Pro Forma Statement of Cash Flow

In order to calculate the figures that measure a property’s financial performance, it is important to understand the components of the pro forma statement. The pro forma statement of cash flow is an annual statement that lists income and expenses for the property. It includes revenue and operating expenses through net operating income and before-tax cash flow.

Cash flow is the amount of spendable income from a real estate investment; it is the amount of cash available after all expenses and debts have been paid. It is an indicator of overall financial health of a property.

The pro forma cash flow statement below illustrates the components for computing before-tax cash flow.

   Gross Potential Income (GPI)
- Loss to Lease
- Vacancy and Collection Loss
=  Net Rent Revenue
+  Miscellaneous Income
+  Expense Reimbursements
=  Effective Gross Income (EGI)
- Operating Expenses
=  Net Operating Income (NOI)
-  Annual Debt Service (ADS)
=  Before-Tax Cash Flow (BTCF)

The pro forma statement illustrates some important financial measurements used in real estate. It shows that gross potential income (GPI) is adjusted to give effective gross income (EGI), which in turn is adjusted by operating expenses to produce net operating income (NOI). NOI is a commonly used measure of financial health in real estate.

Gross Potential Income
Cash flow is not just money in movement. It involves planning and a bit of calculation. The first step in computing cash flow is determining the gross potential income.

Gross potential income (GPI) is the maximum rent that can be derived from 100% occupancy and 100% collection of rents over the course of a financial period (normally, a year).

To compute gross potential income, assume that all space/units are occupied, all rents are paid in full, and all payments are received on time.

Rent Roll
A rent roll is a tool used to identify sources of income. It provides a good picture of a property’s GPI. In a residential property, a rent roll is a listing of each rental unit described by size and type, rental rates and other payments received.

At commercial properties, a rent roll generally does not indicate payments received; these are reported separately (e.g., a collections summary) because of the payments in addition to rent, such as pass-through charges and tenant improvement allowance reimbursement. However, it may include information about rent escalations and when they apply. In a shopping center, such a listing may be called a tenant roster.

Loss to Lease

Loss to lease is the amount of money lost due to rents being less than the maximum market rents, or GPI. This measurement is most important when evaluating a property in a rising market in order to project future rent increases.