How To Prepare a Pro Forma Operating Statement For an Apartment Building
Arguably the single most important document in any commercial loan package is the Pro Forma Operating Statement. A pro forma operating statement is a projected budget on an income property for the next twelve months. This pro forma must take into consideration that the owner will suffer some vacancies and some collection losses, that apartment lenders will insist on a line item expense for professional property management, and that the owner must set aside some reserves every year to cover the eventual cost of replacing the roof, replacing the HVAC unit(s), maintaining the exterior walls, and repaving the parking lot.
As you prepare your apartment pro forma operating agreement, keep in mind that the most important feature of any new apartment loan is that it be as large as possible. The vast majority of apartment borrowers want to leverage their building as high as possible. You will therefore want your gross potential income to look as large as possible and your operating expenses to appear as low as possible. You can’t cheat, however, because the lender will surely catch you and punish you by offering you or your borrower a much smaller loan than you deserve. In the detailed section at the bottom of this training article I will teach you what adjustments you can or cannot get away with.
The order in which the documents appear in a commercial loan package is called the stacking order. The higher that your Pro Forma Operating Statement appears in your stacking order, the more respect for, and the more confidence in, the commercial loan officer for the bank will have in the borrower and/or the loan broker. I recommend the following stacking order for a multifamily loan request:
Executive Loan Summary
Picture Page and Description of the Collateral
Pro Forma Operating Statement
Last 12 Month’s Actual Operating Statement
The rest of the package
Here is what your pro forma operating statement should look like:
CHERRY BLOSSOM APARTMENTS
PRO FORMA OPERATING STATEMENT
|Gross Scheduled Rents (a)||$1,876,000|
|Laundry & Vending Income (b)||4,132|
|Parking Income (b)||7,902|
|Gross Potential Income:||$1,888,034|
|Real Estate Taxes (c)||$56,387|
|Fire and Liability Insurance||23,876|
|Repairs and Maintenance||36,877|
|Cleaning and Painting||4,000|
|Reserves for Replacement (e)||53,809|
|Total Expenses (f):||309,411|
|Net Operating Income:||$1,488,181|
a. Current actual rents, including the market rent of the manager’s unit and any vacant units.
b. Last year’s actual income.
c. Because this is a purchase money deal and real estate taxes will be reassessed, we have used 1.25% of the purchase price.
d. 5% of Effective Gross Income.
e. 3% of Effective Gross Income
f. Unless otherwise indicated, all expenses are last year’s actual figures.
Here is that same sample pro forma operating statement as a Word document. Be sure to download this document right now to your Desktop or your Documents. You will want to use this sample pro forma operating statement as an exemplar. The next time that you need to prepare an apartment pro forma, simply open this exemplar, copy it, and edit the copy for your particular apartment loan. Please note that I have used a Courier font in this exemplar. Courier is a proportional font, which means that every character takes up the same amount of space on the page. The reason this is important is because you will want your columns of numbers to line up properly.
Real Estate Taxes