Real Estate Modeling 101: Why the Proforma?
If financial statements reveal the health of a company, pro-formas do the same for properties.
Most books and websites describe a real estate pro-forma as a “cash flow projection” — which is technically correct. But it’s more practical to think of a pro-forma as a simplified hybrid of an Income Statement and Cash Flow Statement, tailored to a property instead of a business.
In my upcoming blog posts, I’ll break down the key line items of a real estate pro-forma and share a simplified Excel template to get you started. But first, let’s address an important question:
Why can we condense the financial reporting of a property into one schedule, rather than building out a full Income Statement, Balance Sheet, and Cash Flow Statement?
The easiest way to explain this is by noting that we can do something similar for companies.
In models like DCFs, LBOs, or mergers, it’s common to skip full 3-statement projections by:
Forecasting key Income Statement items—such as revenue, expenses, and taxes.
Creating a simplified Cash Flow Statement with essential recurring items: Depreciation, Changes in Working Capital, and CapEx.
Tracking Cash, Debt, and Equity separately, without the need for a full Balance Sheet, and estimating Working Capital changes using a percentage.
A complete Cash Flow Statement isn’t required since many of its items are non-recurring and don’t affect future projections.
Properties are far simpler than companies, making this streamlined approach even more practical. For example:
Working Capital is usually negligible, and the analysis follows cash accounting rather than accrual accounting.
Income taxes are often ignored, as properties are typically held by pass-through entities like Partnerships, S Corporations, or REITs that don’t pay corporate taxes.
Many activities from corporate Cash Flow Statements don’t apply, and Debt, Equity, and Debt Service can be handled directly on the pro-forma.
To be clear, properties still maintain full financial statements. But for modeling, valuation, and investment analysis, the focus is almost always on the pro-forma rather than the full statements.
In the next installment, we’ll take our first dive into a simplified proforma that will allow us to walk through it together.