Your Pro Forma and Feasibilty Page
(Say that five times fast!)
Earlier in our build, we did back-of-the-envelope calculations, talked to architects and contractors, and put together preliminary numbers in a pro forma. Now that we know how much it's going to cost to build the project, we want to do one final dive into our pro forma to make sure that this is a project we're ready to build.
While I’m not going to go through every single element of a pro forma, I want to talk you through the most urgent parts so that you have a working knowledge of how they are built.
The pro forma is essentially the brain of our project from a numbers standpoint. We continuously enhance it with every new piece of information—contractor costs, architectural fees, city permits, etc. Each detail helps us build a clearer financial picture over time.
As a boutique multifamily developer, my approach has always been to keep the financial analysis simple. Some projects require vast, very complex pro formas (particularly if you’re working with private equity firms or large institutional investors), but I aim for documents that are easy to understand. After all, If I can see how a building is built, there’s no reason why the numbers shouldn’t be equally transparent. And candidly, if I look at a pro forma and the numbers are hard to understand, my spidey-senses are on high alert.
Crucial to the pro forma is a feasibility page. This where I lay out a comprehensive overview of the project's financial feasibility, focusing on costs, revenue potential, and expected returns. This helps me make informed decisions as I proceed (or adjust) the plan. I think about this page as something like a dashboard, where I can track all of the important data.
The feasibility page includes all developments costs including:
Land: The cost of purchasing the property on which the development will be constructed.
Hard Costs: Expenses directly related to the physical construction of the building, including materials and labor. Will usually also include demolition and the cost to build the parking structure, if one exists.
A & E Fees:
Architectural: Fees paid for architectural design and drawings.
Civil Engineer: Fees for civil engineering services, including site preparation and infrastructure design.
Structural Engineer: Costs for structural analysis and design to ensure building stability and compliance with codes.
Interior Design: Fees for designing interior spaces and selecting furnishings and finishes.
Municipal Fees:
SAC (Sewer Availability Charge): Fees for connecting to municipal sewer services.
Building Permits: Fees paid to the local government for permission to build or modify structures.
Park Dedication: Fees paid to the local government to go towards parks and recreational amenities elsewhere in the city.
**Note, these fees differ in every city and jurisdiction. Your city planning and building department are the place to go if you don’t know them.
Builder’s Risk Insurance: Insurance that covers a building under construction against damage due to events like fires, storms, and vandalism.
Legal: Fees for legal services related to the development, including contract review, negotiations, and compliance with zoning laws.
Marketing: Costs associated with promoting the development, such as advertising, website and promotional materials.
Leasing Commissions: Payments made to real estate agents or brokers for securing tenants.
Lease Up Reserve: Funds set aside to cover potential operating expense shortfalls during the initial leasing phase of the development.
Common Area Finishes: Costs for finishing shared spaces within the development, such as lobbies, hallways, and recreational areas. (This is sometimes included in the hard costs - just need to be sure it is accounted for somewhere!)
Commercial Build Out: Expenses related to preparing commercial spaces within the development, typically involving customization for tenants.
Retail Tenant Improvements: Costs for modifications made to retail spaces to meet specific tenant requirements.
Real Estate Taxes (during construction): Taxes due on the property during the period of construction before it is fully operational.
Insurance (during construction): Coverage for risks associated with the construction process, separate from builder's risk insurance.
Survey: Costs for a professional survey to establish boundaries, topography, and other physical characteristics of the site.
Phase I and II and Geotech: Environmental assessments to evaluate the soil and underlying geology for potential hazards or construction issues.
Phase I generally involves reviewing existing records and a visual inspection of the site.
Phase II might involve more detailed soil sampling and lab tests.
Pre-Construction Inspections: Expenses for inspections required before construction begins. May also include items such as moving utility poles or other obstructions.
Development Contingency: A reserve fund to cover unforeseen costs or overruns during the development process.
Developer Fee: Compensation for the developer for planning, coordinating, and overseeing the development process. This is typically 4-5% of the total budget.
Interest Reserve: A reserve fund to cover interest payments on the construction loan during the construction phase.
