Portland, Oregon-based real estate and business consultant Dominic O’Dierno is the CEO of Amare LLC. Working with real estate companies, Dominic O’Dierno helps them conduct financial modeling and generate real estate pro formas.
A pro forma in real estate is a statement that estimates a property’s potential income, helping investors determine whether they will realize a positive return on investment if they buy the asset. It is the starting point for real estate professionals, brokers, and investors who want to assess the investment value of a property. Prepared correctly, it gives projections of a property’s net realizable cash flow while showing how certain adjustments and variables are likely to affect overall returns.
Just like the financial statement or income statement of a company, a pro forma is divided into multiple parts. The first part comprises revenue and related items. Real estate professionals estimate an asset’s base rental income in a period using prevailing market rates. They then make adjustments for vacancy rate, concessions to tenants, and expense reimbursements. This gives gross income.
In the second part of the pro forma, expenses are subtracted from gross income. These include property management fees, operating and administrative expenses, and property taxes. The result is net operating income (NOI) which is then adjusted for capital costs to get adjusted NOI. Finally, debt repayments are subtracted from the adjusted NOI to give cash flow to equity investors. This is how much the investors can expect to pocket from the property in that period. If the sum is attractive, investors will purchase the property. If not, they are likely to pass on it.
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