#Guides #Real Estate | 12 min read | Updated: 7/12/2021

Real Estate Pro Forma Software: Commercial Property Investment Analysis

Updated: 7/12/2021
, Founder of Sloboda Studio
#Guides #Real Estate
12 min read

One of the mistakes many new property investors make is not using real estate pro forma software for estimating the costs of buying a property.

Thus, they have no opportunity to assess the costs of buying property correctly.  This situation happened to Joseph Khan, who was once the owner of 6 properties.

The fact that he didn’t initially calculate the actual house management fees and didn’t account for a high vacancy loss were among the main factors that resulted in the further sale of the properties.

Pro-forma projections help to buy properties for reasonable prices and avoid unprofitable investments. 

The proforma development for properties could have prevented such an outcome. Building management fees and vacancy loss are among the loan building development and construction analysis.

real estate investment trends in 2021
Source: Statista, The College Investor, Financeonline, Fitsmallbusiness, Forbes

What Is a ProForma?

real estate pro forma

Similarly to corporations and enterprises, properties should also have financial reports. However, investors only need some specific information for calculating the actual financial building value. That’s where pro-forma plays a significant role.

A proforma is a documented report that compiles current or estimated revenue and expense data to forecast the net operating income and cash flow.

Proforma also gives investors a projection of expenses, as well as the expected return on investment. As a result, it helps you to make fewer loans for your commercial project and save money.

Darren Robertson of Northern Virginia Home Pro says that investors need to be precise and accurate when preparing their proforma for building development since NOI (net operating income). The loan of money is a crucial component of any commercial project. In addition, capital predictions from a proforma we use in other investment building calculations such as:

  • cash return
  • ROI (return on investment)
  • cap rate.

Probably, the most valuable thing about the proforma is that it helps to understand a financial building’s value, not only here and now, but also to give revenue and cash capital predictions for many years into the future.

Real Estate Pro Forma Software

The 4 Basic Elements of Real Estate ProForma

Among the essential elements of pro-forma, we can list profit, net operating income, cash flow, operating expenses, and capital costs. Let’s look closer at these 4 elements.

The 4 Basic Elements of Real Estate Pro Forma

Below are the main elements of proforma.

Profit

Potential Gross Income (PGI)

PGI is an estimated total rental profit of a property if the building was fully rented out with no vacancies.

Projecting potential growth revenue depends both on contractual lease terms and market rents. For all contractual leases included in the rent roll, the financial investment for each lease is estimated for each year in the holding period. This includes the particular lease terms for each tenant. 

Investors need to consider accounting for renewal assumptions after a lease expires to forecast a potential future rental revenue. It involves predicting market leasing commissions, abatement, tenant improvements, reimbursements, and so on.

Vacancy Loss or Allowance

It is never the case that a building is 100% leased at all times. So, it should be expected that there are going to be gaps between rents. 

Vacancy loss is an inevitable loss of potential rental revenue, rather than an expense. It happens when a new tenant hasn’t moved in yet and the previous tenant has already moved out. Naturally, it takes time to find a new one.

There are a couple of simple ways to calculate vacancy:

  • by taking a simple percentage of the potential rental revenue
  • by using a total amount for each year in the ownership period.

The more complex calculations include estimating downtime between leases and take into account current market conditions.

This element varies from 5 to 10% of gross rental receipts in multi-family and office properties.

Concessions & Free Rent

This is a type of incentive that landlords offer when a new tenant moves in or an existing tenant renews. In this situation, the incentive is usually free rent for a month or two.

Expense Reimbursements

Even though these are expenses that residents handle, expense reimbursements usually refer to revenue. Tenants cover expenses such as property taxes, utilities, and insurance. This element of proforma may vary. There can be various types of leases that tenants and landlords agree on.

General Vacancy

The general vacancy is the percentage of available units. They are unoccupied during a particular period of time. 

Effective Gross Income (EGI)

The EGI consists of a projected gross income plus other revenue, including late fees or laundry.

Other Commercial Profit

This element of proforma in the industry includes any other additional source of potential financial revenue from the building, such as:

  • vending or laundry machines
  • revenue from payments
  • revenue from cell phone providers who put cell towers on the properties.

Operating Expenses

Building Management Fees

You should always include building management fees in the proforma for residential building development. It’s vital when the owner:

  • manages the house directly
  • decides to hire a third-party management company to handle tenants
  • sets up property repairs and maintenance. 

