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Crafting a Commercial or Industrial Pro Forma Operating Statement

Preparing a Pro Forma for commercial or industrial properties involves nuances that differentiate it from residential property Pro Formas, particularly due to the variety of lease types. Here's a guide to effectively preparing these crucial documents.

Full Service Lease Pro Forma

For full service leases, where the owner is responsible for all operating expenses, the Pro Forma is prepared similarly to an apartment building's:

1. Use Actual Rent Roll: Include market rent for vacant spaces.

2. Operating Expenses: Document actual expenses.

3. Vacancy Allowance: Typically, a 5% allowance is used, although higher rates may be more realistic for certain properties, like overbuilt office spaces.

4. Management Expenses: Allocate 3-5% of Effective Gross Income for management, depending on the building's size and tenant composition.

Replacement Reserve

This reserve is essential for future major repairs and should be around 2-3% of the Effective Gross Income, or potentially lower for newer buildings.

Triple Net Lease Pro Forma

In triple net leases, tenants cover most operating expenses. The Pro Forma for these leases is simpler:

1. Include All Operating Expenses: Initially document all operating expenses.

2. Tenants’ Expense Contribution: Adjust income to reflect the portion of expenses paid by tenants.

3. Expense Stops: Account for situations where tenants are responsible for increases in specific expenses over a base year.

Dealing with Owner-Occupied Units

When a unit is owner-occupied, disregard existing leases and base calculations on the market rent of the owner’s space. This should be clearly noted in the Pro Forma.

Complex Situations: Mixed Lease Types

When properties have a mix of net and full service leases:

1. Analyze Each Lease Individually: Determine the responsibilities of each tenant.

2. Compute Tenant Contributions: Based on the net rentable square footage, calculate each tenant's share of the expenses.

3. Document Tenant Expense Contributions: Reflect these in the income section of the Pro Forma.

Preparing a commercial or industrial Pro Forma requires a detailed understanding of the property’s lease agreements and a methodical approach to documenting income and expenses. By accurately reflecting the real financial picture, property owners and potential lenders can make informed decisions based on realistic projections and expectations.