Base Rental Income at the top represents this “potential revenue” with 100% occupancy and full market rents paid by tenants.
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.
Common deductions and adjustments are ones for the Absorption & Turnover Vacancy, Concessions & Free Rent, Expense Reimbursements, and General Vacancy.
Absorption & Turnover Vacancy is for the months of downtime when a tenant leaves, and it takes time to find a new tenant. It’s not an expense, but rather “foregone rental income.”
Simple Calculation: If a tenant is renting 2,000 square feet for $50 per square foot per year, this tenant leaves, and it takes 6 months to find a new tenant, then the Absorption & Turnover Vacancy is 2,000 $50 (6 / 12) = $50,000.
Concessions & Free Rent is used for when a new tenant moves in, or an existing tenant renews, and you grant “free months of rent” as an incentive.
Simple Calculation: If a tenant is renting 2,000 square feet for $50 per square foot per year, this tenant leaves, and it takes 6 months to find a new tenant, then the Absorption & Turnover Vacancy is 2,000 $50 (6 / 12) = $50,000.
Expense Reimbursements are an addition to revenue and represent tenants’ proportional share of property taxes, insurance, and maintenance/utilities.
Simple Calculation: If a tenant renting 2,000 square feet is responsible only for its share of property taxes, and property taxes for the entire 10,000-rentable-square-foot building are $50,000 per year, then this tenant must pay (2,000 / 10,000) * $50,000 = $10,000.
General Vacancy is for space that’s “permanently vacant,” AKA there is no tenant and no plans for one anytime soon.
Simple Calculation: If this same 10,000-rentable-square-foot building has 1,000 square feet that is always empty, the General Vacancy line item would be 10,000 10% $50 = $50,000.
As in the screenshot above, t would appear with a negative sign on the pro-forma since it represents a deduction from “potential revenue.”
Effective Gross Income sums up all these adjustments and is similar to Net Revenue or Net Sales for normal companies, but on a Cash basis rather than an accrual basis.
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