Why We Do Not Chase Pro Forma Rents at Acquisition

Chasing pro forma rents is the fastest way to destroy occupancy after acquisition.

Many sponsors raise rents aggressively in year one to hit the pro forma. The result is often higher rents on fewer units. Here is what we do instead.

The Pro Forma Trap

The pro forma shows market rents the property should achieve. New owner sees the pro forma. New owner tries to raise rents to market immediately.

Existing tenants get the increase notice. Some absorb it. Some give notice. Property loses 15 to 25 percent of its tenants over the first 12 months.

Net effect. Higher rents on the units that did rent but more vacancy and more turnover costs. NOI often goes down before it goes up.

The Patient Approach

We push rents gradually. Capture loss to lease through renewals over 18 to 24 months, not all at once.

Existing tenants paying 1050 with market at 1175. We do not jump them to 1175 at renewal. We move them to 1095 or 1115. Take 50 to 65 dollars of the gap.

Next renewal, take the rest. By the second renewal cycle, the tenant is at market without leaving.

Turnover at Market

When tenants do leave, we lease the unit at market. Not at the pro forma maximum. At the actual market rent supported by comps.

New tenants accept market rents because that is what they would pay anywhere. Existing tenants resist large jumps because of the comparison to what they paid last year.

Two different pricing dynamics. Recognize them. Lease accordingly.

The Math Comparison

Aggressive approach. Raise rents 12 percent in year one. Occupancy drops from 95 to 88 percent. Net revenue change is roughly 4 percent positive but turnover costs eat half of that. Result. NOI up 2 percent. Reputation damage to the property.

Patient approach. Raise rents 4 percent in year one. Occupancy holds at 95 percent. Turnover costs normal. Result. NOI up 3 to 4 percent. Reputation enhanced.

Year three. Aggressive property is still working to recover from year one damage. Patient property is steadily compounding.

Investor Perception

LPs see year one cash flow. Aggressive sponsors can show better year one cash flow temporarily. Patient sponsors show steadier compounding.

Over the full hold, the patient approach almost always produces better total returns. The compounding works in your favor.

Educate your LPs on this. The pro forma is a target, not a year one execution mandate. Patient execution gets there better than aggressive execution does.

Exception: Heavy Value-Add

If you are renovating units and bringing them to market through capex, the pricing math is different. The renovated unit at the renovated price is a new product. Existing tenants do not have a comparison.

Even here, sequencing matters. Renovate vacant units first. Establish the new price point. Then renovate at turnover. Then offer renovation packages to renewing tenants who want the upgrade.

The Discipline

Resist the pressure to hit pro forma rents in year one. The pro forma is a stabilized target. Get there steadily.

Operators who understand the patience required outlast operators who chase the short term number. Patient capital partners with patient operators. That is the kind of alignment that produces long term wealth.