Question on Pro Forma statements given by auction properties
Typically, how far in the future do Pro Forma statements project? Is it just the current 1 year ahead?

Or do they look 5-10 years into the future?

Perhaps it depends, in which case, answer my question in the most general sense possible.

(context: I am running the pro forma for the purpose of a acquiring a retail center that is currently only half occupied with pizza hut as anchor tenant. I plan to buy it and then after 5 years of holding it, I intend to sell it in the fifth year. also, this would be joint venture situation...)

edit 1:

also do you know if it is common for expense recoveries to vary based on different level of occupancies? for instance, when I have lower level of vacancy/greater level of occupancy, should i expect to recover more in expense (because of reimbursements from tenants)? Or would it be possible that the collection rate/SF would change change enough so that they become equal, i.e. rather than collecting $1.20/SF with 75% occupancy, I am now collecting just $1.10 with 85% occupancy?

&amp;#x200B;

edit 2:

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I am a bit confused since some of these pro formas project that they property is going to have 85% occupancy...I mean, is this realistic for the first year? After all, in my context, I am looking at property that has just 55% occupancy. Isn't 85% a bit high/too optimistic no matter the location? That's quite a jump after all. Perhaps the 85% is used here since it reflects the breakeven occupancy rate they require? This would make sense since it would be more appropriate to assume the property retains the in-place tenants and then adds maybe 10-20% more (so like a max of 75% occupancy)
[{"id": "gf04nd3", "text": "Are you doing the pro forma? How long do you intend to hold the property for? It does depend. Everyone is going to analyze a deal differently. A proforma is a tool used for project management and investment purposes. It's often a loosely educated guess that gets refined as you get closer to closing. It then becomes the metric by which you attempt to manage the asset.", "replies": [{"id": "gf09dh7", "text": "Buying it  and after holding it for 5 years, I intend to sell it in the fifth year...so what's the pro forma then?", "replies": [{"id": "gf0b3mw", "text": "You can model out 5 years and cap the noi of yr 5 for your sale value. Some may model out a 6th year purely for valuation", "replies": [{"id": "gf0iyl7", "text": "Correct, would want to cap Year 6 NOI for a sale at the end of Year 5.", "replies": [{"id": "gf0lpie", "text": "you mean I would find NOI for year 6 (even though that is the year after sale) and use that value as part of the valuation / as part of final terminal amount?", "replies": [{"id": "gf0ma53", "text": "Correct, you cap the 12 months after sale to get your terminal value, because that's how the next buyer would look at it.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gf07hra", "text": "Wow - it depends on a lot of things, and why you\u2019re running the proforma in the first place. For commercial real estate I would expect more than 1 year, but it\u2019s not cut-and-dry.", "replies": [{"id": "gf09j9q", "text": "Running the pro forma for the purpose of a retail center that is current only half occupied with pizza hut as anchor tenant. I plan to buy it and then after 5 years of holding it, I intend to sell it in the fifth year", "replies": [], "depth": 2}], "depth": 1}, {"id": "gf08st6", "text": "At least through disposition", "replies": [{"id": "gf0lids", "text": "disposition? what are you talking about?", "replies": [{"id": "gf0nvgb", "text": "When you sell. Looks like through year 5.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gf0hk8f", "text": "**A pro forma is utterly, completely, beyond worthless when buying a half occupied retail property in today\u2019s CRE climate**. \n\nYou need historical info detailed enough to splice out what it will take to operate the property at a deficit until you can add more tenants.", "replies": [{"id": "gf0kxe0", "text": "alright I will look into breakevn occupancy...also do you know if it is common for expense recoveries to vary based on different level of occupancies? for instance, when I have lower level of vacancy/greater level of occupancy, should i expect to recover more in expense (because of reimbursements from tenants)? Or would it be possible that the collection rate/SF would change change enough so that they become equal, i.e. rather than collecting $1.20/SF with 75% occupancy, I am now collecting just $1.10 with 85% occupancy?", "replies": [], "depth": 2}], "depth": 1}, {"id": "gf0nm3r", "text": "If this is 55% occupied with a Pizza Hut, I\u2019m gonna guess it\u2019s a 15-20 year old strip center with Pizza Hut flexing a 5-year option and is paying net plus reimbursements. Depending on your market you may have to offer gross leases rather than net + reimbursements for second use space. You may also have to offer TIAs which is something to think about", "replies": [{"id": "gf0pnsq", "text": "You are saying I might have to offer gross lease rather than net leases because some second-rate/in-line tenant might not be willing to cover the cost of insurance, maintenance and property taxes?