Gross Sales Proceeds

Sales proceeds is the amount of cash received from the sale of a good or an asset. Typically, these sales proceeds are discussed as gross or net. Gross sales proceeds are the total sales amount received from the transaction while net sales proceeds are the total sales amount after paying for expenses, fees, and taxes.

Gross Sales Proceeds vs. Net Sales Proceeds

Gross sales proceeds are the payment received for selling an asset, whether tangible or intangible. This amount could include expenses related to the transaction, the cost of production, or other costs. For example, if a home is selling for $250,000, this amount would represent the gross sales proceeds. The gross sales proceeds of the home include the selling costs (legal and title fees) as well as the agents fees or commission.

Net sales proceeds are the final consideration that the seller receives after deducting all costs and expenses that occur during a transaction. Depending on the asset sold, the costs could be a small percentage or a very large percentage of the gross sales proceeds. Capital gains taxes, or a levy assessed on the positive difference between the original purchase price and sale of an asset, could also be considered when calculating the net sales proceeds. For example, when selling a house the first cost that is deducted is the success fee (a fee paid to the real estate agent for the successful sale of a property).

How to Calculate Gross Sales Proceeds

In commercial real estate, the gross sales proceeds can be calculated by taking the net operating income (NOI) and divide it by the cap rate.

Now that we know the formula to calculate the gross sales proceeds, we can dig a little deeper. The NOI can be calculated using two different methods. The first method is the forward 12. The forward 12 NOI is calculated by summing the forward 12 months. For example, if the exit month is month 60, one would sum the NOI for months 61-72 to determine the forward 12 NOI. Likewise, if the exit month is month 48, one would sum months 49-60 to determine the forward 12 NOI.

The second way that the NOI can be calculated  is by using the trailing 3 method. By using the trailing 3 method to calculate the NOI, one would take the sum of the trailing 3 months and then multiply the sum by four. For example, if the exit month is month 60, one would take the sum of NOI for months 58-60 and then multiply the sum by four.

The primary difference between the two methods is that the trialing 3 is based on actual performance while the forward 12 is based on performance estimates or projections.

Once you have solved for the NOI, one must determine the cap rate or capitalization rate. The cap rate indicates the rate of return that is expected on a real estate project. It is used to assess real estate investments and their profitability. Different types of real estate projects have various cap rates and one must do a little bit of research to determine an appropriate rate. If you would like to learn more about cap rates, please visit our blog for a more detailed discussion on the topic.

If use the forward 12 method to determine an NOI of $500,00 and use a cap rate of 5%, the gross sales proceeds would be $10,000,000.

Conclusion

The gross sales proceeds are an important part of any real estate cashflow model. One must determine an appropriate method to calculate the NOI (trailing 3 vs. forward 12) and then determine a cap rate. Gross Sales Proceeds are before any reduction for expenses, taxes, and fees. By selecting the most applicable method an analyst can make their model as realistic as possible.

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About the Author

Eric Bergin is the founder of TSM. He realized that there was a need for real estate financial models that were more than just generic templates. He wanted to create a personalized product for his customers that would ensure success for them and their company. Please reach out to him if you have any questions regarding gross sales proceeds or if he can help you with your modeling needs.