What a pro forma is
A pro forma is a project’s financial forecast, usually a spreadsheet. It estimates what the project will cost, where the money will come from, how much income the finished building should produce, and whether the whole thing works. “Pro forma” simply means “as a matter of form,” in the sense of a projection prepared in advance. It is a set of assumptions, not a record of what happened.
Cities, lenders and community groups often review pro formas when a developer asks for public support. You do not need accounting training to read one. The main lines fall into four groups: uses, sources, operations and value.
A hypothetical project
All numbers below are invented to illustrate the structure. Imagine a 40-unit apartment building.
Uses: what the money is spent on
| Item | Amount |
|---|---|
| Land | $1,000,000 |
| Hard costs (construction) | $6,000,000 |
| Soft costs (design, permits, legal, fees) | $1,200,000 |
| Financing costs and reserves | $800,000 |
| Total development cost | $9,000,000 |
Add the items: 1,000,000 + 6,000,000 + 1,200,000 + 800,000 = 9,000,000.
- Hard costs are the physical building: materials, labor, site work.
- Soft costs are everything else needed to make the project happen, such as architects, engineers, permits and legal fees. Here they equal 20 percent of hard costs ($1,200,000 ÷ $6,000,000), though this ratio varies a lot in practice.
- Financing costs and reserves include loan interest during construction, lender fees and money set aside for surprises. Timing delays push this line up, which is why project cash flow matters.
A contingency line is common, a cushion for cost overruns, and a careful reader checks that it exists and is plausible.
Sources: where the money comes from
| Source | Amount | Share |
|---|---|---|
| Senior loan | $5,400,000 | 60% |
| Equity | $2,000,000 | about 22% |
| Public subsidy or grant | $1,600,000 | about 18% |
| Total | $9,000,000 | 100% |
Check: 5,400,000 + 2,000,000 + 1,600,000 = 9,000,000. The shares are 5.4 ÷ 9 = 60 percent, 2 ÷ 9 ≈ 22.2 percent, and 1.6 ÷ 9 ≈ 17.8 percent.
A basic rule: sources must equal uses. If they do not, the pro forma shows a gap, and the missing piece must be found. Whether the public subsidy line is large or small is one of the first things a city reviewing the request will look at.
Operations: what the building earns
| Line | Annual amount |
|---|---|
| Gross potential rent (40 units × $1,500 × 12 months) | $720,000 |
| Less vacancy and collection loss (5%) | −$36,000 |
| Effective income | $684,000 |
| Less operating expenses | −$270,000 |
| Net operating income (NOI) | $414,000 |
Check: 40 × 1,500 = 60,000 per month; × 12 = 720,000. Five percent of 720,000 is 36,000. 720,000 − 36,000 = 684,000. 684,000 − 270,000 = 414,000.
Operating expenses typically include property taxes, insurance, utilities, maintenance, management and replacement reserves. Property tax assumptions are worth checking, since a tax break would change this line. NOI is the money left to pay lenders and, if anything remains, owners.
Debt coverage: can the loan be repaid?
Lenders compare NOI with the yearly loan payment. The ratio is called the debt service coverage ratio. If the annual payment on the $5.4 million loan were $330,000, the ratio would be 414,000 ÷ 330,000 ≈ 1.25. Lenders commonly want a cushion above 1.0, with the exact requirement depending on the lender and the type of project, so a ratio near the minimum signals thin margins.
Value: what the building is worth
Investors and appraisers often estimate value by dividing NOI by a capitalization rate, a percentage reflecting expected return and risk in the market. At a hypothetical 6 percent:
$414,000 ÷ 0.06 = $6,900,000.
The building would be worth about $6.9 million when finished, but it costs $9.0 million to build. The difference, $9,000,000 − $6,900,000 = $2,100,000, is the gap between cost and market value. The $1.6 million subsidy in the sources table covers most of it, which leaves $500,000 still to find: the lender and investor together would be putting $5,400,000 + $2,000,000 = $7,400,000 into a building worth about $6.9 million. A real project would have to close that remainder by lowering costs, raising rents or finding more support, or accept that it does not yet work.
What to check when reading one
- Assumptions behind rents and vacancy. Are the rents realistic for the neighborhood?
- The hard-cost basis. Is it based on a contractor’s estimate or a rough guess?
- Contingency and reserves. Are they present and reasonable?
- Developer fee and overhead. These are legitimate costs, but they can be large, and their size is a fair question when public money is involved.
- Sensitivity. What happens if costs rise 10 percent or rents fall 5 percent? Small changes in input can move the results a lot. Try recalculating: 5% lower rent income reduces effective income, and because expenses stay the same, NOI falls by more than 5 percent.
- Who bears overruns? The answer should be written down.
A pro forma is only as good as its assumptions, and even careful ones are uncertain. Reading it is mostly about understanding what must go right for the project to work, which helps in judging requests for support and the claims made for a project.