\n\nand yeah pizza hut and dollar tree have leases that date back to 1978 and they just renewed until 2030 or so", "replies": [{"id": "gf0qdov", "text": "Well yes, you may have to offer gross rather than net + reimbursements, but a gross rent still covers taxes, insurance, utilities, repairs, and management. New leases in 15+ year strip centers tend to be smaller tenants as opposed to national tenants like DD, Jimmy John\u2019s, and Pizza Hut. While these large national tenants in brand new strip centers are fine paying net + reimbursements, smaller tenants in the older generation of strip centers are less favorable for the uncertainty of rent. Eg. one year, reimbursements may be $6 but the next year it may be $8psf depending on repairs and maintenance. These smaller tenants may be more favorable for a $23psf gross rent rather than a $16psf net rent + reimbursements that fluctuate between $6 and $9psf. That way they know what their rent is every month", "replies": [{"id": "gf0si73", "text": "to that end, can I expect to recover more in expenses from tenant reimbursement  when I have lower level of vacancy/greater level of occupancy? \n\nOr would it be possible that the collection rate/SF would diminish  with increased occupancy so that they become equal, i.e. rather than collecting $1.20/SF with 75% occupancy, I am now collecting just $1.10 with 85% occupancy and thus, my end result (i.e. tenant reimbursement) is the same?", "replies": [{"id": "gf0tijf", "text": "Well it\u2019s normally consistent. For instance, if RE taxes are $40,000 for a 10,000sf building, your taxes are $4psf whether you have a tenant in a space or not. If a tenant occupies 2,000sf they pay $4psf so $8,000. If a tenant occupies 8,000sf they still pay $4psf but overall it\u2019s $32,000. Utilities would be different i suppose. If a place is vacant you\u2019re probably paying $15,000 or $1.50psf to keep the pipes from freezing, electric on, etc. if it\u2019s fully occupied your utilities may be $30,000 or $3psf", "replies": [{"id": "gf0u3fe", "text": "so that sounds like it is in fact possible to have opex increase  with greater level of vacancy, so I suppose that means I would in turn have greater tenant reimbursements?\n\n&amp;#x200B;\n\nsecondly and relatedly, it is feasible that I could have a diminished collection rate ($1.10 instead $1.20) with greater occupancy (85% instead of 75%)?", "replies": [{"id": "gf0uss7", "text": "Yeah. Tenant reimbursements are estimated at the beginning of the year and then you and your tenants will settle up at the end of the year. Either they pay you the difference if they come up short or you pay them if they overpaid. Usually reimbursements are written in the lease as the percentage the tenant occupies. So if a tenant occupies 30% then the lease will say they pay their net rent + 30% of RE taxes and CAM.\n\nTo your second point, i don\u2019t think that is possible. More occupancy typically comes with more expenses", "replies": [{"id": "gf0w0ze", "text": "to my second point...[https://imgur.com/a/94pqMa5](https://imgur.com/a/94pqMa5)\n\n&amp;#x200B;\n\nsee here...the  way I did was that I knew the building was 64k sq ft\n\nI also knew in the first box (in place NOI), the expense reimbursement listed there was at 55% occupancy and was equal to 54k\n\n&amp;#x200B;\n\nIn the second box (pro forma NOI), the expense reimbursement listed there was at 85% occupancy. and was equal to 58k\n\n&amp;#x200B;\n\n&amp;#x200B;\n\nSo....my math said....\n\n&amp;#x200B;\n\n64/54 for first box which is  nearly 1.2\n\ncompared to\n\n64/58 for second box which is 1.1\n\n&amp;#x200B;\n\nSo this why I am asking you this question because I do not understand the math here (the math says I am collecting a lower rate and yet overall, I am still more in total expense reimbursements)", "replies": [{"id": "gf0xn9l", "text": "Ahhh i see what you\u2019re saying... first, you want to calculate your reimbursements off of occupied square footage. So $54,000/35,200=$1.53psf and $58,000/54,400=$1.07. Did a broker create this pro forma? How did occupancy and rent both increase 56% but the reimbursements only increased 8.4%? this pro forma must be anticipating that the new tenants would be on gross leases rather than net + reimbursements. If every tenant was net + reimbursements then your recoveries at 100% occupancy would cover all real estate taxes and CAM. At 85% occupancy, your recoveries should be much higher than this pro forma. It seems that the overall rental rate is like $9.50 though. Is that typical of your market? That seems pretty low but i live in a higher COL area", "replies": [{"id": "gf0y8i4", "text": "1. yes, a broker did create this\n\n&amp;#x200B;\n\n2) And I am also not sure how occupancy and rent increased that much and reimbursement increased so little--perhaps a case of deception? Not sure