Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Devil in the Details: Over Simplified Analysis

When reflecting on the above simple analysis, the expression “the devil is in the details” comes to mind. What I mean is that each step in this analysis must be taken apart, examined, and refined to verify its accuracy and to ensure that the underlying assumptions are not flawed.

The following questions, all of which you should posit before undertaking a project, illustrate why the simplified analysis in this chapter is merely a starting point toward a fuller understanding of a commercial real estate transaction.

• During which time frame do the income and expense figures relate? Are they from the past calendar year's numbers, the past trailing 12 months' figures, the current income and expenses annualized, or the projected next 12 months' base rent, based upon contractual agreements in place plus assumptions for renewals and the lease-up of vacant space? Are these numbers based upon monthly figures or annual results?
• Are the numbers actual income and expense numbers or are they “scheduled” figures? Is there any expense recapture included?
• What is the composition of gross income? Is certain revenue excluded, such as percentage rent? Should certain revenue items be excluded?
• Is the vacancy and collection loss factor at the appropriate level?
• What costs go into the operating expense line items? Is the subject expense an ordinary and necessary cost to be expensed in the year incurred, or is it a capital charge to be spread over its useful ...