Constructing Pro-formas

Real Estate I/S Potential Gross Income (PGI) - Vacancy & Collection (V&C) Effective Gross Income (EGI) + Other Income - Operating Expenses Net Operating Income -Capital Improvement Exp. (CI) Property Before-tax Cashflow (PBTCF) Finance I/S Sales - COGS Gross Profit - S&A Expenses EBIT David M. Harrison, Ph.D.

Texas Tech University Real Estate Investments

Potential Gross Income (PGI)

# of units x rent per unit; rent/ft 2 x # of ft 2  Forecasting Growth:  In Equilibrium –  Disequilibrium:  Excess Supply –  Excess Demand –  What about Functional or and/or Economic Depreciation?

David M. Harrison, Ph.D.

Texas Tech University Real Estate Investments

Intra-building Lease Analysis

 Suppose you are tasked with projecting the future rental income of a 10-unit commercial property. The facility currently is fully leased, with each tenant originally signing a five-year lease upon their occupancy date (which varies by tenant). Existing lease terms are: Tenant 1 2 3 4 5 6 7 8 9 10 Remaining Lease Term (Yrs) 1 1 2 2 3 3 4 4 5 5 Rent $64,000 $96,000 $81,500 $122,000 $50,000 $210,000 $160,000 $70,000 $200,000 $150,000 FT 2 8,000 12,000 10,000 15,000 6,000 25,000 18,000 8,000 22,000 16,000 David M. Harrison, Ph.D.

Texas Tech University Real Estate Investments

Calculating PGI

 What is PGI for Year 1?

 What is PGI for Year 2?

   Notes:    David M. Harrison, Ph.D.

Texas Tech University Real Estate Investments

What Drives PGI???

 Individual Tenant Rents  Tenant #1 –  Tenant #2 –  PGI 2 =  Additional Considerations     David M. Harrison, Ph.D.

Texas Tech University Real Estate Investments

Calculating PGI, cont.

 Now suppose you are analyzing a brand new 36 unit apartment complex set to open next fall across the street from the local university. You believe that under current market conditions, you can fully lease the facility at a rate of $1,200 per month. Each lease will be for a 1 year term, and general inflation is forecast to be 4 percent for the foreseeable future. A quick market analysis reveals the following information about similar complexes in the area: Complex Armadillo Estates Cottonpatch Cabins Red Raider Row Sunset Suites Tejas Towers Victor’s Vintage Villas Rent/Month $825 $1,375 $800 $1,050 $700 $1,125 Size 1,050 1,400 1,000 1,100 900 1,500 Age 14 2 12 6 22 26 David M. Harrison, Ph.D.

Texas Tech University Real Estate Investments

PGI Example #2, cont.

 What is PGI 1 ?

 If real estate is an inflation hedge, calculate PGI for years 2 – 10:  Does age influence rent?

David M. Harrison, Ph.D.

Texas Tech University Real Estate Investments