The cost of hiring building management varies from 3% to 8% of the property’s rental revenue. So, it is important to add this expense to proforma. Your investor should always be compensated for managing the house on their own.

Other Operating Expenses

No matter whether the property was just built or was built a while ago, it is essential to allocate a part of the monthly gross income in a reserve account to cover future repairs, maintenance expenses, and utilities. 

Property Taxes

All properties are liable to local or government taxes. Usually, these taxes include a small percentage of the total financial value of the house. Moreover, these taxes tend to escalate every year as the value of the building grows.

Reserves

There are always cases when unexpected capital costs will come up. Reserves help to balance the property’s cash capital. Starting by allocating a small amount of money each year, investors can then tap into reserves when they need them without hurting the property’s cash capital. In case, the reserves are not enough to cover the costs, then investors will have to use the property’s annual payment.

Loan Payment 

In case the building is leveraged, this will include principal, interest, insurance, and taxes.

Net Operating Income and Cash Flow

Almost at the bottom of the proforma are some of the most important metrics for valuing the building and determining its performance in a deal.

Net Operating Income (NOI) 

Net operating income is a calculation used to estimate the profitability of building investments that generate revenue. The NOI is calculated by deducting all operating costs from the effective gross income of a house.

Net operating income is one of the most commonly used indicators of payment for commercial land proforma software.  

The NOI does not include expenses such as tenant improvement allowances, rental fees, and some capital improvement costs. Accounting for these items in the NOI provides greater accuracy in establishing the profitability of the project.

Adjusted NOI 

It is the property’s NOI minus the net capital costs not covered by the reserves. Adjusted NOI leaves out compensation taxes and the change in working capital.

Cash Flow to Equity 

It is an adjusted net operating income minus debt service. Pecuniary resources to equity tend to be close to the distributions made to the equity investors of the property. That is because properties rarely compile large currency balances.

Capital Costs

Such costs are also called below-the-line expenses which are calculated after the net operating income is figured out. Capital costs can be related to expenses that will be beneficial for a long time.

Capital Expenditures (CapEx)

These are expenses that are not attached to tenants, but rather the property itself. Such expenses may include a new elevator, heating system, roof, air conditioning, and so on. Expenses can fluctuate from time to time and depend on the state and age of the building.

Tenant Improvements (TIs)

Tenants improvements are paid incentives to encourage them to start renting or renew a lease. These improvements can be additional doors or walls, or any other kind of property improvement. This is not a day-to-day expense, but more of a yearly expenditure.

Leasing Commissions (LCs)

These are commissions paid to property agencies, individual realtors, or brokers. It’s useful when they find new tenants or persuade existing tenants to renew their lease. Commissions are based on a percentage of the total lease value throughout the lease.

What Is Not Included in Real Estate ProForma?

What Is Not Included in Real Estate Pro Forma?

There are 2 elements that are not included in property proforma:

Income Taxes

Flow-through and legal entities own property. In these cases, the property’s revenue is treated as the revenue of investors or owners. It means that if investors decide to form a partnership and acquire a property, they would be paying taxes individually rather than as a corporation.

Depreciation

Depreciation is a profit tax reduction that lets taxpayers restore the cost or other basis of specific property placed into service by the investor. It’s a non-cash deduction that decreases the investor’s taxable commercial profit.

Thus, there is no use in including depreciation in proforma since proforma excludes taxes.

5 Essential Features of Real Estate ProForma Software

Real estate analysis software allows investors to predict and estimate a property’s financial condition before buying.

5 Essential Features of Real Estate Pro Forma Software

We have gathered the main features of real estate proforma software:

Property Analysis

It’s the main feature of this program. It enables investors to enter all the necessary elements that a proforma requires and get a forecast. Projections can be created in detail from month to month for each coming year.

This type of investment software allows easy handling of lease terms with changing:

  • rent growth
  • reimbursements
  • tenant improvements
  • lease expirations
  • market leasing assumptions
  • renewal probabilities
  • leasing commissions. 

The system’s interface allows previewing output immediately as investors transform their assumptions. In this way, they can instantly try out particular scenarios. 

Modeling of Different Scenarios

Pro-forma helps to model different scenarios if deals go excellent, average, or poorly since investing is very theoretical.

Using a proforma software solution, investors can create any number of scenarios. They would differ in periods, financial factors, input from various sectors, etc.

Investors can print or download great scenarios and run reports based on those scenarios.

The modeling feature reduces the effort required to create other projections. It ensures consistency in various scenarios. 

