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ProCash, an Economic Model for Income Properties

Capitalizing & Expensing Costs During Rent-Up

If construction financing carries after the opening date, construction interest and real estate taxes will be expensed in proportion to occupancy. If permanent financing closes before a minimum occupany is achieved, the interest portion of debt service and ground rent are capitalized in proportion to occupancy. As this suggests, the construction period can extend well past the opening date.

This feature is not imposed in the default specification of the inputs (AVI[30] is set to zero). However, if AVI[30] is specified as a decimal between 0 and 1, then it will be taken as a factor to derive occupancy from rental income. For example, if rental income is 40% of pro forma and AVI[30] is .55, then the system will assume occupancy is 72.7% of full (.4 divided by .55), and 72.7% of interest and ground rent will be expensed while 27.3% will be capitalized into the account called "accounting adjustments". Similarly, 72.7% of construction interest in that period will be expensed if the permanent financing has not closed, and 27.3% will stay in the construction interest account.

AVI[31] allows the user to instruct the system that when occupancy reaches a certain level (e.g. .9 for 90%), then all carrying charges will be expensed.

AVI[32] allows the user to specify that at a certain number of months after project opening all carrying charges will be expensed regardless of the level of occupancy.

This feature does not affect cash flow, except through its impact on income taxes and perhaps for its impact on the amount that can be borrowed, but it may be important to presenting the project in rational comparative terms. For example, without this feature, delaying the closing of the permanent mortgage would greatly and incorrectly increase the capitalized costs of the project while very favorably and incorrectly affecting operating results and incorrectly reducing tax shelter.

AVI[30]Adj. factor to get occupancy from AVI[29] RU(.55) 480  2
AVI[31]Percent occupied to expense all Const.fin costs 480  2
AVI[32]Max mos after open to continue cap. 480  2

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