This document discusses real estate financial modeling and pro-formas. It begins by identifying the major components of a pro-forma model and their functions. It then illustrates the relationship between the components and how a pro-forma projects cash flows over time for a real estate transaction. The document provides examples of pro-forma components for an apartment building ground-up development and income property acquisition, including assumptions, sources and uses of funds, rent rolls, and cash flows. It concludes by covering best practices for modeling in Excel, such as annotating cells and sanity checking outputs.

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Demystifying The Excel Pro‐Forma:
What It Is And How You Can Begin To Master It
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Copyright © 2009 – 2013 by Real Estate Financial Modeling, LLC. All Rights Reserved.

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Goals
1. Identify the major components of the pro‐forma and
their functions
2. Illustrate the relationship of the components to one
another
3. Learn the “Cardinal Rules” of modeling with Excel
4. Learn Best Practices for inheriting a model
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The Framework
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Today
(Time 0)
The
Future

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Commercial Real Estate Transaction Flow
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Equity and debt
capital fuel a real
estate transaction
Operation of the
asset/sale of units
generate positive
cash flow
Operating/sale
cash flows fund
repayment of debt
& return of equity
Excess cash flow =
profit to equity
investors
Projecting into the future

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What is Financial Modeling?
Forecasting of future financial outcomes
(calculations) based on current assumptions (inputs).
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A Pro‐Forma Is A Projection Model
A story about a financial transaction that attempts
to predict how and when cash will be:
• Invested in the transaction and repaid
• Borrowed for the transaction and repaid
• Generated by the transaction and spent/paid.
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Pro‐Forma Fundamentals
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A Pro‐Forma does three things relative to the
dollars going into, out of, and being applied within a
specific real estate transaction:
1. Identifies the purpose of the monies
2. Quantifies the amounts
a) Applies expense inflation and income
growth factors as applicable
3. Times the flows

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Pro‐Forma Fundamentals
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Example: Real Estate Taxes paid twice a year: Jan. and July
When? Why?
Time 0 Time 1 Time 2 Time 3 Time 4
How? How Much?

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The Importance of Timing
• Owners generally do not want to spend money before they
absolutely have to
• Vendors and service providers generally want to get paid
as soon as possible (and are typically paid monthly)
• Investors want to get paid based on the transaction
documents, whose profit‐sharing terms have been
architected based on their investment timing objectives
• Lenders want to match the lengths of their assets and
liabilities (thus pre‐payment penalties)
• Internal Rate of Return (IRR) metric depends partly on the
timing of cash flows
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Time Value of Money / Discounted Cash Flow (DCF) Model
Assumptions:
Dry Cleaner, Sandwich Shop, Bakery/Café, Convenience Store Year 1 Year 2 Year 3
Cash Investment
Expected Annual Net Operating Income (NOI) from Base Rent
Base Rent Adjustment for Inflation due to Escalation Clauses 3.00%
Percentage Rent
Expected Return with Escalation and Percentage Rent
Year Over Year Growth
Cash on Cash Return
Expected Net Sale Amount, Inflation Adjusted
Expected Value
Net Cash Flow (Return on Investment)
Discount Rate 7.00%
Present Value
Net Present Value of Expected Values $196,760.85
Using NPV function $196,760.85
$451,954.00
Today (Time 0) End of Year 1
$60,747.66
End of Year 2 End of Year 3
($1,000,000.00) $65,000.00 $67,300.00 $1,319,654.00
6.50% 6.73% 6.97%
$1,250,000
$65,000.00 $67,300.00 $69,654.00
NA 3.54% 3.50%
$0.00 $1,800.00 $3,654.00
$5,000.00 $5,500.00 $6,000.00
Discounted Cash Flow Model
Year 1 Year 2 Year 3
Percentage rent estimated at $5,000 in Year 1
$58,782.43 $1,077,230.76($1,000,000.00)
Purchase of newly-built 4-Tenant Retail Strip Center:
No financing used (purchase is all cash)
Leases are Triple Net (NNN), meaning Tenants pay all expenses
Leases total $60,000/year, and have a 3% annual escalation clause Today (Time 0)
$60,000.00 $60,000.00 $60,000.00
($1,000,000.00)

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Transaction Types
1. Acquisition/Disposition (sale) of an existing income‐
producing property:
Apartments, Office, Industrial, Hotel, Retail, Self‐Storage
2. Renovation and continued operation of an income‐
producing property/Re‐positioning of existing property
3. Land entitlement, subdivision and sale of lots to builders
4. Ground‐up new property development
‐ Unit sales: Detached Houses, Townhomes, Condominiums
‐ Income‐producing property
5. Refinancing of property
6. Mortgage Note Purchase
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Pro‐Forma Overview – Apartment Building Ground‐Up Development
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Pro‐Forma Components – Apartment Building Ground‐Up Development
1. Assumptions Tab
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Pro‐Forma Components – Apartment Building Ground‐Up Development
2. Lot and Building Characteristics
• Describes the zoning and physical characteristics of
the land and structure you intend to develop and
build
‐ Calculates the Square Footages of the various
uses associated with the structure, both Gross
and Rentable
‐ Calculates the number of parking spots and
levels of parking
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Pro‐Forma Components – Apartment Building Ground‐Up Development
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2. Lot and Building Characteristics example

