WHY I CAN'T PRICE YOUR PROPERTY ON PRO FORMA NOI

“My tenants are paying $12 a foot, but market rent is $18. Price the property using $18.”

No.

I will market the upside. I will document it, explain it and defend it to buyers.

What I will not do is pretend the upside has already signed a lease and started paying rent.

In-place rent is income.

Market rent is evidence.

Pro forma rent is a plan.

Those numbers can appear next to each other in an offering memorandum, but they are not interchangeable.

The owner’s argument usually sounds reasonable. The tenants have been there for years. Their rents are below market. The spaces could lease for more today. As the leases expire, the buyer can increase the rents or replace the tenants.

All of that may be true.

But notice who is doing every verb in that explanation.

The buyer.

The buyer has to negotiate the renewal. The buyer risks losing the tenant. The buyer carries the vacancy. The buyer funds the tenant improvements, pays the leasing commission and waits through the free-rent period.

Then the buyer has to produce enough operating history for the lender, appraiser and next buyer to accept the increased NOI as stabilized income.

That work has value.

It just belongs mostly to the person doing it.

A legitimate mark-to-market opportunity can absolutely increase what a buyer will pay. The argument becomes stronger when the lease rollover is near, the tenants are paying materially below verified market rent, the spaces are functional and competing vacancy is low.

But “market rent” needs more support than a broker flyer from the nicest new property in the county.

A new flex project in Viera is not automatically a rent comp for a 1970s warehouse in Cocoa because they both have roll-up doors.

We need comparable size, condition, clear height, access, loading, power, parking, buildout, location and lease structure. We need to know whether the quoted rent is asking rent or achieved rent. We also need to know whether concessions, tenant improvements and free rent were quietly hiding behind the headline number.

The expense side matters just as much.

Owners love using future market rent on the income side while keeping historical owner-managed expenses on the other side.

Unfortunately, if we are moving into the future, we have to bring all of the future with us.

That means professional management, post-sale property taxes, current insurance, repairs, reserves, vacancy, credit loss, tenant improvements, leasing commissions and downtime.

Suddenly the pro forma becomes less inspirational.

A buyer will also look at the lease rollover schedule. If half the building expires in the first two years, the “upside” is also concentrated rollover risk. If the existing tenants cannot afford market rent, the opportunity may require replacing them, improving the spaces and leasing them again.

That is not a rent increase.

That is a business plan.

There are two honest ways to sell an under-rented property.

Sell now. We present the in-place NOI, prove the loss-to-lease and create competition among buyers who understand the opportunity. The owner receives some credit for the upside, while the buyer retains enough of it to justify the execution risk.

Or fix the income before selling. Renew the leases, raise the rents, document every agreement, clean up the operating statements and allow the new income enough time to become credible.

Then sell the proof.

Every legitimate dollar added to NOI can create multiple dollars in property value. That is how an owner moves the price.

Not by changing the font color on the pro forma.

Potential is valuable.

Proof is bankable.

And until the new leases are signed, the property is still producing $12.