Setting Up a New Construction Development Pro Forma – Put in Time Up Front to Save Time Later On

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New construction development projects (large ones, small ones, infill projects)—they all start with a pro forma.

Pro forma financial models are essential tools in a real estate developer’s toolbox.  If you’re thinking about building any new construction project or acquisition/rehab—be it anything from a single-tenant industrial property to a 100-acre master planned mixed-use community—building your pro forma is one of the first steps you’ll take. Developers use pro formas to help negotiate with equity partners, structure financing with potential lenders, and create project specs with architects and engineers.  Better yet, developers use pro formas to decide how big (or small) and how fancy (or simple) a specific project will be.

Like an architect communicating their design through blueprints, the developer communicates internally and externally through their pro forma.

In previous articles I discussed starting a real estate development pro forma from scratch and the 3-part framework (assumptionsàcash flowàreturns). If you want to build a new construction development, these are important things to keep in mind. However, if you really want to make your pro forma work for you, the absolute best thing you can do is build it with this in mind:

Related: Starting a Development Pro Forma – Where to Begin

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Flexibility

Why is flexibility so important when building an investment-grade pro forma for a new construction project?

Two reasons:

1)      When starting with a blank slate, you have countless options and decisions to make. Your pro forma, through analyzing different scenarios, gives you the best way to maximize your investment. For example, which is a better use of your capital: rental or condo and should it be with 100 units or 150 units. These decisions, which can have enormous impacts on your financial bottom line, are analyzed with your pro forma before any shovel hits the ground.

2)      Your project is always changing.  As you go through the early development process—through due diligence, financing, design, and entitlements—information about your project becomes more available and solidified.  As your project changes, so does your pro forma—which affects your investment and risk in the project.

How do you make a robust, yet flexible pro forma when questions like these pop up?

  • The land seller has another parcel we can buy. What if we change our 80-unit multifamily project to 120 units? How will that impact our financial returns?
  • There’s a new update with the entitlements. We have to push our construction start date back another four months. How does that impact our investment?
  • We need to adjust our unit absorption assumptions because our competition across the street had a harder time filling up their units than we originally thought. What does a slower absorption period look like financially?

These questions and changes come up every day when developing a new property. Because of this, a flexible, well-built pro forma will save you time, money, and numerous headaches as you develop your project.

Here are two parts of your development pro forma where spending time and effort up front on your pro forma’s structure will save you time later in the development process.

Timing – Create a timing schedule in your pro forma that can be adjusted quickly as timelines change.

When starting a new construction project, developers typically have a general understanding for the project schedule. For example, they’ll anticipate design lasting four months and construction completion in 14 months. Despite early projections, project timing always changes. Construction may actually take 18 months while design lasted only 2.5 months.  You’ll want your pro forma to adjust quickly to these changes because timing effects your bottom line.

When starting your pro forma, create a timing section in your assumptions tab that feeds into your entire financial model. When timing changes, you can quickly adjust this piece. If your cash flow timing feeds from these inputs, they’ll automatically adjust and save you hours of re-tooling your pro forma.

Related: Three Basic Elements of any Development Pro Forma

Simple Timing Schedule

Here’s an example of a simple timing schedule (built in your assumptions tab) that can be changed and updated quickly.

Timing Example.emf
Property Size – Input as much as data as you know about your property size, physical constraints, and structure.

Property sizes change quickly and have a tremendous impact on your bottom line. When you want to change your unit mix from 100 one-bedroom units to 150 one- and two-bedroom units because the market is more accepting of two bedroom units, adjusting for this change with one input will increase flexibility and provide a way to analyze different scenarios.

Here’s an example of unit mix inputs in a pro forma assumptions tab that can quickly be modified.

Unit Structure Example.emf
While new construction development projects are inherently messy and can take months and years to complete, a flexible pro forma can save time and help maximize one’s investment.
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About Author

Kyle Zaylor

Kyle is the creator of realestate-java.com, a blog dedicated to commercial real estate development. Kyle is also a real estate development associate with Blu Homes, Inc. His company focuses on building sustainable homes throughout the country.

8 Comments

  1. Kevin Perk

    Kyle,

    Nice article with some good information. One really has to be flexible as they go through the development process, and a good pro forma helps conceptualize and reduce the risk.

    As someone who used to be on the review and approval side of the development process, I can tell you that projects rarely end up the way they were originally proposed. The public review and approval process can be quite grueling on a project, to the point that it kills it. In addition, you could always tell the ones who had skimped on developing a good pro forma as they were the ones who usually ended up in trouble very early on.

    Kevin

  2. Kyle,
    Great article! Do you by chance have a pro-forma on Excel you could share with me? I’m working on a convenience store and didn’t want to have to start from scratch.
    Thanks.
    Bob

    • Hi Bob. Thanks for checking out the post!

      Building a pro forma from scratch can be a huge pain. However, developments typically have a ton of moving parts. So it’s one way to really zero in on the nuts of bolts that make a deal work (or worse, don’t work). There are a few ways to quicken the learning curve though.

      I’d be more than happy to help point you in the right direction with development pro formas. Send me a PM and let’s chat offline.

      • Hi Kyle,

        Thanks a lot for putting this together. I’m in the planning phase of my first developments: a duplex and a couple of fourplexes. I’ve put together a pro forma in Excel with some conservative numbers I’ve come up with based on my experience managing rentals in this market, but I’d love to compare it with something more professional. Would you mind sharing your template with me, and perhaps giving me some feedback on the one I’ve made?

        Thanks so much,
        Ross

      • Great Info Kyle!
        I wouldn’t mind getting some tips for starting one of these from scratch, too. (Maybe even a template!) I’m currently planning a mixed use development, first time I’ve done something on this scale, with other investors and parties involved besides myself! I know I’m going to need a robust pro forma and the thought of creating it seems daunting.

  3. Peter Hossack on

    Thanks for the article Kyle. Like others I am just starting an investment scenario with a small builder/ developer and a couple investors. A functional template or sample of how to build would be a great help. We are looking to buy the properties/ obtain permits ( underway) , build, rent out commercial space , hold for a short period and sell or design a way to allow each investor to leave the project. I’m hoping to get some parameters to initially TEST if my investment through this process has a stronger chance of growing than alternative non- development investments.
    Thanks,
    Peter

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