When you list your rent-controlled apartment building for sale, your broker will almost always include what are called “pro forma” or “market” rents in the listing published on Loopnet and the MLS. These are the rents the broker believes the units would achieve were they available on the open market. Getting them wrong is one of the ways that a bad broker can really screw a seller.
One might ask: Why? After all, smart buyers are trained to ignore the pro forma rents and focus on the actuals. With rent control buildings, it’s not like the low-paying tenants are leaving any time soon, any way. So the actuals are what matters.
But, for certain buyers, the pro forma rents do become important. These are buyers like me who are looking to buy screwed-up buildings and “unscrew” them (that’s how I explain our business model at cocktail parties; cute, huh?). We are looking for buildings we can add value to. And how much we can charge for available units, the “pro forma” number, is incredibly important to us.
Why? Because, in my business, the numbers work like this: First, I figure out what rents you can charge. Then, I figure out what that will make the building worth (for example, in Silver Lake, for a larger building, it’s maybe 11x the total annual rent). Got that number? Then I subtract the cost of renovating and the profit I want to make. What I have left over is the price I can afford to pay for the building in the first place.
Remember that my original number, my estimate for the value of the building when it’s total renovated, is being driven 100% by my estimate for what rents I can achieve. So a dumb listing broker who under-values the pro forma rents is making it harder for value buyers like me to recognize the true (higher) value of his client’s asset. And that’s another reason sellers should hire good multifamily brokers to sell thier apartment buildings, not their cousin’s uncle’s roommate who pushes condos in Reseda.