REAL ESTATE DEVELOPMENT PROFORMAS
A pro forma is to a property what financial statements are to the company. You can think of it as a simplified merger of the income statement and cash flow statement for a property. Because properties are not as complex as companies, it makes it easier to simplify the income and cash flow statements, since it need not contain much of the data that the full statements have.
What Is A Real Estate Development Pro Forma?
Sometimes referred to as a real estate development model, a pro forma is a feasibility analysis of a planned real estate development or project that forecasts the financial viability and the returns that could be expected when the property is sold. The proforma contains all the financing sources as well as the uses or project costs, and then projects the cash flow on a project timeline.
Developers rely on a property's proforma to guide them on whether or not to proceed with a real estate development project by comparing the cash inflows with the projected outflows. Investors also rely on proformas to gain better insight into a property's financial performance. The results of pro forma data give better and more accurate forecasts about the financial performance of a property more than any other analysis.
How To Plan Your Real Estate Development Pro forma
The first step you need to take before you begin writing your real estate development pro forma is to plan the strategy you want, the project timeline and the overall project plan.
Your Real Estate Development Strategy
You can either choose the Develop and Sell strategy or the Develop and Hold strategy or a hybrid of the both.
Develop And Sell Strategy
This is the more common strategy where the developer plans to sell off all the developed properties after the project is completed. So the procedure is that the developer acquires land, then gets Development Permit which allows him to lawfully develop the land. Then he begins construction, after which he sells everything to pay back any debts he may have accrued in the course of development.
The kind of loans involved in this strategy include construction loan and land acquisition loan.
Develop And Hold Strategy
Also known as 'Build and Hold', this strategy is utilized when the developer wants to develop a property, and rather than selling it off to an investor, decides to hold it for a period of time.
There are many benefits that this strategy comes with such as increased yield and value of the property as well as greater ease of financing. By the end of the development, the cost of the units will be way lower than their market value, making the developer to be at a greater advantage than if he had sold immediately.
To acquire loans for this strategy, you should be looking at three types of loans: land acquisition loans, construction loans and permanent loans - this pays off the construction loan from the operating income from the leased developed units.
Sell Some And Hold Some Strategy
In this strategy, the developer can decide to sell some units of the developed properties so as to pay off construction loans, while holding enough units so that the operating cash flow is either positive or neutral during the duration of time he chooses to hold those units. Whichever strategy a developer uses will affect how the real estate development pro forma will be written.
2. Your Project Timeline
Before writing your development pro forma, you need to formulate a project timeline which helps you analyze the start and end dates of all projected events for your development project. Your project timeline is the basis for every assumption you'll make in your project.
3. Your Project Plan
It's always wise to have a plan for the start and end dates of significant events in the course of your real estate development project. This helps distribute costs of the development across your project timeline, which then constitute your project cash flow. A standard development pro forma timeline usually is calculated in months. Whatever proforma template you're using should have the ability to expand flexibly to accommodate your project duration.
WRITING A REAL ESTATE DEVELOPMENT PRO FORMA
Now that we've explored all you should consider before writing your real estate development pro forma, we will now take a look at the contents of a development pro forma. A real estate development pro forma simply contains the total sales or proceeds from sales of the project and the total costs accrued in the course of the development, as well as the sources of funding for the project.
You should note that a real estate development pro forma is divided into two major parts; uses and sources. Uses refer to all the project costs incurred, while sources cover all the means funding is acquired for the project.
We'd take a look at what each of these entail:
Total Development Costs or Uses:
Under this, there are direct costs and indirect costs. Direct costs, also known as hard costs, include all the costs incurred for and during construction and improvement. Indirect costs refer to the professional fees for the architects, engineers and other construction professionals. They are also called soft costs.
Sources:
There are two main categories of sources; Equity Sources and Debt Sources.
Equity Sources (Developer's Equity)
Under this category, development funding can come from general partners, limited partners (investors), joint venture partners, or land owners.
2. Debt Sources
This is also referred to as development finance and includes land acquisition loans, which are used to acquire land to serve as the development site.
Total Sales:
This is also called Gross Realization Value (GRV). It is a compilation of all the proceeds gotten after the developed units have been sold.
Funding Table
This section in your development proforma should contain the maximum amount of debt you can incur from the various funding options mentioned above. The maximum debt available to you could be based on any of the following;
Lender's Loan To Cost Ratio (LTC) - Here, the lender calculates and determines the total development costs to be incurred in the course of the project.
Loan To Cost Ratio based on the actual development costs to be incurred in the project timeline.
Loan To Cost Ratio based on the total sales of the developed units.
Fixed Maximum Debt, which refers to the total amount of funds you can be allowed to borrow. Your broker or lender can let you know your fixed maximum debt.
Fixed Maximum Equity, this helps you know the maximum amount of equity to input in the project so that you can know how much to get from other sources.
Construction Loan: Used to fund construction or refurbishing costs.
Mezzanine Loan: Used to underpine construction loans in the event where there isn't enough equity to cover construction costs.
Permanent Loan: This pays out the construction loan based on the operating income from leased units.
Interim Income: This refers to the temporary income gotten in the course of and after construction, including rental income; interest income; sale of chattels, old house; rocks, soil and wood available on site; and miscellaneous income
Order of Draws
In obtaining funding, the Developer's Equity is used first, followed by the Limited Partners, then the mezzanine loan comes next. When every of these sources have been exhausted completely, then the construction loan can be utilized.
Types Of Real Estate Pro forma
Your real estate pro forma will vary slightly based on your development strategy, either Develop and Hold or Develop and Sell. Each of these strategies require specific inputs in the pro forma.
Whatever strategy you're using, however, you need to calculate construction costs, sale value and operating income arising from various residential and commercial units. You must figure out the cost of construction of the type of unit, whether residential, multi-family, condominiums, apartments, town houses, single family homes or commercial buildings. Then calculate the total sale value of the residential and commercial units.
Step One - To Calculate Construction Costs
Find out the total built area for each type of unit using any of these methods:
Average Construction Cost Per Unit
Average Cost Per Unit Of Measurement (M2 or SF)
Average Cost Per Individual Area
Step Two - To Calculate Total Sale Value
To do this, use either of these methods:
Average Market Value Per Unit
Average Cost Per Unit Of Measurement
Step Three - Time Of Sale And Sales Commission
In order to foretell the total sales or proceeds from your development project, you need to determine the date when you expect those sales to happen. In the case where you're using a sales agent, you should input the sales commission percentage here. These dates are then used to project your cash flow across your project timeline.
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