The Pro Forma World

• Pro forma based on estimates, projections, and market surveys. Definition of Pro forma = budget/revenue.
  
• Developer tries to key in on specific numbers for what the project will actually cost for construction and financing.
  
• Based upon these assumptions, developer calculates whether a profit can be made through the cash flow profit center and the actual sale of the project.
  
• The bank then offers a loan in an amount dependant on its belief in the strength of the tenant market and the "street" rental rates.
  
• Everything may be positive on paper.
  

Hard Costs + Soft Costs = Project Costs

• Some costs are fixed while others are variable.
  
• Evaluate the costs on a per-square- foot ratio basis.
  
• Project Cost is the Acquisition Cost or Purchase Price.
  
• Determine loan amount and annual debt service.
  
• Conduct a break-even analysis.
  
• Calculate projected net operating income (NOl).
  
• Calculate lending institution's loan (NOl divided by debt coverage ratio = allowed mortgage payments)
  
• Also the loan-to-value and loan-to-cost ratios are employed.
  
• Recalculate loan amount and new break-even rental rate; determine equity needed.
  

Overview of the Process

• Hard Costs + Soft Costs = Project Costs
• Some costs are fixed while others are variable.
• Evaluate the costs on a per square foot ratio basis.
• Project Cost is the Acquisition Cost or Purchase Price
  
• Determine loan amount and annual debt service.
• Conduct a break-even analysis.
• Calculate projected net operating income (NOl).
  
• Calculate lending institution's loan (NOI divided by debt coverage ratio = allowed mortgage payments). Also the loan-to-value and loan-to-cost ratios are employed.
• Recalculate loan amount and new break-even rental rate; determine equity needed.
  
  

Outline for the Developer's Pro Forma Hard Costs

• 
  
• Land Purchase or Value
• Environmental Engineer
• Architecture and Engineering (Should your architectural contract include:
  • Off-site Work
  • Utility Systems and Ditches (on-site, off· site)
  • Demolition
  • On-site Work
  • Building Construction
  • Developer's Impact Fees
  • Contractor's "General Conditions"
  • Other Amenities

ON SOFT COSTS , Remember: Estimated Fixed costs vs. Estimated variable costs

• Interest on Land Loan Until Construction
• Opportunity Cost on Cash Land Purchase
• Advertising and Promotion
• Legal
• Accounting
• Bank Counsel
• Bank Appraiser
• Other Closing!Administration Costs
• Real Estate Taxes until Lease-up
• Liability Insurance on Vacant Land
• Terrorism Insurance
• Builder's Risk Insurance After Construction
• Liability Insurance After Construction
• Environmental Warranty Insurance
• Title Insurance
• Land L0811-Points
• Construction Loan-Points
• Permanent Loan-Points
• Construction Interest (See Addendum/Page 18)
• Lease-up Reserve
• Developer's Fees
• Commission/Leasing Fees
• Consulting/Advisory Fees
• Utility Costs after Construction
• Operating Costs after Construction
• Lien Waivers
• Pre-penalty Waivers
• Contingency or the 3 M's (mistakes, misfortunes, & misrepresentations)

SOLUTION OF COSTS USING VARIABLE SUBSTITUTION. Let "T" equal the "Total Project Cost."

• The "Total Project Cost" is defined as the sum of all "Hard" and "Soft" costs.
• Therefore, any project cost, that is a function of the final cost can be represented as a function or percentage of "T".
• For example, if the developer's fee is 5% of the total cost of the project, it is first converted to decimal form. Five percent (5%) would be converted to "O.05T"
• This conversion is completed for all of the items that are dependent on the Project Total Cost.
• After those calculations are made, then the actual dollars are added (Hard and Soft costs).
• Next, the "T" costs are added.
• The combination of these two sums should equal "T", which is the Total Project Cost.
• You can then solve for "T" by adding similar terms. To check your work, you can use your value of "T" to see if they do indeed add up.