Proforma merely a starting point in predicting a property’s potential

August 9, 2010

Have you heard the one about the real estate developer? He never met a proforma he didn’t like.

On the other hand, as an operator, I want to know, first and foremost, what something is going to cost me to operate. During my many years of developing and managing multi-family properties across the Midwest with Village Green Companies, I was known (affectionately?) as the “Budget Monster.” It was a title I relished borne of an approach that has served me (and my clients) well.

Every budget or proforma, first and foremost, has to be carefully developed and scrutinized. Dover Realty Advisors subscribes to a system of “sources and uses” which creates internal escrows; an inherent discipline for properly handling hard and soft project expenses – everything from legal to accounting to inspection work.

It is imperative that there is absolutely no guesswork where cash flow projections are concerned. If rents are too low and costs are off the return will not be there and what you thought would be a 10% return is suddenly 4%. You need to know where every dollar is coming from and where it is going.

Also key for analysis: What’s happening now in a particular area you are looking to develop. For example, are competing properties on the drawing board (a negative), or, are transportation/infrastructural improvements in the works (a positive).  How about with regard to the demographics of your potential customers? Are factors related to age and income lining up in your favor? Are these individuals there now? Will they stay? Are more coming? If you are going to have to wait 5 years for a particular neighborhood to transition in your favor, or, if it is poised for a downturn, more than likely that area is not ideal or even viable.

The proforma, then, should be a starting point for determining a property’s viability. From there, do your homework and then some.

Sometimes the best deal you ever did was the one you didn’t do.