Multi-Family Acquisition: Pro Forma Assumptions

Purpose

The purpose of this post is to outline the key functions of the Pro Forma feature in CREModels multifamily acquisition models. These features should be universal across all acquisition models unless noted otherwise.

Comparison Columns

The Broker OM column (the first column of the Pro Forma Assumptions table) provides inputs for the user to add pro forma assumptions from the broker’s offering memorandum to be used in comparison to the historical data of the property. To aid in comparison of the Broker OM assumptions for each income and expense group, the user has the option to customize the income/expense data displayed in the two columns directly to the right of the Broker OM column.

In order to display data from 2 or 3 Cldr Yrs Prior, the user must enter this data in the Historical Data tab in the expanded columns.

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The first column allows the user to display data from the previous calendar year (the T-12 data entered on the Historical Data tab), or data from each of the two prior calendar years. In order to display data from 2 or 3 Cldr Yrs Prior, the user must enter this data in the Historical Data tab in the expanded columns.

The second column to the right of the Broker OM column allows the user to display the annualized income/expense values from a varying number of recent months (e.g., T-1, T-2, T-3, etc.) within the last year. Additionally, the first column under Annualized Period can be adjusted in the same way. For example, this feature can be especially useful if there is only historical data available for the past 6 months, in which case, the user may want to change the Annualized Period column to “T-6” and the second comparison column to “T-3”.

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Replacement Reserves

Replacement Reserves can be added to the model on a per unit basis. This input is considered a capital expense and will not influence the NOI.

Adjustments

The Multi-Family Acquisition model gives the user the capability to adjust individual income/expense groups for Year 1 of the pro forma statement using the override columns. Overrides can be made in the form of either a total $ value or a per unit value.

a) $ Override

The first override column ($ Override) allows the user to enter a projected total expected $ value for the income/expense group during pro forma Year 1. In the example below, the user has entered the estimated Property Taxes to be paid during Analysis Year 1 in the $ Override column. In order to apply this override, the user must change the dropdown to the right from “non-adjusted” to “adjusted”.

b) Per Unit

The second override column Per Unit) allows the user to enter a projected per unit $ value for the income/expense group during pro forma Year 1. In the example below, the user has entered the estimated Repairs & Maintenance expense per unit to be paid during Analysis Year 1 in the Per Unit column. In order to apply this override, the user must change the dropdown to the right from “non-adjusted” to “adjusted”.

Management Fees

Management Fees are an expense that is directly correlated with income. To more accurately project future Management Fees expense, the Multi-Family Acquisition model provides an optional input to enter the Management fees as a percentage of either Total Effective Income or Net Rental Income. The user can select either % of Total Effective Income or % of Net Rental Income from the dropdown to determine the method of calculation for Management Fees.


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Down Units (For Renovations)

Using the renovation assumptions entered in the Unit Mix (number of units renovated, average reno downtime, and current rent/unit), the model calculates the expected Down Units (For Renovations) loss for Analysis Year 1 and includes this value within the Year 1 Pro Forma of the Pro Forma Assumptions section. This loss is also calculated for Analysis Years 2 and 3 (if applicable) and incorporated into the model’s calculations but is not displayed on the INPUTS tab.


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Growth %

The Multi-Family Acquisition model allows the user to customize the growth rate expected for individual income or expense groups during Analysis Years 2, 3, and 4. These rates can be changed by entering the expected growth rate for the target income/expense group in the corresponding Year [X} Growth % input (highlighted below).

Gross Rental Income, Physical Vacancy, and Bad Debt growth rates can be adjusted within the Income Growth table of the model. Down Units (For Renovations) loss is based on the renovation assumptions entered in the Unit Mix and cannot be manipulated by an override growth %. A separate post has been made addressing the Income Growth table.

Note: Replacement Reserves can only be grown at one fixed annual rate.