The concept of rent expense as a pro forma add-back is really confusing me at the moment.
The way I understand it, whether Rent Expense is added back as a PF adjustment depends on the following scenarios:
(1) Company owns its real estate through a separate entity and pays rental expense to it (considered a related party transaction). In the event of a sale, and if seller chooses to sell real estate as well, all the Rent Expense gets added back as a Pro Forma adjustment.
(2) Company owns its real estate through separate entity but decides to keep the real estate in the event of a sale. If so, the only potential pro forma add-back is the difference between rent expense paid and a normal market rate level of rent.
My questions:
1. Is the addback approach right in either scenarios?
2. I don't understand why you need to add back the entire Rent Expense in scenario (1)?
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