Pro Formas?

[MARK MONTANO]

Hey there BP nation! I was just curious if anyone on here has done one of these before?  I'm very interested in learning to draft one of these. 

[Denise Evans]

A pro forma is just a spreadsheet showing anticipated revenues and expenses over a projected time period, usually one to five years.  Basically, it is just a budget. For a new project, the best practice is to prepare three different pro formas for any project, with numbers for a "best case" scenario (most rapid lease-up, for example), a "worst case" scenario, and a "most likely case" scenario. 

If preparing a pro forma for a banker, they will want to see certain expenses that you might not actually incur. For example, if you self-manage rental properties, the banker will still want to see an 8% to 10% management fee expense in the pro forma. That is because the banker has to look at the property as if the BANK owned it, not as if you owned it. They will also want a vacancy and collection losses expense, that could be another 5% to 10% of gross projected rentals.  The banker will also want to see maintenance and repair expenses as if a 3rd party did that work, even if you typically do it yourself.  A banker might also want to see a reserve of money put aside each month for future capital expenditures, such as a new roof or replacing appliances.

The pro forma for the bank (and your own internal use) will include debt service as an expense.  A pro forma prepared to aid in selling a property would not include debt service as an expense--it should assume the buyer will pay cash. BTW, a pro forma should always be used to sell income-producing property, because the buyer is not buying yesterday's revenue stream, it is buying tomorrow's revenue stream. The price should be based on tomorrow's revenue stream, as long as it is realistic and not pie in the sky.