Preliminary Pro Forma\n\nBuild a back-of-the-envelope pro forma to decide whether a deal is worth pursuing before spending real money on diligence.

Going Deeper (Intermediate)

A preliminary pro forma is a rough financial model to test whether the deal works before deep spending: total costs (land + soft + hard + financing + contingency) vs. expected revenue (sales or stabilized value) = profit/margin. A quick go/no-go.

Advanced / Pro-Level

Make the back-of-envelope rigorous enough to trust:

• Residual land value — start from target profit and back into what you can pay for the land.
• Test a profit margin on cost (developers often target ~15–20%+) or, for income product, yield-on-cost vs. the market cap rate (the spread is your reward for risk).
• Sensitivity-test the key drivers — sale price, costs, timeline, interest rate — because development is uncertain. The prelim pro forma is iterated as DD sharpens the numbers; never let a thin margin survive a small bad assumption.

Practice Challenge

Your prelim shows a 6% margin on cost, and it assumes everything goes perfectly. Why is that a likely "no"? (Answer: a 6% margin leaves no room for the cost overruns, delays, and price softening that development reliably delivers — a small adverse swing wipes it out; developers want a margin/spread thick enough to survive sensitivity (often 15–20%+), not a best-case sliver.)

In Practice

A developer spends $50k on engineering before realizing the deal never penciled. A back-of-the-envelope pro forma first would have saved it. Run the numbers before you spend.

Common Mistakes to Avoid

• Spending on diligence before a rough pro forma
• Optimistic numbers with no margin
• Ignoring carrying and soft costs

Takeaway: Run a quick pro forma first; if it doesn't pencil on the back of an envelope, walk.