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Single Family Rental Pro Forma Template and Guide

You may download and view the accompanying excel template for this guide here:

Single Family Rental Sample Pro Forma
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DEVELOPMENT PRO FORMA

This worksheet is used to calculate your total development budget. It includes all uses of funds for hard and soft costs as well as sources of funds. From the Operating budget worksheet, it carries over the amount of a mortgage loan that the project can support, then subtracts the mortgage amount and developer equity by formula to determine the required funding amount.


Acquisition Costs

In this version separate lines are shown for land and building costs, although these could be combined into one line item if desired. Soft costs related to acquisition, such as the appraisal and closing costs, should be listed under soft costs.

Construction Costs

The amount should be estimated until there is a contract, then the actual contract amount should be entered. Besides the "hard" costs of materials and labor, the contract price will typically include such components as an allowance for the contractor's project-related expenses or "general requirements" such as building permits, fencing around the site, temporary storage for materials, the contractor's overhead/profit, and the cost of a performance bond or letter of credit provided by the contractor to insure that the project will be completed (if required). This amount should also include site improvements such as excavation for foundations or utilities, grading of the site, walkways, on-site roads, landscaping, outdoor lighting or parking spaces. Estimates of construction costs for single-family rental rehab projects are usually completed by a rehabilitation specialist based on a work write-up. If substantial rehab or structural repairs are involved, the estimate or a portion thereof might be created by an architect with input from a engineer.

Including a construction contingency amount outside the construction contract is typical and advisable. Usually, the amount of contingency funds is not shared with the contractor. The contingency is used to fund change orders. Typical contingency amounts for rental rehab projects are 10% to 15%. Typically, the more carefully the project has been evaluated and specifications identified, the lower the contingency amount needed.

Soft Costs

• Architectural fees should be based on estimates from an architect. These fees may be based on a certain percentage of the construction contract amount, a fee per dwelling unit, a flat fee for services, or another basis. With rental rehab projects, the specifications and cost estimates are often completed by a rehab specialist, either a specialist on the developer's staff or a contracted specialist. Note that design and construction management costs could be $0 for budgeting purposes if the developer fee has been calculated to pay for all project planning and management costs.

  • The engineering fee should also include mechanical or structural engineering costs, if any, incurred as part of the design process.

  • Environmental review costs could include the cost of a third-party contractor completing reviews required to determine clearance; the third-party reviews would need to be approved by the grantee or other "responsible entity".

  • A survey prior to acquisition may or may not be required by grantees for single-family programs. Prior to providing construction or permanent financing, it may be required by the mortgage lender. A survey can reveal easements that make some of the land unbuildable.

  • Property/casualty insurance should be obtained by the developer for the interim period before builder's risk insurance comes into effect. If the developer is also the general contractor, the developer should obtain builder's risk insurance as insurance against casualty and liability risks during construction. Otherwise, builder's risk insurance is typically obtained by the building contractor and will be included in the construction contract amount, above. In addition, grantees typically require developers to obtain commercial general liability insurance, the cost of which is typically covered by the developer fee.

  • Operating reserve - Pre-funding this reserve can cover the cost of operating the property while lease up is occurring, or during periods when the property is not fully leased up. In this example, the operating reserve was calculated conservatively as two month's rent revenues.

  • Tenant relocation- For occupied properties requiring relocation of tenants, the developer agreement should spell out whether the financial and management responsibilities of tenant relocation lie with the grantee or developer.

  • Rent-up marketing costs - This line item includes the estimated costs of rent-up, such as advertising. Developers should make sure that the staffing costs of rent-up are covered either in the development budget or in the operating budget for the first year, but not in both pro formas.

  • Soft cost contingency - This is a contingency amount that may be used if one or more soft costs are higher than anticipated.

  • Developer fee - This is the fee a developer charges to the project for their time and risk. Developer fees as a percent of total development costs generally fall between 10% and 15%. Developer fees should be calculated based on the estimated time, effort and risk required of the developer. In general, higher developer fees are allowed if the developer is not being reimbursed by any funding source for construction financing costs and holding costs and/or has equity at risk in the project. In general, fees should also be lower for "easy" projects -- such as acquiring and selling homes in good condition that require little or no rehabilitation. Sometimes fees are established as a specific dollar amount per dwelling unit; this may be appropriate in projects where the per-unit development costs are relatively low. For example, 15% of a $40,000 total development cost may not be sufficient incentive for a developer to participate. Finally, it is generally not a good practice to both pay a fee and also reimburse the developer for staffing and other internal costs; this raises the possibility of "double dipping."

OPERATING PRO FORMA

The Operating Proforma worksheet is designed to summarize a rental project's bedroom distribution, income targets, operating income and expenses, net operating income (NOI) before debt service, estimated debt service (from the Operating page) and the NSP gap financing needed, if any. This example shows only a single rental unit and should be adapted as needed by the individual project.

  • First enter the Project Name, Developer Name and Address of property.

  • Enter the number of dwelling units of each type. A proforma could be used for several scattered-site units in one project, but with single-family rentals, the pro forma will typically be for a single dwelling unit, though it might be for a 2-4 unit property.

  • Enter the estimated monthly rental amounts. These should be based on "rent comparables" of similar units in the vicinity of the project, in conditions similar to the after-redevelopment condition of the rental unit(s) in the project.

  • No "other income" is included because single-family rentals do not have income from sources such as common laundries or renting a function room.

  • Next, enter your project's estimated annual expenses in the expense line items. These should be based on past experience of the developer or data obtained from similar types of rental projects. Maintenance costs of detached or semi-detatched single-family rentals are typically higher than for low-rise apartments. However, tenants in scattered-site rental units are typically responsible for grounds maintenance, per their leases.

  • Net operating income (NOI) is calculated by subtracting total operating expenses from gross effective income. This indicates the amount of income available to pay debt service and provide for "debt service coverage."

  • "Supportable debt" is then automatically calculated by a formula based on the NOI and the assumptions in the "supportable debt service calculation" grid. In this example, the calculation assumes a debt service ratio of 1.2, which means that the NOI must be 1.2 times (or 20% higher) than the amount available for debt service. The debt service amount is also calculated automatically based on the supportable debt amount.

20-YEAR CASH FLOW PROJECTION

It is a standard requirement of lenders for borrowers to provide a multi-year cash flow projection for a period of years equal to the term of the loan. This projection spreadsheet allows users to enter assumptions about inflation in rents and operating costs which automatically calculate increased income and expense amounts for each year. This projection is used primarily to demonstrate that the debt service can be paid in each year.

The above guide and template is an adaptation from the U.S. Department of Housing and Urban Development. To learn more, or to download the original template, click HERE.

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