First Steps of Building a Proforma and Putting Yourself in Your Lender's Shoes

So a common question I get with building on my perform model, whether it's for sales storage or any commercial real estate asset class, is how do you get your start with analyzing these numbers?

And people often want me to look over them. Well typically I don't have that opportunity to go through that cause there's just too much information to go through.

But I wanted to go through this because this is a simple way to grasp what the purpose of your proforma is and how to build it out step by step.

I think oftentimes when people see a complicated proforma with 17 to 30 pages, it just freezes them and they don't know where to start.

Where I typically find, actually surprisingly, the people who are best at building our performance are actually people that have no background in real estate at all.

It's actually, people are just good at analyzing numbers for what they are and then they're just inputting them. And that's solely how it is.

So the first ask we're gonna start with and to kind of give you a background about this, I worked at commercial lending and residential lending for roughly about five years.

And then I took that experience and took it over to Twins Capital and allowed it to basically figure out how I wanted to address gaps for my lending personally through our company funds to figure out a way that we could find gaps to find really quality assets to lend on that banks necessarily would not.

So I have that perspective, but then I also had the perspective of being the loan officer about how I look over these.

One of the things I find with proformas oftentimes is they're not very readable and even if they give you all the information they need, it just looks like one gigantic library.

So going back to that example, so much information at once, just getting slacked within the face. It's nice to have something nice and breathable.

So right off the bat you can see with this is I have very nice clear bull face hand writing and in place for the lender to see.

The other thing about this tool as well is that I used to use a number of different tools. I used more than one of course I've used some of the best in the industry.

Michael Blocks is the great one. But one of the things I liked about this template is that this was a template that the we or myself as a lender, when I worked for two large lenders, we would send this exact same template out cause it was a really ultra simple template and that way then it's somebody I never done one before.

It wouldn't scare them way, it's easy for them to follow. But on the flip side, when they would send it back to us and I was actually trying to put this together for loan committee, what I noticed is like wow, I can just find everything exactly where I need to because I'm so familiar with using this.

And so I liken this too or you know I have multi-family where we have tenants and we go to court, we use widely accepted leases that everybody in the area uses.

And we've also used custom leases and whenever we've had custom leases, the lawyers don't even bother to read it or they just assume that we are trying to make it very landlord friendly.

And so ultimately it just becomes way more than they wanna read through. And so that's why we want this is that we want this to be so simple that there's less questions asked.

It goes through the loan committee faster. It requires less edits as us ever putting it together. So this first part, proforma rent roll, what we are simply doing is we are grasping the unit number, the size, the square footage, the start and pay through is not a big deal unless you have a lot of tenants that are really pushed out far cuz the bank sometimes will wanna know how many people are on a month to month lease, how many people are, or how long are these rents locked in for?

And so simply you're gonna put the actual rent roll here and then you're gonna put your proforma rents. Now the reason why I like to do is line by line is because it allows you to go granularly later on.

If later I find out like oh these units these seven units are not renovated anywhere close to what we would need to get market rent, then I'm gonna specifically change these items out.

When you take that level of detail as you go through your performer, as you go through your due diligence, the bank notices that and the bank is less likely to ask you more questions.

We mentioned it a while ago that Twin Oaks Capital does feasibility studies in house. At the very beginning we used to always have to order them.

But then of course over time what happened was is that the banks actually noticed that like wow, these feasibility studies that you were doing, are they exact same as a third party gurus that you guys are hiring to do?

And the reason why is cuz we are doing such a good job, we're following all the same rules that I would turn around and give that to these third parties.

They would essentially copy our feasibility study and give it back to us with their name on it. So by doing that, the more times you do this stuff correctly, the more times you answer these questions ahead of time, the less issues you're gonna have with banks ask you questions.

You're all gonna find that the very first time you do a deal with a lender, they're gonna ask you way, way more questions than your second, third, fourth and fifth time.

In fact, we've even gotten some deals too where they've already given us bank approval before we've gotten approved approval out or sorry, a proforma out simply because they just know that the numbers I've already started to calculate out, I've done them so many times that they know that they can trust it.

Now we're not gonna get into this, but if you have a new bill proforma, then you're gonna actually just go straight into putting in the proforma rent and then go from there.

