How to Create a Real Estate Pro forma + FREE Download

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We’ll begin with OPERATING REVENUE. The top-line of revenue items is the Scheduled Gross Income, or SGI, is what the “Potential” Rental Income would be if the property were 100% occupied for the entire year.

In larger properties, especially in office and retail properties, any lease discounts or months of free rent are reflected on a separate line, often called “Loss to Lease, Concessions, or Rent Discounts”

Vacancy, which represents the lost rental income when a tenant leaves and the space sits empty before a new tenant moves in. For most multifamily properties in normal market conditions, the standard vacancy assumption is 5%. For other types of properties, it can vary widely depending on a variety of factors.

Expense Reimbursements. This is the amount collected from the tenants in addition to the rent to reimburse the landlord certain operating expenses, such as utilities or other services.
In multifamily properties, they are often referred to as RUBS, which is an acronym for ratio utility billing system. In other commercial properties, these are typically referred to as “net lease” items.

Other Income
This line item represents revenue from sources other than rent, such as laundry income, miscellaneous fees, forfeited deposits, etc. If this income is fairly consistent from year-to-year, it should be included in the pro forma.

The sum of all of these revenue items is called the Effective Gross Income or (EGI).
EGI represents the actual top-line cash revenue that a property generates after the adjustments for vacancy and other items.

Once we have aggregated all of the revenue items, then we look at the property’s OPERATING EXPENSES

Operating expenses are only those commonly recurring items that are specifically for operating the physical asset on a day-to-day or monthly basis. They don’t include major capital projects that happen only once every few years, they also don’t include principal and interest payments on a loan, and they also do not include non-cash items such as depreciation and amortization.

Important to include in the pro forma is money set-aside for Replacement Reserves. Savvy operators put aside a dedicated amount each month for bigger ticket items that may happen less frequently than every month.

These are summed up to determine the Total estimated annual operating expenses.

Then, once you have determined Operating Expenses, you subtract it from the Effective Gross Income, and the difference between the two is the Net operating income.

Net Operating Income or (NOI) is actual cash generated by the property before any payments to lenders or owners, and it’s the number used to determine the value of a commercial real estate asset. Any pro forma, regardless if it’s being used just to show the operations of the property or if it’s going into even greater detail for the investor, needs to show the line items that culminate is highlighting the NOI.

Most pro forma show each line-item listed by their annual dollar amount. But it’s also common to see the same items listed in multiple columns showing them as metrics, such as dollars per unit per year, or as a percent of total revenue. Looking at these items using these different metrics makes it easier to compare different properties because every property has different levels of income and expenses.

Now let’s talk about an Investment Pro forma.

An Investment Pro forma is typically compiled by a buyer or an investment group. It still includes the line-items that make up the Net Operating Income, but an Investment Pro forma will also usually include items below the net operating income line, such as interest and principal payments on loans, tax benefits, and the net cash flow to the owners.

The key takeaway for building a good pro forma is to present the information in a clear way that makes the reader easily able to understand it, and metrics are always helpful, as it makes the property easy to compare to other properties in the market.

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[kalenhayman]

Very clear and easy to listen to. Thank you for the educational content, Trevor! Watching from Vancouver, Canada.

[Michael]

Hi Trevor, Do you have an example spreadsheet of the investment pro-forma that you can share? Thanks!

[rickeyleenetwork]

Hey Trevor how do you get the EGI percentages? How do you do the calculations to come up with those percentages per line item? Thank you!

[bnichole]

Hi Trevor! Do you have a specific Net Lease Pro Forma Example? Or would I just use the Commercial Multifamily Pro Form example you provided below? Thank you in advance!

[kazutomonishimura]

Hi Trevor, Capital Expenditures are excluded in Total Operating Expenses? however, Capital Expenditure are included in operation expenses? Am I correct?