Pro Forma

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 on what the project will actually cost for construction and financing.
  
  
  
• Based upon these assumptions, developer calculates whether a profit cau be made through the cash flow profit center and the actual sale ofthe project.
  
  
• The bank then offers a loan in an amount depending on its belief in the strength ofthe tenaut 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

Obtain the following costs and calculate the financial analysis leac,llng

• 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
  
• Detennine 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 am 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 Vatue
• 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

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
Pennanent Loan-Points
Construction Interest (See Addendum/Page 18)
Lease-up Reserve
Developer's Fees

Commission!Leasing Fees
Consulting/Adviso!), 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 tenns. To check your work, you can use your value of "T" to see if they do indeed add up.