building-real-estate-pro-formas

name	building-real-estate-pro-formas
description	Constructs property pro forma models with rent roll analysis, expense projections, and cash flow forecasting. Use when building real estate models, projecting property cash flows, or analyzing investment returns.
tags	["modeling","real-estate-finance","investment"]
metadata	{"author":"casemark","practice_areas":["Real Estate Finance","REIT Analysis","Property Investment"],"document_types":["Model"],"skill_modes":["Modeling"]}

Building Real Estate Pro Formas

Constructs property pro forma models with rent roll analysis, expense projections, and cash flow forecasting.

When To Use

• Underwriting an acquisition or disposition of income-producing property
• Modeling a development or value-add repositioning from ground-up or renovation budget through stabilization
• Preparing annual asset-management budgets or reforecasts for an existing portfolio asset
• Evaluating refinancing scenarios by stress-testing debt service coverage
• Supporting REIT-level NAV or FFO/AFFO analysis that rolls up individual property cash flows

Inputs To Gather

• Rent roll: Unit-level or tenant-level detail — tenant name, suite/unit, SF or unit count, lease start/end, base rent (per SF or per unit), escalation schedule, renewal probability, free-rent or abatement periods
• Market data: Comparable rents, vacancy rates, absorption trends, and cap rate benchmarks for the submarket [VERIFY — source CoStar, CBRE, or local broker comps]
• Operating expenses: Historical T-12 or T-3 actuals broken out by line item (property taxes, insurance, utilities, R&M, management fees, payroll, G&A, contract services)
• Capital expenditure plan: Near-term capex reserves, tenant improvement allowances (TI), leasing commissions (LC), and any deferred maintenance or renovation budget
• Financing terms: Loan amount or LTV, interest rate (fixed/floating), amortization period, IO period, term, prepayment provisions, debt covenants (DSCR floors, LTV caps)
• Hold period and exit assumptions: Projected hold (typically 5–10 years), exit cap rate, disposition costs (brokerage, transfer tax)
• Tax and entity structure: Property tax assessment schedule, depreciation method (27.5 yr residential / 39 yr commercial), any tax abatement or PILOT [VERIFY — jurisdiction-specific]

Workflow

1. Build the revenue module

   • Lay out each lease on a unit-by-unit or tenant-by-tenant basis across the projection period
   • Apply contractual escalations (fixed bumps, CPI-linked, or percentage rent)
   • Model lease expirations: assign renewal probability and downtime assumptions; re-lease at projected market rent
   • Calculate gross potential rent (GPR), then deduct vacancy and credit loss (typically 3–10% depending on asset class and market) [VERIFY — market-specific vacancy]
   • Add ancillary income: parking, laundry, storage, expense recoveries (CAM/NNN reimbursements), percentage rent overages

2. Build the expense module

   • Start from the T-12 actuals; inflate each line item at an appropriate growth rate (general inflation for most; separate escalator for property taxes and insurance)
   • Management fee: typically 3–5% of EGI for institutional assets [VERIFY — per management agreement]
   • Replacement reserves: $150–$300/unit for multifamily or $0.15–$0.30/SF for commercial [VERIFY — lender/investor requirements]
   • Net operating income (NOI) = Effective Gross Income minus total operating expenses

3. Build the capital and TI/LC module

   • Schedule tenant improvement allowances and leasing commissions at each lease rollover
   • Include any renovation or repositioning capex phased by quarter or year
   • Separate "above-the-line" capex (capitalized into basis) from operating expense repairs

4. Build the financing module

   • Model debt service: monthly P&I during amortizing periods, IO payments during interest-only periods
   • Calculate DSCR (NOI / annual debt service) each year; flag any year where DSCR falls below covenant threshold (commonly 1.20–1.25x)
   • If floating-rate, show base-case rate path plus stressed scenarios (+100 bps, +200 bps)

5. Calculate return metrics

   • Unlevered cash flow = NOI minus capex/TI/LC
   • Levered cash flow = Unlevered cash flow minus debt service
   • Exit value = forward NOI / exit cap rate, less disposition costs
   • Equity waterfall: preferred return, catch-up, and promote splits if applicable
   • Compute IRR, equity multiple, cash-on-cash yield, and average annual return for both unlevered and levered scenarios

6. Run sensitivity and scenario analysis

   • Sensitivity table on exit cap rate vs. rent growth (or vacancy)
   • Downside scenario: higher vacancy, slower rent growth, cap rate expansion

Output

• Summary page: Property name, address, asset class, SF/units, acquisition price, going-in cap rate, stabilized yield, target IRR/equity multiple
• Annual cash flow projection (typically 5–10 year hold): GPR, vacancy, EGI, operating expenses by category, NOI, capex/TI/LC, unlevered cash flow, debt service, levered cash flow
• Return metrics table: Unlevered IRR, levered IRR, equity multiple, cash-on-cash by year, peak equity outstanding
• Sensitivity matrix: Two-variable table (e.g., exit cap rate x rent growth) showing IRR and equity multiple at each intersection
• Key assumptions schedule: Clearly list every assumption — growth rates, vacancy, cap rates, financing terms, TI/LC per SF — with source or basis noted
• Footnotes and flags: Mark any assumption lacking market support with [VERIFY]; note where historical data was extrapolated

Quality Checks

• NOI sanity check: Compare modeled NOI margin to submarket benchmarks; multifamily typically 55–70%, office 60–75% of EGI [VERIFY — asset class and market]
• Cap rate cross-check: Going-in cap rate should align with recent comparable transactions; flag divergence >25 bps
• DSCR covenant compliance: Confirm no year breaches the lender's minimum DSCR; if it does, note the shortfall and potential cash sweep or reserve trigger
• Rent growth reasonableness: Projected rent escalation should not materially exceed historical submarket CAGR without explicit justification
• Expense ratio consistency: Total opex as % of EGI should be stable year-over-year absent a known structural change
• IRR back-check: Reverse-engineer the exit price implied by the target IRR; confirm it implies a realistic exit cap rate
• Unit economics: Per-unit or per-SF revenue and expense figures should fall within market ranges; outliers need annotation
• Circular reference check: Ensure no unresolved circularity between debt sizing, equity, and return calculations