what to do to see the full picture in that regard. (I still cannot get over the fact that the collection rate decreases and total reimbursement increases, albeit if only marginally)\n\n&amp;#x200B;\n\n3) to answer your final question, I am trying to find out, but the broker did not post any comparables and I am struggling to find resources to find what common average rent would be. this is in Griffith park in Indiana which is like a neighboring metro area to Chicago. I am so use to the convienece of the broker giving me the comps, I don't know where I would look to find average rents that are comparable)", "replies": [{"id": "gf10j6i", "text": "Ahhh so That Kmart is probably majority of the vacant space. Large anchor tenants like that often do not pay reimbursements because they attract other smaller tenants. That\u2019s why your recoveries barely increased and overall collection rate is decreasing. I didn\u2019t know there was a large anchor tenant like that.\n\nSo i actually live in downtown Chicago and work throughout the msa. I\u2019m very familiar with that area. There\u2019s a few reason rents are low. One, it\u2019s an old shopping center that requires more upkeep than newer generations. Two, there\u2019s a huge vacant space with no real anchor tenant. Large vacant spaces look terrible to consumers; therefore, potential tenants avoid moving in, killing the value of the property until they offer competitive (ie low) rents. Three, the area isn\u2019t that great anymore. It\u2019s old and has low-to-moderate crime. \n\nCostar is the best source for any kind of commercial real estate info. It\u2019s expensive tho. I pay $1100/month for it for national access. \n\nI saw your other reply. I believe i answered the first Q which is because anchor tenants don\u2019t pay reimbursements. For Q2, i do a lot of shopping centers and strip malls. For newer generation centers, they\u2019re reimbursements can be up to $16psf or 40% of the total revenue", "replies": [{"id": "gf11i4u", "text": "shucks, I am looking at taking out a loan at  75% LTV\n\nI don't know now. Do you see any reason that this area is a good investment? Perhaps like as undervalued one? It's not like the average median income nearby is bad...it is about 75k  and the pizza hut just renovated...so I guess it is a mixed bag? Not too sexy, not too ugly", "replies": [{"id": "gf1258f", "text": "Not sure a bank will give you a 75% LTV with how bad the retail market is even though it is recovering now. At its current price, it\u2019s a great investment so it\u2019d be worth pursuing. Did the previous owner get foreclosed on? That may explain the low asking price. My one big concern is that vacant Kmart though. Going to be very difficult to lease that up. Normally when the anchor tenants move out a shopping center is on its last leg unless millions are dumped in to revitalize it.\n\nAt the end of the day you have to do your due diligence and determine whether you want to take the risk on or not", "replies": [{"id": "gf12eof", "text": "I know...perhaps I could shoot for something like 60% after this talk. It looks like a couple of tenants had some aged receivables that were never paid so perhaps there was not enough rent because of a few bad apples.\nLike I said, I don't think Kmart is involved, so I am not sure why you mention it unless it still influences things somehow but yeah as to your last point, it looks like the next owner will be responsible for revitalization", "replies": [{"id": "gf12o0i", "text": "I\u2019m saying Kmart to refer to the large vacant space in the shopping center. It was a Kmart before it went vacant", "replies": [], "depth": 15}], "depth": 14}], "depth": 13}], "depth": 12}, {"id": "gf11suh", "text": "also I am bit confused since kmart doesn't seem to be involved (neither as a tenant nor as a source of income thru easement agreement) according to the offering memo\n\nthe park includes dollar tree NNN, pizza hu NNNt, USA army recruiting center gross, Rainbow shops gross , advance America NNN, Hollywood nails NNN (and month to month lease), china buffet gross (and month to month lease)\n\n(and for the record, I am bit confused how you can have gross  leases and operate month to month seeing that gross leases are supposed to determined in advance)", "replies": [{"id": "gf12iol", "text": "Kmart isn\u2019t going to show up on any revenue or marketing brochures since they filed for bankruptcy years ago and the space is now vacant. If you go on google maps you\u2019ll see it. That\u2019s majority of the vacant space. The reason the pro forma\u2019s recoveries didn\u2019t increase much is because it assumes kmart\u2019s old space gets leased up. These large spaces don\u2019t pay recoveries.\n\nGross leases don\u2019t have to be determined in advance. You look at previous expenses and determine how much to charge while staying competitive", "replies": [{"id": "gf12ut5", "text": "I see that makes sense. I didn't know what you meant at first, but yeah it looks the griffith park owns the space that kmart used to have", "replies": [], "depth": 14}, {"id": "gf12xr6", "text": "I just don't get why these large spaces don't pay recoveries ?  