Real Estate Modeling 101: The Proforma Expenses

Real Estate Pro-Forma – Property Expenses

After calculating Effective Gross Income (EGI), the next step in the pro-forma is to account for property expenses. These are typically more straightforward to explain:

Property Management Fees

Most property owners outsource day-to-day management to third-party companies. These management firms handle tenant interactions, rent collection, problem resolution, and the coordination of repairs and maintenance. Their fees are usually calculated as a percentage of the EGI.

Example Calculation:
If the management fee is 3% of an EGI of $1 million, the fee would be:
1,000,000 * 3% = $30,000.

Operating Expenses

This category covers the ongoing costs required to maintain the property, including insurance, utilities, and routine repairs. Larger properties may also have expenses for staff salaries, janitorial services, landscaping, security, and marketing. These costs are usually calculated on a per-square-foot basis.

Example Calculation:
If operating expenses are $10.00 per rentable square foot annually for a 50,000-square-foot property, the total annual cost would be:
50,000 * $10 = $500,000.

Real Estate & Property Taxes

Local governments levy property taxes to fund services like schools, police, and infrastructure. These taxes are typically a percentage (1-4%) of the property’s assessed value, and they may increase annually as property values rise.

In some regions, such as Australia and the U.K., Stamp Duty is also imposed on property transactions, either alongside or instead of annual property taxes.

Example Calculation:
If a property’s assessed value is $20 million and the combined tax rate is 3%, the annual property tax would be:
20,000,000 * 3% = $600,000.

These expenses are deducted from EGI to determine the Net Operating Income (NOI), which represents the property’s profitability before accounting for financing costs.

Our next step in the proforma underwriting process will be to assess and include capital costs