How to Prepare an Apartment Pro Forma

How to Prepare an Apartment Pro Forma

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

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. The stakes are high. If a lender does not accept your Pro Forma, he will not take the time to prepare one of his own. He will merely select a very conservative operating expense ratio such as 40 to 45%. Operating expenses of 40 to 45% will kill most deals.

Remember, the loan size rather than the interest rate or points is usually the sticking point in income property negotiations.

At this time, please take a moment to review the attached Pro Forma Operating Statement form. Since this is a universal form, only a few of the blanks will be filled in for any individual property.

First let us discuss Gross Scheduled Rents. You should usually use the current actual rent roll. Insert in your rent roll the market of any vacant units.

The only time a lender will accept projected rents is if the rent increase letters have already been sent. It is helpful, but not mandatory, to include a few samples of the rent increase letters that have been mailed. However, be careful not to scare your client away by asking for copies.

The new rent level should be no further off than 90 days. Then if the lender objects, the Placement Officer can suggest that the file be put aside for a few weeks until the rent increase is in effect. Invariably the lender ends up accepting the projected rents now. Another time you can get away with projected rents is if the apartment building is located in a city with rent control, and the annual increases are scheduled to take effect within 90 days.

There were times in the late 1980’s when lenders would consider in certain areas, such as the Bay Area, the greater Los Angeles area and the greater San Diego area, a Vacancy Allowance of less than 5%. Those days are gone. You must use at least 5% today.

The lender may insist on 7% to 10% for Sacramento, the Central Valley and most outlying California areas; however, you should still insert 5% for these areas and pray.

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 deadbeats.

Inserting the actual operating expenses is greatly simplified if a well-done appraisal arrives with the package. 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 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 you should document them well.

Few borrowers, however, keep records that current, and you must be careful not to scare the borrower away by demanding that he spend hours poring over his records.

Be careful not to double count the insurance premium or real estate taxes by annualizing them. Remember that these expenses are just paid once or twice a year. The best source for the annual real estate taxes is the preliminary report. You might find the annual insurance premium in the previous year’s tax return, or you might simply have to ask the borrower or the borrower’s fire insurance agent.

Here are a couple of useful rules of thumb. Because of Proposition 13, real estate taxes in California are computed by taking 1.25% of the original purchase price. To compute an estimate of a fire insurance premium, use $5.50 per thousand dollars of coverage. Therefore, if the sum of the existing 1st mortgage and your new 2nd mortgage is $787,000; you can take 787 times $5.50 to arrive at a very rough estimate of the new fire insurance premium.

There will be times where the borrower simply has only a few months operating history. Examples include properties taken back in foreclosure, and recent purchases. In cases like this, ask the borrower to prepare for you a Utility Statement. A Utility Statement is a breakdown of the building’s various monthly utility expenses for the last 12 months or less. You can annualize these numbers for your Pro Forma.

The real estate taxes can be obtained from a prelim and the insurance premium from the borrower.

To estimate Repairs and Maintenance, use between 6-10% of Effective Gross Income, depending on the age of the property and the quality of the tenants.

In the absence of specific offsite management numbers, you should use 5% of Effective Gross Income. This is what most professional property management firms charge. Onsite management should be handled as follows.

Show the full market rent of the resident manager’s unit on your rent roll and on your Gross Scheduled Rents.

Then list as an expense under Management Onsite the difference between the market rent of the unit and what the resident manager actually pays. This difference is known as a rent credit, and is fully taxable under the IRS codes. If the resident manager receives a small salary in addition to a rent credit on his unit, be sure to include this as well.

Many small units do not have resident managers, and lenders will accept this. However, even if a building is owner managed, you should include an off-site Management expense of 5% of Effective Gross Income.

The reason why is because in the event of a foreclosure, the lender will have to hire a professional property management firm to manage the property.

Business Financials For Due Diligence Explained

Real Estate Investing

All business professionals need a good working knowledge of financial statements to include how they are created and how they can be used to make key business decisions.

Business transactions are transformed into financial statements through a due diligence and accounting process.

Three required statements are produced:

Income Statement

Balance Sheet

Cash Flow Statement

The statements provide results of business activity, not the reasons. To understand the reasons, we must look at relevant ratios.

These ratios are standard indications of business reasons and serve as the basis for key business decisions.

They are derived from a combination of calculations of components of the financial statements to indicate a unique and universally accepted metric or measurement.

We can glean relevant indications of the company’s success from these metrics. They become the “language” through which we understand business activity and we use them to help understand and analyze financial statements and also compare one company to another or one financial period to another.

Winston Rowe & Associates utilizes an initial due diligence review that provides an in depth understanding of business and financial activity as it pertains to the financing commercial real estate transactions.