Construction Loan Fees/Closing Costs: Fees associated with securing and closing a construction loan, including origination fees and other related expenses.
When I’m organizing all of this data I list it in a row in an excel sheet with additional columns tracking the overall cost, the cost per gross square foot, and then the per unit cost. Tracking the overall cost is essential for securing funding and managing cash flow throughout the development process. It helps ensure that the project stays within budget and that financing is lined up to cover all anticipated expenses. Gross Square Foot is important because it allows me to compare my project costs to similar projects or industry averages. It provides a standardized measure of cost efficiency and is crucial for competitive analysis. (My developments don’t always mirror the market - but it’s important that I know what the market is paying!) The Per Unit Cost is key for setting sales prices (if you’re building to sell) or rental rates (because, like me, you want to build and hold). The cost per unit can influence how a property is positioned in the market, affecting decisions about amenities, target demographics, and marketing strategies.
When I’m looking at the Total Development Cost row I can see numbers for each of the above and they quickly give me insights into whether I'm on track or off track in my budget. Remember, we’re updating these numbers constantly, so if, say, our Phase II reports indicate the need for soil remediation, that increased line item is going to ripple out across the rest of my numbers and effect my Per Unit Price.
Once I start construction, if my per-unit price jumps from, say, $208,00 to $232,000, I know that investors are going to show up at my house in the middle of the night in black Escalades with tinted windows and missing license plates.
Kidding.
But you get my point.
The feasibility page gives you quick insights into the health and future of your project.
The second thing I include on the Feasibility page is Unit Mix and Rents.
This table is critical as it details the distribution of different types of rental units within the building, along with their associated costs and potential revenue. Here's the information I track:
Unit Type: Describes the configuration and/or size of the unit (e.g., Studio, 1 Br, 2 Br ).
Qty (Quantity): The number of units available for each type.
% (Percentage): The percentage each unit type represents of the total number of units.
Gross SF (Square Feet): The average size of each unit type.
Total Area: The total square footage of all units of that type (Qty x Gross SF).
Projected Rent: The expected monthly rent for each unit type.
Rent/SF (Rent per Square Foot): The monthly rent divided by the unit size, indicating the rent charged per square foot.
Monthly Rent: The total monthly rent collected from all units of that type (Qty x Projected Rent).
Annual Rent: The total annual rent collected from all units of that type (Monthly Rent x 12).
Why is this data important? Well, among other things, we need it for setting pricing strategies, and comparing the profitability of different unit types.
And then, finally, at the very bottom of my Feasibilty page I have a running Cash Flow Analysis which takes into account:
Rental Income minus vacancy (typically 5%)
Net Rental Income
Retail Income
Parking Income
Pet Income
Internet Income
Storage Unit Income
Any other miscellaneous Income (Application Fees, Utility Reimbursements, etc)
I add all of this up and calculate the income minus expenses (typically 35-40% in new construction in the early years), which leaves me with the net operating income. I then arrive at a Yield on Cost which is calculated by dividing the stabilized NOI by the total project cost (including land purchase, construction, and other costs). Yield on Cost provides an indicator of the return on investment that the property generates relative to the total cost of the project.
Okay, I know that was a lot to digest in one sitting BUT remember that you’re updating these numbers regularly which means that they become less and less intimidating. Truthfully, there was a time when a feasibility page turned my stomach into knots. But eventually, I realized that as long as I built them so that they were a) easy to read and 2) tracked those numbers that were most crucial to my build, they weren’t all that intimidating. In fact, sometimes, a quick glance at the feasibility page gave me confidence when that inevitable doubt crept in about all of the hard work ahead. Fear is sometimes inexplicable and transient. But the math doesn’t lie and you can often ride the calming wave of that math to the quiet side of the build.
Next week we’re going to dive into the capital stack so sharpen your pencils!
Great post as always Sean. Making sure all your input data is well organised is key for setting up a good feasibility analysis.
This was a great post. I underwrite development deals and your post captures the important metrics that developers need to capture in their models. For your projects, are you targeting a certain return on cost?