Tips for Completing a More Realistic Pro-Forma Statement
How the multi-family industry comes to calculate an apartment property's value will play out over time and is one of those basic exercises industry experts have to partake. It's also the key to the entire value equation because the accuracy of the picture you are painting is all about the details.
Of course, we have tools to help us along the way, but it is, nonetheless, vitally important that you understand how those tools work in practical terms. And when you're working with those tools—particularly the “pro forma” document that quite likely will include input from the seller of the property—accuracy is paramount.
One thing to consider in making the call as to the accuracy question is that the sale could be taking place at least in part due to the seller's unhappiness.
With that in mind, a good place to start is by taking a careful look at the assumptions upon which the pro forma numbers were based. What those pro-forma numbers should begin to reveal is the line of thinking that the seller (and a broker representing the seller) used to develop the document. What we want to do, then, is take those numbers and evaluate them against what is more or less likely when (and if) the property becomes ours.
We also care more about future performance than we do about past performance, although understanding the “why” related to expenses and income is obviously important for comparative reasons.
Identifying the gaps in various expense categories is also a useful exercise, because it challenges you to imagine a case scenario where your own management skills and those of your company are likely to affect the value.
It's those resulting numbers, generated as part of your pro-forma exercise, that start to reveal a picture of future performance for the property.
Another key part of the pro-forma process is to accurately understand what the industry standard is for various costs associated with a property. In other words, what “should” a particular category in a pro-forma statement cost and does this property come close to being what you might expect?
And, conversely, if it doesn't, is there a plausible reason why the costs aren't in line?
Find out, and you're starting to make some progress.