It has been a while since my last blog. But this morning I started thinking about how things have changed in the real estate investment community. And as I was thinking, a question popped into my head. Does it make sense to market a shopping center based on a pro forma cap rate?
A pro forma cap rate is based on the possible future income to a shopping center, either through lease up of vacant shop space, a pre negotiated rent increase, or an increase of rent during an exercised option period. Of the three possibilities mentioned, the only one that provides any real value is the pre negotiated rent increase. There are too many variables that come into play to count on a tenant to exercise their option or to find a new tenant for a vacant space.
In today's economy, buyers are analyzing shopping centers based on actual income. Lending institutions are underwriting shopping centers based on actual income. Tenant options are important, and to some buyers the ability to add value through lease up is important. But if the actual present income can't support the debt, any future potential income is pointless.
I believe it is important to include potential income in the marketing material for a shopping center, but I believe it is a waste of the sellers time and potential buyers time to promote the sale of a shopping center based on a pro forma cap rate. In todays market, the pro forma cap rate is a great tool for showing the long term income potential and providing some insight to the current asking cap rate based on actual income.
