2. PROBLEMS TO WATCH FOR IN PRO FORMAS (4) Vacancy Losses (a) absurdly low single-digit levels typically assumed (5) Expenses in General (a) can be idiosyncratic (1) property taxes in California: liability can change dramatically at sale due to adjustment to market-value assessment (2) Tenant Improvements (TI): can be very high at lease expiration; are not deductible capital improvements (6) Reversion Calculations @ Sale (a) always the most uncertain of calculations; dependent upon forecasting prowess

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