But in this case this deal was actually a hybrid of a new build and a construction. And then we have this tab right here.

This tab right here is just gonna summarize kind of what the whole layout of the land is, how many you have each units, how you can force value and kind of go from there.

So you can see here that you know, we might have this unit right here force $30 a rent. That's quite a big amount considering it's a one 60 base price but we only have nine of them.

So from here this is gonna be the first two tasks that you build on. This is very easy to v have a VA do.

It's not somebody that you need to have of a real estate background. Again, like I said before, this is great for VAs, this is great for people that are very good with financial numbers.

Simply basically just data entry or even using an app like Adobe Acrobat or whatever to to pull information from a rent roll.

Now let's move on to the build out costs. You might not be new, new construction like we do, but we also do do properties that have significant value add.

So for example, you know we have a 40 40 plus unit property. We're looking at that we probably will put $22,000 per unit and to turn it over.

And so this is where we go with the line items and this is where we're gonna break it down. I like to do not too many line items but I like to do a lot just so that way the bank sees like wow this is how granular this borrower is.

And it also shows how much of a mass have, I'm not just using like, oh we're just gonna do $50 square foot from generic number.

Like well no, what am I specifically doing? So like in this case legal, okay, my legal, I actually will put an attachment and I'll show that.

So then sometimes I'll put metrics in here showing that C attachment. C attachment C attachment. We aren't guessing at numbers, we are actually using either historical data that we're referencing or we are using actual quotes.

So as you can see here, we have an actual and we're kind of going through here now ignore these numbers because these line ams got kind of moved around because you know, some of these line actually end up getting combined.

But in reality we actually were waling our budget on this. Now if you want bonus points, I would only do this primarily if you have a building construction background or you are actually gonna be gc the contract is I actually like to go January, February, March, April and I do a 12 month or I, I put out the entire month by month buildout.

And then what I'll do is I'll break down when that money will be spent over the course of the next 12 months.

So it's basically a month and a month buildout plan showing how everything's gonna work. Now you might get this through an appraisal or whatnot, but for them to actually see when you're gonna spend it, that really tells them when, okay this is wly when we need to get our inspector out to do inspections for construction.

It's also when we can expect that you know you're gonna be done the project. And more importantly, it also justifies if we are asking for interest only if I'm doing new builder or new value out of construction, it's gonna help me if I can say, well I'm gonna have nine months of construction so at a bare minimum I would think that I need nine months interest only because I'm not gonna be making money off of this property when these units or this new bill of construction is getting done.

And then from there then we're gonna break it into the projection. Now one of the mistakes I constantly see people make is that, you know, going back to this example, we can control forcing rents.

We can control that by increasing value through renovations or simply bringing rents to market. What I dislike when I see this so often I used to hate to see as a lender is that let's say use utilities if the gas bill is $500 a month and you are simply going to say, well the rule of thumb we have is $400 a month, the lender is not typically going to substantiate that unless you have a specific reason.

Why are you going to switch out a furnace, which we believe will be 20% more gas efficiency that substantiated? Are you gonna put implement rubs where now the tenants have some responsibility for it and so therefore when they have more responsibility they might use it less.

That will justify a decrease as well. Simply just saying that it's high, we're gonna get the tenants lower because this is the rule of thumb is not gonna work.

And so even if the bank does accept that, I would employ you that you never focus on increasing anything unless you have simply something to substantiate management fee.

Okay? If you are getting management fee done at 6% versus eight and a half percent then and that's historically what your numbers are, then you can justify that by saying that.

And then this is what we use it to reference here. Say perform insurance 3% at $20 for 10 insurance. So we have all these assumptions that we kind of put in here from there then we also will go through each of the line that we specifically can't control.

So call center, okay, do I have a call from a call center that says we can do it for 8 55 when they're pre-analysis they're getting it for 1,050.

If I do, then that justifies why I'm showing a lower number in the pl. It also shows how I can bring value to this deal by bringing costs down another one insurance.

Okay? You might see that there's opportunity to bring the cost for insurance by whether it's raising the deductible, whether it's changing some things for coverage or because you have umbrella planned that you're adding it to all these things you will substantiate and then you'll actually reference in that.

