Real Estate Modeling 101: The Proforma Revenue
Below, we’ll walk through a simplified pro-forma for an office/retail property with three tenants, each under different lease structures: Full Service, Single Net, and Triple Net.
Simplified Office/Retail Proforma
This is a simplified example of a core real estate deal designed to highlight key concepts. More advanced scenarios are covered in detail in our full Real Estate Financial Modeling course.
Here’s a high-level overview:
The Proforma: Revenue Line Items
The revenue section of a real estate pro-forma begins by outlining the potential income the property could generate if it were fully occupied, with all tenants paying market rents.
However, adjustments are necessary because:
Properties are rarely 100% occupied, and vacant space generates no rent.
Some tenants may pay below-market or above-market rates.
Tenant turnover results in downtime, during which no rent is collected.
New tenants may receive rent-free periods as an incentive to sign long-term leases.
Properties may also generate income from expense reimbursements, where tenants cover part of the operating costs outlined in their lease.
Each revenue line item reflects one or more of these scenarios:
Base Rental Income
Represents the potential rental income assuming the property is fully leased at market rates.
Example Calculation:
A 10,000-square-foot property with a market rent of $50 per square foot annually would generate:
10,000 * $50 = $500,000 in Base Rental Income.
Absorption & Turnover Vacancy
Accounts for the lost rental income when a tenant vacates, and it takes time to secure a replacement. This is not a cash expense but reflects a temporary loss of potential revenue.
Example Calculation:
If a 2,000-square-foot tenant leaves and it takes 6 months to find a new tenant, the vacancy loss would be:
2,000 * $50 * (6 / 12) = $50,000.
Concessions & Free Rent
Reflects incentives, such as rent-free periods, given to attract new tenants.
Example Calculation:
If a tenant leases 2,000 square feet at $50 per square foot annually and receives 3 months of free rent, the deduction would be:
2,000 * $50 * (3 / 12) = $25,000.
Expense Reimbursements
Represents the share of property taxes, insurance, and maintenance costs that tenants are required to cover, as outlined in their lease agreements.
Example Calculation:
If a tenant renting 2,000 square feet must pay its share of property taxes, and the building’s total property taxes are $50,000, the tenant’s portion would be:
(2,000 / 10,000) * $50,000 = $10,000.
Potential Gross Revenue (PGR)
This figure sums up all expected revenue, assuming all spaces are leased, excluding non-rental income sources.
General Vacancy
Represents the income lost from spaces that are permanently vacant with no immediate plans to lease.
Example Calculation:
If 1,000 square feet of a 10,000-square-foot building remains empty, the general vacancy deduction would be:
10,000 * 10% * $50 = $50,000 (appears as a negative number in the pro-forma).
Effective Gross Income (EGI)
This is the net revenue the property earns, adjusted for temporary and permanent vacancies, rent-free periods, and any other deductions or variations in lease rates. It’s similar to a company’s "Net Sales" but based on cash flows. EGI can also include income adjustments for percentage rents (common in retail) or leases above/below market rates.
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In the next installment we’ll start talking about working through a properties expenses.