Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.
What is a Pro Forma?
Pro forma is a Latin term meaning “for the sake of form”. In the commercial real estate world, it describes a method of calculating projected financial results.
This means estimating a property’s cash flow projections. These projections include the property’s anticipated revenue, expenses, net operating income, cash flow and expected ROI.
Historical vs. Pro Forma Analysis
A historical analysis of a commercial property will incorporate actual results over a period of time…usually one year. Whereas a pro forma analysis will be forward-looking…using estimated numbers.
Generally speaking, buyers want to pay a price based on historical performance. But what gets them excited is their pro forma projection. This projection tells the story of how the property will perform under their ownership.
Misleading Pro Formas
You’ll see many different styles of pro formas from brokers and sellers. Some are overly simple…while others are complex and confusing.
Buyers should be aware of this and be cautious when analyzing a seller’s pro forma. As a buyer, the best practice is to create your own pro forma.
Summary
A pro forma is a “best guess” of future property performance. If presenting a pro forma is part of a property’s marketing strategy, sellers should paint the most attractive forward-looking picture possible. That said, most commercial properties are priced using a cap rate which is derived from the current rent roll and historical expenses. And it’s not necessary for all sellers to present a pro forma analysis of their property.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@BeachwoodSells.com