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Assignment 2.pdfFinancial Breakdown showing Net Operating Income and Return on Equity.
(Source: LDEV 699 Professor Bentley Scott)
(Source: LDEV 699 Professor Bentley Scott)
The graphic pictured to the left is a full cost analysis break down for an apartment building in Dallas, Texas. I created this graphic for a project but I believe it is an excellent example of a real proforma. Development projects are typically defined in the most basic financial terms by their cap rate. The cap rate is simply the ratio of net operating income(NOI) divided by the perceived valuation of the property. This graphic shows just how the net operating income is calculated.
Defining the cap rate of a property can become difficult when trying to calculate it in terms of expected future rates. Either party, buyer or seller, may plug in numbers that they feel are more correct or benefit them.
This graphic also depicts the estimated ROE or return on equity. ROE is calculated by adding the NOI to the Debt service. This metric is of significant importance to investors because it is an easy way for them to calculate potential profit.
This type of break down of information is observed and distributed for almost every development project. The proforma is essential in calculating the perceived return on an investment and development will always be driven by the potential for profit.
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