Broker Pro-Forma vs Income Statements

2 Replies

I’m currently under contract on a 16-unit apartment complex. The broker’s pro-forma showed NOI of $51K, however, when I dug into the income statements, actual NOI was only $36K. I called the broker, and she explained that she had omitted a few expenses from her pro-forma (new paint, carpet, plumbing repairs) since they were one-time, non-recurring charges. What appeared to be a deal with decent cash flow is now close to a break-even deal after considering mortgage expenses. I feel that these are very real expenses that should be taken into account when arriving at the cap rate and sale price of the property - regardless of whether or not they were one-time charges. How would you handle this situation? Renegotiate? Walk away? Accept the “non-recurring expense” rationale and move forward with the deal? Thanks in advance for the second opinions!

@Jeff O'Neal  

In my experience broker proformas are always incorrect. I used to get angry about what I perceived as lies, but then I realized that the broker is making a proforma because the current owner doesn't have one to give to the broker. Also, the broker has to pull teeth from the seller to get real information. In this case, sounds like she knew about them and just chose not to include them because it wouldn't benefit them. That's rubbish. Those costs should absolutely be reflected as R&M. 

This could be an opportunity to renegotiate, but if the deal isn't cash flowing and your goal is to cash flow -- it might be time to walk away. Is it the cost of capital that is making break even? Maybe you can figure out a way to reduce your cost of capital?

@Joseph Gamatoria  That's correct -- the broker (who also owns the property management company) had full access to actual operating data but chose to omit these larger expenditures with the justification that they were non-recurring and therefore wouldn't be representative of future operating costs.  I guess the same situation could occur anytime a seller makes significant improvements before a sale.  Including the cost of a roof replacement on the proforma, for example, would likely drive the cap rate to zero even though the property may cash flow well in subsequent years.  I think I understand the broker's rationale, but I would have been more understanding had this info been disclosed as a footnote on the proforma.

I have okay financing terms for this type of property (80% LTV, 5.5%, 20 year amortization) -- not sure how much better I could do with respect to the cost of capital with two more rate increases expected this year.