I mean a new tenant is subject to paying expense recoveries just like everyone else", "replies": [{"id": "gf141f5", "text": "It\u2019s an incentive that\u2019s become normal practice. There\u2019s even some anchor tenants in malls that don\u2019t pay any rent at all. Their existence attracts consumers. In turn, these consumers attract a lot of smaller tenants for the small shops who are willing to pay premium rents in order to be within a shopping center with a lot of foot traffic. Large anchor tenants know this so they use it to their advantage", "replies": [{"id": "gf145bj", "text": "I guess, it just sounds like this assumes that the big vacant space will be occupied by a new tenant (and a big anchor tenant at that)\nseems like big assumption? ...or no?", "replies": [], "depth": 16}], "depth": 15}], "depth": 14}], "depth": 13}], "depth": 12}], "depth": 11}], "depth": 10}, {"id": "gf0yqsv", "text": "1. I am still confused with 1.53 lowering to 1.07 as occupancy increases unless you can say you can collect less on average because you have more tenants?\n2. how could reimbursements increase 56% ? That would mean total reimbursements would total over 80k in the case of 85% occupancy which seems outlandishly high", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}, {"id": "gf0wnrz", "text": "to my first point, the weird thing with my tenant recoveries is that according to that imgur link, the collection rate changes....so it is not just the overall recovery that changes...in fact, as my overall recovery increases with higher occupancy , I am nonetheless collecting a lower rate /SF", "replies": [{"id": "gf0xyv7", "text": "Yeah, see my response to your other comment. Something strange is going on here. Not sure if whoever made the brochure screwed up or what. If every space was net + reimbursements then your recoveries should\u2019ve increased in-line with your base rent revenue \u2014 approx 56%. As i said, perhaps the pro forma is anticipating that the new tenants would want gross leases, but then the base rent revenue should\u2019ve increased even more. Where did you find this pdf?", "replies": [{"id": "gf0ykdx", "text": "ten x", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "gf14mta", "text": "would taxes/operating expenses ever be a certain percentage of effective gross income? or does it just happen to be coincidence here? It seems like it would be its own fixed value-- independent of EGI-- but I am not sure", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gf0op84", "text": "My UW Madison valuation course we did 6 years", "replies": [], "depth": 1}, {"id": "gf1piwm", "text": "Is it April fools day? What did I just read? Dude with all due respect if you don\u2019t know this stuff already don\u2019t fuck with it, you\u2019re gonna have a bad time. Between your post and responses to other people you really really really shouldn\u2019t buy this.", "replies": [], "depth": 1}, {"id": "gf1u9rh", "text": "I'd do a little research on that anchor franchisee, Pizza Hut is closing 300 locations owned by them (NPC International). Make sure this isn't one of them. \n\n[https://www.cnbc.com/2020/08/17/pizza-hut-to-close-up-to-300-locations-operated-by-bankrupt-franchisee.html#:\\~:text=Pizza%20Hut%20will%20close%20up,to%20be%20dine%2Din%20locations](https://www.cnbc.com/2020/08/17/pizza-hut-to-close-up-to-300-locations-operated-by-bankrupt-franchisee.html#:~:text=Pizza%20Hut%20will%20close%20up,to%20be%20dine%2Din%20locations).", "replies": [], "depth": 1}, {"id": "gf4skq1", "text": "Pro formas are only as good as the assumptions you put into them. \n\nYou edit 2 is not a \"pro forma\" question... its an assumption question (obviously). Your issue isn't the pro forma, but the assumption of 85% in Year 1... when it is currently 55%. \n\nAny sell side pro forma is simply providing you an illustration of what happens in a best case scenario. In this market, hair cut everything by \\~50%... then haircut that.", "replies": [{"id": "gf4slww", "text": "/u/fukurokuju18, I have found an error in your comment:\n\n &gt; \u201cquestion\u2026 [it's] an assumption\u201d\n\nI contend that fukurokuju18 ought to have used \u201cquestion\u2026 [it's] an assumption\u201d instead. \u2018Its\u2019 is possessive; \u2018it's\u2019 means \u2018it is\u2019 or \u2018it has\u2019.\n\n ^(This is an automated bot. I do not intend to shame your mistakes. If you think the errors which I found are incorrect, please contact me through dms or contact my owner EliteDaMyth)", "replies": [], "depth": 2}, {"id": "gf4u928", "text": "I mean, I am going to use pro forma with 85% occupancy...the basic problem lies in the fact that I would not go to a bank for a loan with 55% occupancy so basically I have to assume 85% occupancy for that reason (i.e. to stabilize income for the purpose of receiving a loan)...but yes, I agreed, in-place NOI would be far lower than that arrived at using 85% occupancy", "replies": [], "depth": 2}], "depth": 1}]