With a core focus on flexibility, Winston Rowe & Associates really wants to be able to find a way to help everyone who comes to them find a funding solution that meets their needs.

The best funding solutions occur when they combine data with consultation and common sense.

They can be contacted at 248-246-2243 or visit them online at http://www.winstonrowe.com

Guidelines for CRE Debt Restructuring for Apartments and Multifamily Winston Rowe and Associates

Guidelines for CRE Debt Restructuring for Apartments and Multifamily Winston Rowe and Associates

Winston Rowe & Associates, a no upfront fee commercial real estate advisory and due diligence firm, specializes in providing funding solutions for commercial real estate transactions

They have prepared this article to provide advice for refinancing or debt restructuring for commercial real estate.

For more information about Winston Rowe & Associates and their commercial loan programs, they can be contacted at 248-246-2243 or visit them on line at http://www.winstonrowe.com

Debt Restructuring loans are a common type of commercial real estate loans. Listed below are some of the key detail items that lenders consider when reviewing this loan type.

First.  What is the reason for the refinance and why are you not working with your current mortgage holder?

Some questions your new lender will have are: Did you violate a covenant in your current mortgage agreement? Did your property drop in value? Are there economic problems in the area your property is located? Do you have personal net worth or liquidity issues? Did you shop your loan request to death creating high risk profile with too many credit report inquiries in a short period of time? Just to name a few.

Second. The commercial refinance loan criteria are very straight forward. Your maximum loan to value (LTV) will be 60%. You will need to have a minimum personal FICO score of 680 with no bankruptcies in the previous 7 years. Your personal net worth will have to be equal or greater than the gross refinance amount and the occupancy rate will have to be 80% for a conforming loan.

Third. The supporting documentation will include the review of the last three years of your personal and business financials as well as rent rolls. If there are improvements to be made to the subject property you will need to submit a detailed plan with the necessary permits.

The key to a smooth refinancing process is to be truthful on your loan application and to fully cooperate with the due diligence and underwriting specialists “this is how I do it” approach does not work. If you don’t cooperate and misrepresent material facts, you will most likely not receive your commercial loan.

At Winston Rowe & Associates, their primary objective is to provide the most reliable and efficient means of sourcing both debt and equity funding for your commercial real estate loans.

BUYING AND FINANCING A BUSINESS WINSTON ROWE & ASSOCIATES

How To Finance A Business

Even the most lucrative and attractive business deal can freeze in its tracks if an entrepreneur cannot get adequate business financing. This aspect is especially important if there is an opportunity for business acquisition, as really remarkable deals can be very few and far between, and getting adequate business purchase financing on time is the key. If you have ever thought about buying an established business, are you certain that you are adequately prepared?

Nowadays, it can be difficult to get business acquisition financing using either approach, given tight credit market conditions and wary investors. However, a knowledgeable entrepreneur should not face any insurmountable obstacles.

If you choose to follow the first approach and borrow a certain sum of money, there are several key aspects to be aware of. To begin with, to get a loan from a bank or any other lender you will almost inevitably have to demonstrate your business skills. The lender will also likely want to get adequate information on a particular venture you want to purchase, your collateral, and your plan on how you will repay the money back.

To secure business acquisition financing, you will need to keep several other things in mind. First, always have a backup plan – get approved by as many banks or other lenders as possible to protect yourself in case one of them backs out. Second, know that adequate business purchase financing should also cover operating costs. It is advisable to have a contingency plan in case the revenue drops. Third, make sure you have a comprehensive business plan, as this is ultimately what may convince the bank or another lender to finance your business acquisition.

Equity financing is another option. In this case, you would agree to sell a share of your business to outside investors. By choosing equity financing, you would not have to take a considerable risk and repay the debt; however, you would have to give up partial ownership of the company, possibly giving up some control as well.

Key To Business Acquisition Financing –

In addition to the options mentioned before, you are highly encouraged to be inventive when attempting to secure business financing. The easiest approach is to try to secure seller financing. This would mean that the seller is willing to wait a certain period of time to be paid off. In addition, he or she will probably do their best to help you ensure the profitability of the business. The downside is that not every seller is willing to explore such an opportunity, and the asking price can increase anywhere from 5 to 25 percent.

If you are denied a loan by a bank or another lender, you should apply for a Small Business Administration loan (ie. a SBA loan). SBA loans have quite favorable terms and requirements; however, you cannot have funds available from any other sources.

There are also many other possibilities. You can try to get business acquisition financing from your friends or family members. You can draw from your 401(k) plan, and if you are looking for franchise business financing, you can contact franchise financing companies. With so many options available, getting financing for business is not too difficult, don’t you agree?