The property you have your eye on just got rezoned for more density.
A new housing policy allows additional units.
You can feel the adrenaline starting to rush through your veins. I get it. I’ve been there.
But there is another question that needs to be answered early before anything else:
Do the numbers work?
What do I mean by asking “do the numbers work?”
When you run your preliminary proforma, does it show you making a profit?
It doesn’t matter if the zoning allows 100 units if the cost of building those units is greater than the value they create.
It doesn’t matter if a policy change allows additional density if that density requires a more expensive form of construction that makes the project less profitable.
So what do you need to do?
Your First Pro Forma Doesn’t Need to Be Complicated
Before the project even starts, you obviously won’t have perfect information. You won’t even have all the information.
That’s okay.
You probably won’t have architectural drawings, contractor pricing, detailed municipal fees, financing terms, or a complete project schedule.
Your first development pro forma will be based on high-level assumptions.
This is the back-of-the-napkin (or back of envelope) development pro forma.
(The first time I saw someone do this, by the way, it was actually on the back of a napkin.)
Anyways, you need to understand 3 things:
What can I build?
Estimate the development potential of the property based on zoning, density, site area, building form, parking requirements, and other known constraints.
Use allowed Floor Area Ratios (FAR) or a maximum allowed unit counts to start. Whatever you use, make sure its realistic.
What could the final product be worth?
Estimate the potential revenue. For a condominium project, that might mean estimated saleable square footage multiplied by an average sales price per square foot.
Remember, saleable square footage is not the same as what you can build…at least not always. You may have common hallways or other areas, that aren’t being sold to the individual purchaser of a condominium or strata project.
What will it cost?
Estimate land, construction, consultants, municipal fees, financing, marketing, contingencies, and other development costs.
Revenue minus all of your costs gives you an initial indication of potential profit.
It isn’t a complete feasibility study, but it tells you something extremely valuable:
Is this opportunity worth investigating further?
Everything Impacts Everything
One of the most important lessons in development is that assumptions don’t exist in isolation.
Every assumption will trickle down and impact other assumptions.
Increase the density and you may create more revenue, but you may also trigger underground parking, different construction requirements, additional municipal approvals and so on.
Everything impacts everything.
That’s why a development pro forma isn’t simply a spreadsheet you complete once. It’s a tool for testing decisions.
Test $450 per square foot in construction costs instead of $400.
Reduce your expected sales price.
Increase your contingency.
Change the land price.
Then watch what happens to the anticipated profit.
This sensitivity testing is often where the real value of a preliminary pro forma begins.
Try our Preliminary Pro Forma
We’ve created a free Preliminary Development Pro Forma Calculator to help you understand how basic development assumptions work together.
Enter your land size and development density. Estimate your building efficiency, sales values, construction costs, municipal fees, financing, and other major costs.
Then adjust the assumptions.
Watch how a change in one assumption immediately impacts other items.
The goal isn’t to predict exactly what your project will earn. At this stage, you simply don’t have enough information to do that.
Identify the assumptions that matter most, and determine what questions you need to answer next.
Could You Benefit From Expert Real Estate Guidance?
If you’d like confidence before moving forward on a development site, SiteMentor Development Consultants provide industry-best development feasibility reports that identify what your property can realistically support, highlights potential constraints, and helps you determine the development strategy that makes the most sense for your goals.
