Page 88 - Trump University Commercial Real Estate 101

TRUMP UNIVERSITY COMMERCIAL REAL ESTATE 101

of cash. In the meantime, just make sure you go into each deal with a
cushion of cash built right in.

The Big Lie: Pro Forma Numbers

The term pro forma is not Latin for pretend , but it might as well be.

Most sellers try to give you a work of fiction when they hand over pro
forma numbers.
Smart investors always buy based on actual results . They focus on
numbers that the property is hitting right now , and they focus on recent
trends. Sellers tend to downplay the past and present, while talking up
the future.
It all comes down to a variation on this story line: “ Just wait until
you see how this property will turn the corner in the near future and
become a cash cow. ”
There are two problems with pro forma numbers: First, if you buy
based on them, you ’ re already behind. You must hope that conditions
get better simply to meet those projections. But what if the market
changes, a hurricane blows in, or a big local employer goes bust? Now
things are getting worse, and you bought on the hope that they would
get better.
The second problem: You ’ re rewarding the seller for something
that she didn ’ t do. She could have raised the rents, increased occupancy,
or decreased expenses, but no: She pawned that job off on you — but she
wants you to pay her the same as if she had done all these things!
I ’ ve bought and sold other businesses. When you buy a business,
you should base your decision on the fixed assets and the income

stream, not on promises.

The Right Numbers

Here ’ s how the professionals take a quick but accurate look at deals:
They focus on the last two years of profi t - and - loss statements , the year -
to - date profi t - and - loss statement , and the current rent roll .

68

10/14/08 10:40:37 AM
c04.indd 68
c04.indd 68 10/14/08 10:40:37 AM