How should vacancy affect owner expenses in a DCF analysis?

[David Jiang]

Hey Everyone,

I'm trying to put together a Discounted Cash Flow (DCF) analysis of a potential 5 unit commercial property that I'm looking to purchase. I'm new to running this type of analysis so bear with me.

In calculating the NOI, I've seen examples where the major expenses (taxes, maintenance, insurance) are still counted as an expense to the owner (even though commercial leases are typically NNN) and then it's balanced out by a line item to the income for 'tenant reimbursements' which is essentially the tenant paying the owner back per the NNN.

Every example I've seen has the tenant reimbursements be exactly equal to the expenses such that it's a net zero to the owner. But if we assume some level of vacancy, which all reasonable analyses should, shouldn't that affect the amount of reimbursements as well? 

Here's an example of how I'm thinking it should be done:

If assumed vacancy is 5% on average at stable operating conditions and expenses are $20,000 per year, then tenant reimbursements should be $20,000 x 95% = $19,000 per year.

I haven't seen any example DCF's do it that way though. What do you guys think? Is my assumption wrong? I appreciate the advice.