Property Comparison

Not only does pro forma software allow comparing vital scenarios, but it also enables comparing different properties.

Therefore,  when investors consider a few properties, they can easily analyze them both separately and together in order to determine the best deal.

Reporting

With the help of proforma software, investors are able to generate reports such as:

  • pro-forma itself
  • market leasing projections
  • rent roll
  • construction loan budget.

Based on these reports, investors can make presentations for external and internal professionals. 

Reports can be also customized by including:

  • contact info
  • investor’s photo
  • page numbers and so on.

The selected reports can be exported in PDF or Excel formats. Based on our experience, these reports are visual for internal presentations. With Excel, you will be able to show the results in an accessible way.

Automatic report generation saves some of the valuable time that investors are short of. There is no use to transfer information from the program manually. The property analysis program makes it possible to produce reports with one click.

Pro-Forma Sharing

Besides investors, parties such as consultants and team members can also access property proforma analysis. By sharing a custom link with team members via email, investors can register in the program and obtain view-only access to the proforma.

Real Estate Pro Forma Software

Advantages of Using Real Estate Pro Forma Software

Advantages of Using Real Estate Pro Forma Software

The proforma functionality itself shows its importance. Nevertheless, we will define in detail the benefits of using real estate pro forma software. Furthermore, we know why it is better to use this program instead of Excel sheets: 

Eliminates Errors

One of the main advantages of using real estate pro forma software is to exclude errors that happen when performing analysis manually. Even the slightest mistake can result in a significant loss of money. The system automates the calculating process and property analysis.

Saves Time

It’s useless to waste time on creating and calculating manually with Excel sheets. Instead, all investors can fill in the data in pre-designed fields and get the projections automatically.

Also, you can compare property reports simultaneously and decide what is the best option.

Calculates True Property Value

The main reason for creating a proforma is to find out the property’s true financial value and reduce overpayment.

Proforma software development allows estimating property value over the lifetime of its existence. What’s more, it includes the option of selling it in the future.

What the program gives investors is the ability to compare and chop away properties that aren’t going to make investment sense. They can choose the most likely to be the most profitable one.

Estimates Discounted Cash Flow

When creating a proforma solution, investors usually consider the basic elements, such as:

  • rental return
  • purchase price
  • likely capital gains.

It leads to a negative cash stream with a property that requires additional monthly investment to keep the property flowing.

The Pro-forma eliminates this scenario by giving investors the complete information of the property. It’s happening by introducing all the proforma into the program.

Gives a Property Lifetime Overview

By creating a proforma, investors have the chance to make projections about the property for the years to come. Usually, property information forecasts can be done for up to 25-30 years. It gives an overview of the property’s lifetime for each year. You’ll have a great opportunity to a wise investment.

Our Experience

Property CRM

Real estate CRM -Sloboda Studio

Our client is a residential property agency that helps to buy and sell properties. The agency had issues with navigating various data management channels to find the necessary information. The information was stored in Excel sheets and in a commercial CRM.

Sloboda Studio created a real estate CRM that helped to automate the work processes. Based on our experience, after the system was launched, our client experienced sales conversion and productivity growth.

Final Thoughts

What is real estate proforma software today? It’s an irreplaceable tool for evaluating a property’s potential profit and expenses. Pro-forma gives the whole picture of a property and its value to a wise investment for the future. 

There are 4 basic elements to consider when creating a proforma:

  • profit
  • operating expenses,
  • net operating income and cash flow
  • capital costs

Income taxes and depreciation are not usually included in the analysis since these are tax-related elements that vary depending on the investor’s revenue.

Investors can significantly benefit from using a program instead of Excel sheets. For example, property software allows making more precise estimates of property.

In the article, we have listed the most important features of this system. It gives an understanding of the importance and irreplaceability of real estate pro forma software.

Sloboda Studio has been on the market for 11 years. During the recent 6 years, we’ve been building international software for the property industry.

Frequently Asked Questions

Many investors are used to working with Excel and counting manually. It takes a lot of time. Pro forma helps to get rid of this issue. It’s an intelligent analysis of property investments with a straightforward calculation of your projects' prospects and failures.

Proforma software has 5 core features:
1) Modeling of different scenarios
2) Property analysis
3) Property comparison
4) Reporting
5) ProForma sharing

When you use proforma software, it:
- saves your time
- calculates actual property value - eliminates errors
estimates discounted cash flow.
In addition, with ProForma, you receive a complete property lifetime overview.

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