How Knowing Pro Forma Statements Helps In CRE
Maximizing the return on your investment in commercial real estate means taking the time to do "what if" projections. These "what if" projections are called Pro Forma statements in the world of commerce, and give you considerable leverage in exploring scenarios.
When looking at a rental property, either as one you're planning to buy, or one you already own, the general calculation of profitability is to make estimates on labor, maintenance and refurbishment (new carpeting every so often, and the like), and compare to the actual revenues generated by all tenants, to generate an actual income statement to work from.
A pro forma statement is, in a very real sense, an estimate used for comparing the expected cost of a property upgrade versus what you can charge for increased rent, assuming occupancy levels remain the same, and use this to justify the cost and return rate on upgrading the property. Pro forma statements can also be built for factoring in time, changes to cash flow, and variance in cap rate for a commercial property.
When structuring a pro-forma statement, you need to factor in labor costs, projected vacancy rates, and net income before debt services. You should be using this pro forma projection as a tool to determine viability of assorted projects and upgrades to properties, before spending the money and investing the time.
When looking to finance an upgrade to a property, or to finance an acquisition of a property, pro forma statements of expected revenue generation are sometimes required by lenders, and by HUD for qualified homes.
Another place to use pro formas are when you're trying interest a buyer in a property you've upgraded and improved; it's worth it to run the rents up a bit (which increases the value of the property in a commercial sense) and work out the pro formas to make your initial case for sale. Obviously, before the sale is completed, your buyer needs to see the actual income statements, just like you'd insist on seeing them if the roles were reversed. A pro forma allows you to give a nutshell summary not only of what value the property holds, but also of how its value will increase for an investor, or provide a stable, steady income for the buyer.
About the Author
Anthony Seruga and Yolly Bishop of http://www.maverickrei.com specialize in commercial and investment real estate. As of May, 2006, they and their partners are managing over $600 million dollars worth of new projects.
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