Investor 101: What is a commercial construction loan pro-forma?

In March 21, 2018

Header image: Investor 101 - What is a commercial construction loan pro-forma?

A significant element of the loan approval process for investor-owned commercial construction projects, a pro-forma is a form of paperwork requested from EVERY lender when it comes to a new build that is not owner-occupied. So what is a commercial construction loan pro-forma? It projects the financial path forward once a loan is approved.

As part of the paperwork to help a bank balance risk with the investor’s ability to repay a loan, it forecasts what is expected to happen financially as the project moves through completion of the build, leasing out the space and stabilization.

Is a pro-forma exclusive to construction loans?

Pro-formas aren’t exclusive to commercial construction loans, or even lenders. It can be any business document that predicts or forecasts an expected result. Some use them to project cash flow as part of a larger business plan, it’s commonly used to outline expected changes from a merger or acquisition and, in this case, as a financial outlook for a construction project to give a lender confidence in the project and a timeline to work with for the lending process.

Do owner-occupied projects need them, too?

Most owner-occupied construction projects won’t require a pro-forma to secure funding unless the new building is an expansion related to a significant change in business operations and revenue.

For example, a manufacturing business who would like to launch production of a completely new product, in an effort to remain competitive and grow. The commercial construction project is an expansion designed to focus exclusively on the new product line. Because they’ve never sold it before and the product targets a fresh market for the business, the financial and operational track-records they’ve established for their current product line wouldn’t necessarily predict their success with the new product.

In this case, the pro-forma is about the business and its expected ability to repay the loan more than the specific owner-occupied construction project.

Are you thinking about an owner-occupied construction project, instead of an investment property? Learn about the basic paperwork requirements for a commercial construction loan here.

What timeline should an investor’s construction pro-forma follow?  

A construction loan pro-forma projects the monthly expenses of a project throughout the construction and lease-up period when costs and revenues fluctuate the most, then annualizes projected revenues and expenses  after stabilization, which is reached once the property has reached a 90-95% occupancy rate of its leased spaces.

A five- to ten-percent vacancy rate is typical.    

The pro-forma timeline should cease when the building is considered stable enough to follow a standard profit and loss format. This may be as short as 12-18 months or longer for several years.

What should the pro-forma include?

A construction loan pro-forma is a written document forecasting the financial outlook of a new building from the moment funding is secured to pay for its construction until the completed project is financially stable for its expected use.

Here’s a quick example. For a new build, the first month might include the land purchase and preparation of the site, showing a net loss. The second month includes pouring the foundation, roughing in the plumbing and site work to put in utilities, again showing a net loss. By month six, all construction costs and losses are done, and month seven includes the build-out costs plus any big ticket equipment required to begin. By month nine, all expenses are completed and the property is in its lease-up/occupancy phase. Therefore, the pro-forma details out expenses through the first nine months, then details a monthly projected profit and loss based on lease-up/occupancy until stabilization.

Should the format of a pro-forma vary based on type of project?

At the Mesa branch of Horizon Community Bank, we’re currently helping two different borrowers with their pro-forma projections.

One borrower is an investor hoping to build a boat and recreational vehicle storage facility, and the other plans to develop a new 92-bed assisted living facility.

While both pro-forma’s will follow the same basic format, the storage facility expects to obtain 100% of their revenue from leasing space, but the assisted living facility will have multiple revenue streams, ranging from apartment rentals to health care costs and sales from medical devices.

Each pro-forma will have different line items for their expenses and income, but otherwise follow the same format for the costs to build the commercial property, income from leasing out the available space and other details through stabilization.

Whether an investor is seeking funding for a medical office plaza, a small office building, a major retail space, a storage facility or something else—and no matter which bank is expected to provide the funding—the pro-forma is likely to follow an expected format. No drastic customization is required beyond the calculations.

How do I get one?

While someone can work with other partners to complete a pro-forma, such as a general contractor, marketing copywriter or accountant–and use a form or guidance provided by the lender–a pro-forma must be completed by the borrower.

Most lenders are happy to provide support to the borrower as they create the pro-forma, but cannot do it for them.

We recommend speaking to your lender before investing significant resources into creating a pro-forma to be sure it’s necessary.

If you have questions about how to obtain a commercial construction loan, the paperwork or the process, please contact us today, or come into one of our Arizona locations. We’re happy to provide a no-obligation consultation to help you move forward.

Horizon Community Bank is an SBA- and USDA-approved lender.  

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