Real Estate Investments

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

Real Estate Investments

Potential Gross Income (PGI)

# of units x rent per unit; rent/ft2 x # of ft2

Forecasting Growth: In Equilibrium – Disequilibrium:

Excess Supply – Excess Demand –

What about Functional or and/or Economic Depreciation?

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 Remaining Lease Term (Yrs) Rent FT2

1 1 $64,000 8,000

2 1 $96,000 12,000

3 2 $81,500 10,000

4 2 $122,000 15,000

5 3 $50,000 6,000

6 3 $210,000 25,000

7 4 $160,000 18,000

8 4 $70,000 8,000

9 5 $200,000 22,000

10 5 $150,000 16,000

Real Estate Investments

Calculating PGI

What is PGI for Year 1?

What is PGI for Year 2?

Notes:

Real Estate Investments

What Drives PGI???

Individual Tenant Rents Tenant #1 –

Tenant #2 –

PGI2=

Additional Considerations

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 Rent/Month Size Age

Armadillo Estates $825 1,050 14

Cottonpatch Cabins $1,375 1,400 2

Red Raider Row $800 1,000 12

Sunset Suites $1,050 1,100 6

Tejas Towers $700 900 22

Victor’s Vintage Villas $1,125 1,500 26

Real Estate Investments

PGI Example #2, cont.

What is PGI1?

If real estate is an inflation hedge, calculate PGI for years 2 – 10:

Does age influence rent?