What is non-cash rents? and why is it subtracted from years NOI in order to project next years NOI.
If it is something like you had to pay $10 as rent and you paid $9 and did my laundry (especially those scary socks) so non cash rent is $1, then it should be something that is not expected to happen again next year so why is it subtracted to reach at the value required to forecast the next years NOI.
if it is something that relates to those badass tenants who don’t pay full amount or on time then it should be already present in the NOI as a part of collection losses.
In short i’d be very happy if someone took the pain to explain to me the example given in schweser book 4 on page 52( study session 13). otherwise please explain the upper part only i’d really appreciate it. this thing is bugging me.
The pain is they give last years NOI and estimate of next 12 months growth in NOI. so it should be done simply without all this non-cash rent and full year for acquitions thing as is done in the example
It’s the difference difference between the average contractual rent over a lease term (the straight-line rent) and the cash rent actually paid during a period.
So imagine I pay rent of $100 a year, increasing by $10 a year, for the next 10 years. So my rent i pay in year 1 is $100, year 2 = $110…year 10 = $190.
My “average” rent is = $145 = ($100+$110+…+$190)/10
My accounting rent expense will be this average, but in any given year the actual amount i pay will be different.
So you are just adjusting for this difference between accounting expense and actual expense.
Cool … makes sense now. Thank you. Your answer helped.
One more doubt. see the question gives (clearly)
Last 12 months NOI - $80
Estimate of next 12 months growth in NOI - 1.25%
Full- year adjustment for acquition - $1
Non- cash rents - $2
So before estimating the next 12 months NOI they have actually made the adjustments to the NOI for non cash rent and full yeat adjustment for acquition and then only have they multiplied it by 1.0125 . when it clearly states that it is the increase in the next years NOI that is 1.25 why make the changes to it.
So, essentially, the adjustment will be positive in the first years (so a positive value will be subtracted to arrive at AFFO) and negative in the last years, correct?