So then when the bank gets a performer from us, they're also getting an entire packet, a vendor quotes to substantiate those two as well.

Now I'm gonna skip through year 2, 3, 4, 5 quickly. But ultimately what we like to see is we like to see showing it increases everything.

Your expenses are gonna increase every year. Even if they don't, the bank wants to see that they're gonna increase. Now a secondary reason I like to do this too as well is that you might have a property management company that is very comfortable with just, you know, giving the bare minimum or renewing the tenants.

One of the reasons why I like to use this performer to show them kind of what our expectations are is because a lot of property managers don't realize that wow, my property taxes are going up 5% a year.

My all my costs are going up a year. So if our rent stay the same, we actually are making less money versus more money unless we are actually in the process of a lease up.

So this allows me to really hammer it home that listen, we need to increase the revenue by at least this much to make as much as last year.

And that's my expectation. I don't wanna have the only source of income which is unrealized to be from principal pay down.

So as a result we wanna make sure that, so this is why we need to have this much rent raises.

This is why I need you to be comfortable, be uncomfortable with raising tenants more than just trying to keep them in there because we need to at least maintain our cash flow over these years with this amount of minimum raise.

From there we will go into this, the cash flow analysis. This is where we're gonna show really what the bank is gonna look at.

This is where the bank is gonna spend the majority of the time. To be honest, I see this kind of stuff is fluff.

Most banks don't really look at these case by case numbers, but they like to know that you have a granular.

Now the difference between year one and year five is year five. I actually will just keep these all the same across the board, but year one because we're getting more granular and the bank wants to know we can stick to our plan and really wanna see.

I will actually show changes in month to month. So if you see here, this is a property in Michigan, snow plowing.

I have my snow plowing and make sense in November, December, January, February. Why? Because we have snow in those months.

We don't have snow in July, contrary to what some people may think. So as a result then I will really try to break down case by case.

This is a also show where, okay call center, maybe the call center doesn't start until November. So I really wanna break this down maybe year one, year two until it's stabilized.

Once it stabilize then I'll really keep the numbers kind of the same as we go. Now these last few tabs are things I like to add in just to kind of show the bank to show our master rate, also show them our due diligence guide.

One other thing that we put in here too as well that I didn't show on this is we actually have a deal summary tab with photos that summarizes and roughly about 500 words or less.

What we are doing, I keep it to two or three bullet points on what we're gonna do. So simply it's raise rents to market currently or just below to keep as much you know tenant retention as possible.

But we also will take advantage of selective renovations to push the market when possible. Those renovations will be determined by a two year return, meaning that if I spend $22,000 now through rent raises, we expect we'll get it back in two years.

So really I'm just, just kind of summarizing a summary of numbers and a summary of how we're gonna basically really make this deal hum and make sense for the bank.

From here. Then I'm really gonna put a budget and this budget's gonna be a number of costs. Some of these are gonna get specifically from the bank, some of them are gonna get from the lender and then a number of these will as well.

The one thing you're gonna wanna keep base is that operational reserves and debt service. This is really gonna go back to how fast can you get your deal to have debt service coverage of 1.0 profitably closer to 1.2 as fast as possible.

If I'm gonna go, you know, nine months with negative cash flow, then I need much much higher reserves than a property cash flow from day one.

Right now going to these next tabs, these are due diligence tabs. So we talk about the numbers of assumptions that we put.

This is where I show actually that I am actually doing the due diligence to make sure that we verify these light items are presentable and doable.

So we're actually putting these through cause I'm not sending them 36 statements, showing them that simply the fact that I put them here.

Most of the time the bank will take you at face value that you have these numbers, that you're not making them up.

If they ask for it, then I have an organized folder showing them all these utility statements. And then lastly, the competitor's tab was nice about the competitor's tab too as well is that if your competitor tab is correct, we like to use green light, red light to show green that there are available units in the market.

Red there's not. So that's one thing under the shoe as well, but also two as well. It's very helpful to the appraisal and so when the appraisal ara sees all this information, they can go from there.

Now, depending on your asset class, you might have other due diligence items, but this kind of gives you a general idea of what you're looking for when building a performer.

I don't expect that you're gonna be able to do a performer from day one when you do this, but hopefully this helps you get in that right path where you can at least feel comfortable taking that first step.