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Crafting an Effective Apartment Pro Forma Operating Statement

An Apartment Pro Forma Operating Statement is a pivotal element in securing an income property loan. It's essentially an annual operating budget, and its accuracy and realism play a crucial role in loan negotiations. Here's a guide to preparing a compelling and effective Pro Forma.

Importance of the Pro Forma

The Pro Forma is often one of the first documents a lender reviews. Its credibility can significantly influence the lender's decision-making process, as exaggerated or poorly supported figures can lead to the application being dismissed or subjected to overly conservative estimations by the lender.

Key Components of a Pro Forma

1. Gross Scheduled Rents: Use the current rent roll, including market rent for vacant units. Projected rents are acceptable if rent increase notices have been sent, and the increase is within 90 days.

2. Vacancy Allowance: Today, a minimum of 5% vacancy allowance is standard. In some areas or circumstances, lenders may require higher percentages.

3. Operating Expenses:

If available, use figures from a recent appraisal.

Otherwise, use the borrower's actual operating expenses, ideally from the last 12 months or the previous calendar year.

In the absence of complete records, annualize partial-year expenses, but be cautious with expenses that aren't incurred monthly (like insurance and taxes).

4. Real Estate Taxes and Insurance:

Real estate taxes can often be derived from preliminary reports or historical figures, considering local tax laws (e.g., Proposition 13 in California).

Estimate insurance using a standard rate per thousand dollars of coverage.

5. Repairs and Maintenance: Estimate this as 6-10% of the Effective Gross Income, varying with the property's age and tenant quality.

6. Management Expenses:

For offsite management, use 5% of Effective Gross Income.

For onsite management, account for the rent credit to the resident manager and any additional salary.

Documenting the Pro Forma

Provide footnotes and explanations for all figures, especially for projected rents or annualized expenses.

Be prepared to provide source documents or reasonable estimates to support your numbers.

Be cautious in your estimations to avoid unrealistic projections that could undermine the Pro Forma's credibility.

Practical Tips

For New or Recently Acquired Properties: If the property's operating history is limited, focus on providing detailed utility statements and current tax and insurance information.

For Unique Situations: Adapt the Pro Forma to reflect specific circumstances, such as properties in foreclosure or areas with unique rental market dynamics.

A well-prepared Apartment Pro Forma Operating Statement is a critical tool in income property finance. It requires a balance of realistic estimations, thorough documentation, and careful consideration of the property's specific circumstances. By diligently crafting this document, borrowers can enhance their chances of securing favorable loan terms.