The Shopping Center Development Proforma

The Shopping Center Development Pro Forma

Reprinted With The Permission From The Real Estate Finance Journal
By Richard J. Brunelli

Shopping center development feasibility calculations often begin “on the back of a napkin” when a developer meets the land owner and begins to negotiate a price. Large or small, the same four elements of development are estimated, added, carried, and compared to an average income projection to create a quick “feel” for feasibility. Those elements, which add up to the total cost, are:

Land cost;

Soft costs;

Site work; and

Hard (building) construction cost.

The total development cost must be carried via some combination of borrowed monies and equity, and the developer must factor in an expense and vacancy factor to project the profit picture. Here is how a “back of the napkin” pro forma may shape up for a typical 220,000 square-foot strip center in northern New Jersey.

Land costs $ 42.50 per square foot

Soft costs $ 16.78 per square foot

Site work $ 15.16 per square foot

Hard construction $ 40.67 per square foot

Total cost $115.11

Cost to carry (constant) 0.1143

$ 13.16

Add 10% to cover

vacancy and expenses

and return on equity X 1.1

Average Rent Required $ 14.48

Sophisticated shopping center developers today are using microcomputers to develop more careful forecasts. Each line item must, however, be originally estimated or based on realistic information and professional assumptions. An example of the “back of the napkin” pro forma expanded into a detailed schedule projection is shown in Table 1.

Inexperienced developers will find it difficult to estimate many of the line items that need to be filled in the development budget, especially when they have just begun to consider the purchase of a particular property.

A due diligence period of two to three months is usually required to gather basic information necessary to take most of the guesswork out of the development budget. Unfortunately, with the approvals process being so time-consuming and unpredictable, early pro-formas are rarely accurate and must be updated as new information on costs, projected income, and financing rates becomes available. One of the biggest unknowns facing most shopping center developers today is the cost of off-site improvements and other extraction’s that various governmental authorities demand as a condition of approvals.

Interest Unpredictability. The most unpredictable soft cost is the interest required to carry the project during construction and through a lease-up period until the rents are stabilized. Sometimes, due to expiring option periods, the land is purchased months prior to the developer’s being ready to start construction. Carrying that land could be extremely expensive.

On-site work can usually be budgeted carefully early in the development process when detailed improvement cost estimates are provided by the project




Raw Land Cost $334,000 per acre x 28 acres $42.50 $9,350,000

Soft Costs

Option deposit funds 150,000

Project management fee 50,000

Approval process overhead 120,000

Architects, design, landscape, construction 127,780

Engineer (site) 90,000

Approvals attorney 20,000

Engineer (environmental) 20,000

Engineer (traffic) 10,000

Construction loan fee (1%) 200,000

Permanent loan fee (1%) 200,000

Interest on land, soft costs and site work 450,000

Interest on hard costs during construction 488,820

Construction attorney 20,000

Leasing attorney 25,000

Financing attorney 10,000

Taxes during construction 50,000

Lease-up reserve, lost rent until stabilization 500,000

Leasing fees and marketing 770,000

Township fees (construction) 40,000

County and state fees 20,000

Other permits, sewer, water 20,000

Developer’s fee 250,000

Insurance 60,000

Total Soft Costs $16.78 $3,691,600

Site Work

Clearing 80,000

Grading and fill 320,000

Storm water 392,000

Water 5,000

Sewer 495,000

Electric 10,000

Gas 10,000

Paving, curbing, sidewalks 715,000

Lighting 56,000

Landscaping 61,600

Pad work 50,000

Pylon signs 40,000

Tap fees 75,000

Contaminated soils removal 270,600

Off-site work 756,000

Total Site Work $15.16 $3,336,200

Hard Construction Costs

Dry goods anchor 100,000 sf 30.65 $ 3,065,000

Supermarket 55,000 sf 54.00 2,970,000

Sub-anchor 12,200 sf 42.00 513,240

Satellite 5,593 sf 38.00 592,547

Satellite 15,593 sf 41.00 639,327

Satellite 15,593 sf 41.00 639,327

Pad 3,000 sf 0 0

Pad 3,000 sf 0 0

Total 220,000 sf $ 2.40 $ 528,000

Contingency & general conditions

Total Hard Construction Costs $40.67 $ 8,947,441

Total Development Costs $115,11 $25,325,241

engineer. Unusual subsoil conditions can, however, create enormous unexpected costs. Conditions from rock to quicksand can create an economic nightmare. More recently in New Jersey, developers have been required to remove any contaminated soils from a site before construction can commence. Therefore, site




