I've never really understood "Gross-up Revenue by Absorption & Turnover" and "Reduce General Vacancy Result by Absorption & Turnover". I just know the standard practice for our firms is to un-check "Gross-up Revenue by Absorption & Turnover" and check "Reduce General Vacancy Result by Absorption & Turnover".
Can someone explain how each of those options impacts GV calculation given the function (EGR = PGR - Absorption & Turnover Vacancy - Free Rent + Expense Recoveries + Other Income - General Vacancy)?
Basically:
First scenario calculates general vacancy with absorption/turnover added back as potential revenue - essentially taking a vacancy on the building as if it were 100% leased regardless. Theoretically you'd be double charging yourself and hurting your EGR.
Usually the second option is checked by default... so don't know why you have to play with it. But this scenario keeps vacancy at 0 if absorption/turnover is greater than vacancy.
Now that i think about it, i have no clue why you'd model the first - if anyone knows let me know. I've never once modeled or seen it modeled like that coming from industrial on either side of the ball.
"Potential Gross Revenue" by definition is 100% income potential at 100% rents and 100% occupancy, so adding back to PGR then reducing by general vacancy and actual vacancy is done to model the loss from lack of potential revenue.
In short, it's just a convention to let you see how well a property is doing from it's hypothetical best possible performance given the market.
In MF, they often add a 'loss to lease' line to deduct the difference from market rents vs. contractual rents (assumes market rents went up).
All of this is analytical, makes no real difference in cash flow modeling, but it does help you understand the impact of various assumptions (like inflation and rent rate growth factors).
Doesn't argus calculate zero ($0) potential reimbursement income during absorption and during months vacant? Doesn't that mean that even if we check gross up by absorption and turnover vacancy, then we still aren't getting a true potential gross revenue since we aren't including the potential reimbursement income for these periods? Is there a workaround for this or am I just misunderstanding something?
It's not as common to model this way, but an example:
Say you are buying an office building (office, because the question relates to ARGUS, but can be applied to other product types) in a secondary/tertiary market that that has 90% occupancy and also contains a risky tenant mix. These risky tenants may go BK, maybe there is risk of rent relief, etc. If the market GVAC is 10% and assuming you model vacancy the second way, then you are never factoring the extra loss due to the extra vacancy your building will possess.
Yes, you can just model a collections and revenue loss line (in addition to GVAC), or you can just increase the GVAC to be something higher than the normal market (what I would do), but there are reasons why you may want to artificially deduct $$ from your projections, especially during years of leaseup where there are no GVAC deductions because of the absorption and turnover vacancy offset.
Got it - appreciate the color. Makes total sense, but like you said - baking that into other areas typically.
Also FYI Argus does a forward 12 month look on occupancy (at least last time I checked). So even though you're exporting monthly cash flows, Argus is still thinking in Annual terms. When I'm doing straight Excel models, I just do vacancy loss gross up based on current month.
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