Wednesday, January 4, 2012

If Commercial Real Estate Investors Avoided the Nine Vernon Martin Traps, We would all be in Better Shape.

In 1988, an appraiser named Vernon Martin III published a six page paper in Real Estate Review called Nine Abuses Common in Pro Forma Cash Flow Projections.  They are:

Over-inflated expected income
Under-inflate expected expenses
An assumption that tenants will always pay expenses
Failure to examine individual leases
Underestimation of vacancy and collection losses
Forgetting that tenant improvements and lease brokerage fees are real expenses
Going-out cap rates that are lower than the going-in cap rates
Ignoring sales expenses
Understating the discount rate.

Thanks to Argus, people are pretty good now at looking at individual leases.  But they don't always do a great job of avoiding the remaining abuses.