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Pro‐Forma Components – Apartment Building Ground‐Up Development
3. Capital Structure
• Describes the different sources of funding that will
pay for the development of the project
‐ Equity (Cash, Land, Tax Credits)
‐ Debt (Land loan, Construction loan, Mezzanine
loan, Permanent loan)
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Pro‐Forma Components – Apartment Building Ground‐Up Development
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3. Capital Structure example

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Pro‐Forma Components – Apartment Building Ground‐Up Development
4. Unit and Mix Details
• Describes the types of apartment units, the number
of each, and the expected rents for each unit type
‐ Studio
‐ 1 bed / 1 bath
‐ 1 bed /1.5 baths
‐ 2 beds /2 baths
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Pro‐Forma Components – Apartment Building Ground‐Up Development
4. Unit and Mix Details example
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Pro‐Forma Components – Apartment Building Ground‐Up Development
5. Sources and Uses of Funds Tab
• Describes how the development budget is spent (used)
across the various cost categories over time
‐ Land Acquisition, Hard Costs, Soft Costs, FF&E,
Financing
• Matches Sources of funding to these costs
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Pro‐Forma Components – Apartment Building Ground‐Up Development
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Pro‐Forma Components – Apartment Building Ground‐Up Development
5. Sources and Uses of Funds Tab partial snapshot
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Pro‐Forma Components – Apartment Building Ground‐Up Development
6. Cash Flow Tab, part 1
• Describes the dynamics of cash relative to the newly
developed Asset, with Growth factors taken into account
‐ Revenues received
‐ Operating expenses paid
‐ Real estate taxes paid
• Calculates Net Operating Income
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Pro‐Forma Components – Apartment Building Ground‐Up Development
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Pro‐Forma Components – Apartment Building Ground‐Up Development
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Pro‐Forma Components – Apartment Building Ground‐Up Development
6. Cash Flow Tab, part 1 partial snapshot
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Pro‐Forma Components – Apartment Building Ground‐Up Development
6. Cash Flow Tab, part 2
• “Levers” (adjusts) the cash flows produced by the
building by accounting for all of the Equity and
Financing cash flows in the transaction, resulting in a
Net Levered Cash Flow line
• Net Levered Cash Flow is “what you make” (pre‐
income tax) on the transaction
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Pro‐Forma Components – Apartment Building Ground‐Up Development
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Pro‐Forma Components – Apartment Building Ground‐Up Development
6. Cash Flow Tab, part 2 partial snapshot
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Pro‐Forma Components – Income‐Producing Property Acquisition
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Development Project
Time 1 Time 2 Time 3 Time 4 Time 5 Time 6 Time 7 Time 8 Time 9
Revenues 0 0 0 0 XXX XXX XXX XXX XXX
Expenses YYY YYY YYY YYY YYY YYY YYY YYY YYY
Pre-Tax Profit YYY YYY YYY YYY ZZZ ZZZ ZZZ ZZZ ZZZ
Existing Commercial Building
Time 1 Time 2 Time 3 Time 4 Time 5
Revenues XXX XXX XXX XXX XXX
Expenses YYY YYY YYY YYY YYY
Pre-Tax Profit ZZZ ZZZ ZZZ ZZZ ZZZ

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Pro‐Forma Overview – Apartment Building Acquisition
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Pro‐Forma Components – Income‐Producing Property Acquisition
1. Assumptions partial snapshot
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Pro‐Forma Components – Income‐Producing Property Acquisition
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2. Sources and Uses of Funds for Acquisition example

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Pro‐Forma Components – Income‐Producing Property Acquisition
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3. Rent Roll example

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Pro‐Forma Components – Income‐Producing Property Acquisition
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4. Historical Operating Statements partial snapshot

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Pro‐Forma Components – Income‐Producing Property Acquisition
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Pro‐Forma Components – Income‐Producing Property Acquisition
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5. Cash Flow partial snapshot

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“Cardinal Rules” of Financial Modeling
1. Garbage in, garbage out
Do your assumptions have current and reliable bases?
2. Annotate as much as you can bear (Alt+I+M)
Change is the only constant – keep a running record
3. Learn and use keyboard shortcuts
4. Save multiple copies of all models
5. Always sanity check your outputs
Ask yourself out loud: Do my numbers make sense?
6. "Pay now or pay later"
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Best Practices When Inheriting A Model
1. Find the buried bodies
a) Unhide all hidden Sheets
b) Unhide all hidden rows and columns
c) Ungroup all grouped rows and columns
d) Temporarily paint each sheet so you can find any
invisible text
2. Audit every cell and every formula and be sure you can
explain every formula to someone else
3. Don’t lose contact with the original builder of the model!
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Excel For PC Keyboard Shortcuts
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