The Encyclopedia of Commercial Real Estate Advice

ENCYCLOPEDIA TOPIC ABuying

Actual Versus Potential/Pro Forma Numbers: Don't get reeled in by the potential numbers

Would you buy a business based on its potential income? Probably not. So what are sellers and their commercial listing brokers trying to pull when the marketing flyer lists a mix of potential and actual income? As the buyer, it is essential that you do not participate in a seller's shenanigans. When a seller is intent on selling you a property based on possible future income from it, set a precedent from the beginning by saying that you will only be analyzing actual numbers.

Actual Numbers: These are the real current and historical numbers. They are verifiable by the property's current rent roll, trailing 12-month report (T-12), and last full calendar year's month-by-month profit and loss statement on the subject property. Better yet, why not do the same verification of actual numbers that most lenders require? Ask for the last three years of the seller's Schedule Es from their 1040 tax return on the property to see how they reported the property's income on their taxes. Any savvy buyer of a business will request this documentation. You are not asking for their entire tax return, only for the one page that shows the subject property.

Potential/Pro Forma Numbers: These are enhanced numbers showing the property's potential gross income and net operating income (NOI). Often the marketing flyer will show a mix of actual and projected numbers. The intention is to show ...