The model comes before the deal.

In-place income is what the property collects today under signed leases. Pro forma is what someone believes it could collect after rents are raised, vacancy is filled, or expenses are cut. One is a fact you can verify against the rent roll and bank deposits; the other is an argument. Offering memoranda routinely lead with a pro forma cap rate because it produces a better-looking number, so the first thing to do with any marketing package is recalculate the return on in-place income and treat the difference as the business plan you are being asked to execute.

Both, because each one lies to you in a different situation. Cap rate misleads on a building with below-market leases or heavy vacancy, where in-place income understates what the asset is really worth. Price per square foot misleads when buildings differ in clear height, power, parking, condition, or land ratio, because it treats unequal boxes as equal. Run both, and when they disagree sharply, that disagreement is usually pointing at the actual investment thesis. On land-constrained assets a third measure, value per buildable square foot, often matters more than either.

We build from assumptions outward, in a fixed order: assumptions, sources and uses, renovation budget, monthly pro forma, annual summary, exit analysis, and sensitivity. The monthly pro forma matters because renovation and lease-up do not happen evenly across a year, and an annual model hides the months where the deal is negative. Every assumption is flagged as an assumption rather than presented as a finding, and renovation line items get replaced with real contractor bids before anything is committed. If the deal only works in the base case, it does not work.

A 1031 exchange lets an owner defer capital gains tax on the sale of investment or business property by reinvesting the proceeds into like-kind replacement property. Two deadlines control everything: replacement property must be identified within 45 days of closing the sale, and the purchase must close within 180 days. Both run concurrently from the sale date, neither is extendable in ordinary circumstances, and proceeds must be held by a qualified intermediary rather than by you. Start identifying replacement property before you close the sale, not after. Confirm current rules and your own eligibility with your CPA and qualified intermediary.

It is buying a property for its future development potential while an existing building generates enough income to carry the asset in the meantime. The existing improvements are not the investment; they are the thing paying the debt service while entitlements, permits, or a lease expiration run their course. These deals live or die on two numbers: whether the in-place income genuinely covers carry for the full entitlement timeline, and what the land is worth per buildable square foot at the end of it. Underwrite the downside where entitlement is denied and you are left owning the existing building at the price you paid.

Run it as a comparison, not an instinct. Renovation costs capital and vacancy up front and should return a rent premium that repays both within a defined period. Re-tenanting at the current condition is cheaper and faster but locks in today's rent for the length of the new lease, and on a five-year term that is a long time to be wrong. The deciding factors are usually how far below market the current rent sits, what comparable renovated space is actually achieving nearby, and how long the space realistically sits empty during the work.