What is a Proforma Statement?

By Preston Ames

Why create a pro forma?

The proforma states income and expenses related to a real estate development deal. The proforma states information that is useful for a bank, lenders, or investors. The proforma states cash returns in cash payments in a deal. The proforma also shows the cash flow and time period of the deal.

How to prepare a pro forma?

There is a bit of information a developer needs before they can get started with a proforma statement. It is important to know your operating budget. In the operating budget there is the gross monthly rent, operating expenses, maximum occupancy and monthly reserves.

It is also important to know your development budget. That is all the factors that will go with land purchase, to construction costs and even permits.

A major influence of cash flow is the lender information provided and the loan you get for your development. This tells you your loan to cost, and loan to value. This will state the amortization rate on the loan as well as items like debt to coverage ratio and exit cap rate. It is important to know these before building the proforma.

Once all this data is in the proforma then a user can start programming the proforma to get the necessary cash inputs and outputs. The proforma statement allows an individual to monitor construction loans or any given debts involved in the deal.

The cash flows will look like gross rental income, vacancy, and expense like property taxes, management fee, and reserves.

The goal is to get at the bottom of the proforma where you can see yearly cash flow and internal rate of return. This can be a levered IRR or unlevered IRR. These items tell you your return on investment with the cash that has gone in and the cash that comes out to the investors.

What is the benefit of preparing a Proforma statement?

This is a great tool to see monthly cash payouts during development, input changes to the financial situation of the development, and monitor key timeline deliverables in the project.

Who reads these documents?

 The parties that need to read this financial statement are banks, attorneys, developers, investors, contractors,  and marketing managers.

Preston Ames has an MBA from Cal Lutheran. He has worked as an auctioneer for 6 years and worked as a marketing agent under a real estate broker. He has a certificate in Financial Planning from UCLA and also graduated from the Yale school of management CIMA certification program. His main areas of expertise are marketing, Finance, and Business