What are the key drivers and indicators of pro forma performance and profitability?

- In my experience it’s best to think in terms of “Non-Recourse” deal structuring when doing the Due-Diligence… Sure all these things need numbers, but they can be just as easily non-recourse and/or cost cutters…. Designs are easily available at little to no cost. Engineering n Infrastructure (wet/dry utilities n roads can be built via agreements/JVs without debt service and/or minimal payments, and if any payments try to sell off or trade something to avoid out of pocket costs. Up front Marketing can be avoided and/or cut to a minimum by using several Good Real Estate Brokerage Companies on commission… Maintaining step by step construction n budgets are of course important…

An analysis of current and future potential revenues for Income Properties should include: An economic overview: A review of the main economic indicators, both historical and projected. A competition and leasing market overview: analysis of any competing properties and the rental rates which are being achieved in these properties is required. An investment market overview: An analysis of investment demand, investor preferences, and a survey of current and forecasted valuation parameters will assist in estimating potential revenues as well as estimating the properties ‘liquidity rating’.

Lenders, joint venture partners and equity investors are risk averse; they want to be confident a project will generate enough cash flow to cover debt and profit participation obligations. There’s a trend to even greater oversight of investments in volatile markets.

I agree. Please see my notes on Development Costs above… Deal Structuring is the key. It’s possible to structure little to no money deals if you know what your doing.

In today’s uncertain economic environment, pro formas cannot be static, reflecting only a single point in time. They must be dynamic, especially during the early stages of a development – through ongoing due diligence and design – as a project gains shape and traction. In this key period, as more information becomes available, updating and refining the assumptions in the pro forma helps developers forecast and observe shifts in project risk and profitability.

Given the ever-changing nature of the real estate market, rather than reacting to shifting factors after the fact, developers should consider creating strategies – before they are needed – related to any potential market changes which could result in falling profits. Using the pro forma to test a variety of “what if” scenarios can be particularly helpful. It’s possible to test the impact of cost increases overall by, for example, raising cost per square foot, or by examining individual hard or soft costs, or land value.

Pro formas are educated assessments of future performance. To ensure accuracy, projections need to be continually updated and refined. Even slight changes, when they happen to several variables – higher construction costs, time delays, revenue deferrals – can dramatically affect a project’s bottom line. So, protect your profits, and possibly your future reputation as a developer, by putting those pro formas to work for you.

Studying constraints and opportunities answers a number of vital questions. • What is the current zoning for this property? Could it be rezoned? • What is the existing and future community vision for this area? Is there a land use plan? Municipal strategy? • Does the existing zoning align with these plans? • What government entities have jurisdiction over this property? • What physical and legal restrictions are there? • What is the neighbourhood attitude about new development?