Brandon Donnelly

One common mistake that people make when it comes to development pro forma is assuming that feasibility is easily attainable. It’s not. In fact, it’s best to think of a pro forma as a fragile object that is liable to break if not handled properly. So to that end, here’s a non-exhaustive list of things you may want to keep in mind when trying to both forecast and create the future as a developer:

• As a starting point, you’re safer assuming that your pro forma isn’t going to work. If the numbers look too good to be true or even just really promising — especially at the outset — then there’s a good chance they’re wrong. You’ve likely missed things. Be weary if it feels too easy, especially in our current market, where very little works.
• Cheap land isn’t enough. Just because your land cost feels cheap, it doesn’t mean that your development project will end up being feasible. There are instances and entire markets where even free land isn’t enough. You might actually need a negative land value. Meaning, a subsidy is required to reach feasibility. This is the case with affordable housing.
• Drill down into as many line items as possible. Back-of-the-envelope math — where you just plug in a few cost per square foot assumptions — is fine for an initial screening. But if you’re really serious, you need to get deep into the weeds. Run through the entire process in your mind and think about what might happen, and go wrong. Even with this, you will still miss things.
• Stress test your assumptions. What happens if the city asks you to do X? What happens if the local councillor comes at you with Y? Can your fragile object support them, or will it shatter to pieces? The sensitivity of your fragile object to various stimuli will help you decide whether you want to do the project or whether there’s simply too much risk.
• Ultimately, real estate development is a creative act. You’ll need to come up with creative solutions, and then you’ll need to will your project to life. This is one way to tell that you’re on the right path. It needs to feel really hard. So if your pro forma also feels this way, then there’s a higher probability that you’re narrowing in on something close to reality.