Dry goods anchor $10.00 100,000 $1,000,000

Supermarket 13.00 55,000 715,000

Sub-anchor 17.00 12,220 170,000

Satellite 21.00 15,593 327,460

Satellite 21.50 15,593 335,257

Satellite 23.00 15,593 358,647

Pad 20.00 3,000 60,000

Pad 25.00 3,000 75,000

Total Square Feet 220,000

Total Base Rent $3,041,364

Average Base Rent

Dividing by 220,000 sq. ft. $13.82/sf


Common area maintenance 0.75/sf $ 165,000

Insurance 0.40/sf $ 88,000

Real Estate Taxes 1.25/sf $ 275,000

Common Area Maint. Mgmt. 0.11/sf $ 24,750

Total Reimbursements $ 2.51/sf $ 552,750

Gross Income 3,594,114

Less vacancy @ 5% on noncredit income –56,945

Gross Income After Vacancy $ 3,537,169

Operating Expenses

Common Area Maintenance $ 165,000

Insurance 88,000

Real Estate Taxes 275,000

Management Fee @ 4% of total base rent 121,654

Replacement reserves @ 2% of total base rent 60,827

Total Operating Expenses – 710,481

Net Operating Income $ 2,826,688

may need to be deemed clean by an environmental engineer and approved as clean by a governmental authority before an accurate projection of the cost of site work can be formulated.

There is a Catch-22 with regard to estimated hard (building) construction costs in the early stages of shopping center development. Unlike the construction of an office building, where the developer and architect control the specifications of the building to a large extent, a shopping center is built around a variety of anchor, sub-anchor, and satellite tenants—many of whom require turnkey or special delivery specifications.

Tenant Costs. Typically, a developer will have a good idea as to the types of anchor tenants best suited for a particular site. The cost of constructing those tenants’ prototypical plans can be estimated, or actual costs capped, during the early stages of lease negotiations. Negotiations with anchors often commence before the site is even tied up. Developers are anxious to see what the anchors will pay so as to determine the economic feasibility of the project before risking option monies on a property. In many cases, developers will work closely with certain anchor tenants and/or their broker representatives to project building costs and the income stream those stores will ultimately generate, as shown in Table 2.

On the income side, an accurate projection of satellite rentals is crucial to success. Clearly, the satellite rentals, and often the last 10 percent of the space in the center, provide the basis for the developer’s return on investment. Developers not familiar with a market’s rental rates should consult with local leasing experts early in the consideration of any property.

Finally, financing rates and terms must be projected, as shown in Table 3. Since rates may fluctuate by several points from the time a property is controlled by contract to the time a permanent loan is placed, it is best to prepare perceived worst-case and best-case scenarios with regard to interest rates an debt coverage ratios. This is essential to projecting the amount of equity required and bottom line return on that equity.


Net Operating Income $ 2,826,688

Divided by capitalization rate 9.5% 0.095

Value on sale 29,754,610

Debt coverage at 1.2 ratio, income earned,

net operating income + 1.2 = 2,355,573

Assume financing constant

interest and amortization

@ 11.43; $2,355,573 + 11.43 =

Total Available for Permanent Loan $20,608,690

Total project cost 25,325,241

Less permanent loan – 20,608,690

= Equity required $ 4,716,551

Cash on Cash Return

Net Operating Income $ 2,826,688

– Permanent loan payment (constant) $ 2,355,573

Cash Flow $ 471,115

Cash on Cash Return = Cash Flow 10.01 %


Sale Projection:

Gross sale value 29,754,610

Less closing expenses, legal & commission (3%) – 892,638


Total Project Cost 25,325,241

Net Profit On Sale $ 3,621,372

Profit as a Percent of Total Equity 76.78 %

Often, the only way a developer will generate an attractive profit from building a center will be by incorporating a large developer’s fee into the pro forma and then planning to sell the property on completion to an institution, whose cost of money will be significantly lower than conventional commercial mortgage rates. In many cases, a developer may have no choice but to sell a project upon completion.

Summary. Careful attention to the proforma throughout the development process will help ensure the success of the project or, at least, the limitation of losses. A Line-by-line review of each and every cost item by the developer and the developer’s trusted associates should be conducted on a periodic basis—ranging from weekly to monthly, depending on the stage of the project.

As in many businesses, experience, hard work and careful planning usually lead to success. When it comes to shopping centers, let the pro forma be your guide.