Preparing a Pro Forma Operating Statement - Part 1

The term “Pro Forma” is short for Pro Forma Operating Statement. A pro forma is an annual operating budget for an income property and is probably the most important single document in an income property loan package. An experienced processor will always assemble the package with the pro form as one of the very first items prepared.

Because you have been provided a form entitled ‘Pro Forma Operating Statement” the actual preparation of a pro forma is merely a matter of filling in the blanks. The numbers you choose to insert, however, must be supportable and well documented. While preparing your statement make sure that the operating expenses ratio you are using is not less than 30-35%. Remember the loan size, rather than the interest rate or points, is usually the sticking point in income property negotiations.

Multi-Family Properties
First let us discuss Gross Scheduled Rents. You should usually use the current actual rent roll. Make sure to include on your rent roll the potential rent of any vacant units. Scheduled increases in rent may be allowed, but usually they would have to be in place before the loan funds for the new higher numbers to be factored in.

The required Vacancy Allowance will vary based on property type and location. A good rule of thumb is to use the lesser of actual vacancy or market vacancy (with a minimum of 5%.) The estimated market vacancy can be found at sites like www.irr.com or from a local Real Estate agent.

Borrowers will often protest with claims of actual vacancy rates of 2% to 3%. In these cases remind your borrower that a Vacancy Allowance is really a shortened version of Vacancy and Collection Loss Allowance. Anyone in business eventually gets a few bounced checks and/or deadbeats.

Inserting the actual operating expenses is greatly simplified if the borrower already has a well done appraisal he can provide. In this case, simply insert the expenses as listed in the appraisal, and footnote them as follows: Based on the MAI appraiser’s estimate.

However, you usually should not order an appraisal. In many circumstances the Lender will not accept an appraisal that they did not order. It is also wise to hold off on such a large expense until the lender has reviewed the package and the borrower has accepted in writing the lender’s proposal. Therefore you must be prepared to estimate the expenses yourself and to document them well.

Ideally you will want to review the past 2 years and the year to date operating expenses for the property you are looking to finance. It is always best when a property has an increasing pattern of cash flow, and reviewing more than a few months of data can help do this for you. Do not forget to ask questions about large expenses you may notice on the statements. The most common deviation is the result of non-recurring expenses (such as from a major remodeling), and they can often be extracted from your Pro-forma to lower the estimated expenses on the property.