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It’s not an expense, but rather “foregone rental income.” 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.Ĭommon deductions and adjustments are ones for the Absorption & Turnover Vacancy, Concessions & Free Rent, Expense Reimbursements, and General Vacancy.Ībsorption & Turnover Vacancy is for the months of downtime when a tenant leaves, and it takes time to find a new tenant.
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Here’s a simple example of the real estate pro-forma and each section on it:īase Rental Income at the top represents this “potential revenue” with 100% occupancy and full market rents paid by tenants. Then, you list the “capital costs” (similar to CapEx and the Change in Working Capital for normal companies) that correspond to long-term items that will last for more than 1 year.įinally, you show the Debt Service (Interest and Principal Repayments) and the Cash Flow to Equity at the bottom. Next, you list the operating expenses required to run the property’s day-to-day operations. You always start with Potential Revenue, if the property were 100% occupied and all tenants paid market rates, and then make deductions. The Shape of the Real Estate Pro-Forma and Simple Calculations Properties do have financial statements, but for modeling and valuation purposes, we can simplify and just project the Pro-Forma – as we often do when valuing companies with a DCF and projecting only their cash flows. The Real Estate Pro-Forma is a simplified and combined Income Statement and Cash Flow Statement for properties, with a few modifications – such as no Income Taxes and no Depreciation in most cases. Just as you need to understand the financial statements to grasp financial modeling and valuation for normal companies, you must understand the Pro-Forma if you want to understand real estate.
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12:34: Part 3: How to Build Scenarios into a Pro-Forma (Multifamily Example).2:29: Part 2: Simple Real Estate Pro-Forma Excel & Calculations.1:23: Part 1: Why the Real Estate Pro-Forma?.