Pro forma Mistake Stories/Advice
Just figured out that I made a pretty big pro forma error on a development project.
I missed some impact fees in my development budget and it looks like it’s going to be about a $2m bust. We are weeks away from breaking ground, have debt and equity engaged, and just wired deposit on a loan.
Not sure that it’s going to tank the project (15 bps on the yield) but it definitely is a bad look for me/the company and I am a worried our equity could walk. I’ve spent the last few days squeezing on everything on the budget but no luck so far in reducing other line items.
Has anyone made a mistake like this before?
Not sure how junior or senior you are, but did nobody else review the budget? Seems like something that should have been caught when doing budget reviews with the broader team.
I’m mid level at a small shop with a two person team + the owner - no one else really reviewed any of the costs before it went out. City did not include the fee in their calculation as it is collected by another entity.
How do these budget reviews usually go in your experience?
I'd make sure someone else is reviewing something as important as that to get a second set of eyes on it. Also wouldn't hurt to look at past budgets if they're available to check the boxes/make sure no line items were missed when finalizing the budget.
Yikes. Good luck.
I'm not sure I've ever had one that close to the deadline, but taxes can always throw a model for a loop in unexpected ways. Or insurance.
If there's a positive spin here, it's that institutional inertia is a real thing. If everyone is already in "do the deal" mode, they'll probably swallow it even if they find a way to make you pay for the mistake. If they're already looking for an off ramp though...
Agreed that if you’ve made it this close to the closing table then I wouldn’t anticipate this killing a deal - that said, it might kill your firm’s profit & your sleep schedule over the next couple weeks. But you got the deal to this point, you’ll figure out a fix.
Also, totally opposite opinion from another comment… having been on both debt & equity side, you need to tell them both asap. As lender, I may cause a material delay for a last minute surprise; as equity provider, I may never do another deal with you (especially if you tell me post closing). Development is a long process & you don’t want to go thru it without the trust of your partners.
Agree with @CRE here on institutional inertia. If it was a smaller deal a $2mm mistake is huge but 15 basis points shouldn’t really make or break a deal on the equity side of the table. Lender can be a bit stricter if you are now crossing certain certain benchmarks (e.g., already maxed out your loan proceeds based on a certain DSCR and this 15 basis points now screws everything up).
I've been in a similar situation before - Don't get down on yourself this happens in development. Do you need the additional $2mm to close? I wouldn't bring it up with the bank but you should let the equity know asap.
If this is a cost that can be delayed until TCO i wouldn't even tell anyone and figure it out later.
I’ve made every model mistake you can make. One time I sent equity a model with the land price off by $1.5 MM. I sent them an update later that week. In the email, I listed like 7 immaterial model changes, with “updated land cost” buried in the middle. They still went through with the deal.
The next week I realized that my YOC calc wasn’t picking up some expenses (I made the textbook mistake of adding a row to the end of a list, and the sum formula didn’t pick up the new row). The difference was 10 bps of yield on a pretty tight deal. I made a judgement call and sat on this one until we got SD pricing, where I got bailed out by a budget bust that hid the yield calc when I updated it.
I missed $2 MM of impact fees once too!
Not to make light of these errors, but anyone who has been an analyst with a pipeline of 5-10 active deals at once has made some dumb errors like these at some point. Learn from it and know that next week everyone is going to have some new fire to put up. People are more focused on their own mistakes than yours.
And you can tell yourself what I tell myself - the model is going to be wrong no matter what!
Holy shit this puts things in perspective! You made all of those errors and live to tell the tale.
It's not a great look, but ultimately if the equity walks it isn't your fault. This is the owner's responsibility to catch, and thus to deal with.
Not a pro forma mistake but when I was in REPE, I once put the wrong return on cost in the metrics table of our prelim IC delivery. I was a really young analyst so the difference between a 6.5% and an 8% ROC meant nothing to me (to be honest, I didn't even understand what a ROC was) - it was just a typo that was not caught. Get into the room and our CEO immediately says something to the effect of "why are we doing this deal, this ROC sucks". The VP running the deal tried his best to skate around it, but ultimately IC passed on the opp for a couple of reasons including the thin ROC. We walk out of the meeting and the VP asks me to triple check that number. Yep, turns out the deal was an 8% ROC, not a 6.5%, and I just messed up. Immediately go to my VP, expecting that he would march down to the CEO's office and tell him the real return on cost and push IC to re-evaluate. But he said that's fine, don't let it happen again, and never said anything else about it.
With some hindsight, I've come to realize that the VP not catching the error was also not a great look for him, and that may have been some of the reason he didn't push it. But regardless, certainly saved my butt.
Don't know if this will be helpful or appreciated, but show yourself some grace. You didn't kill anyone and your deal isn't going to save the world. Kind of like a weather forecast, reality won't ever be exactly as predicted, but it will be similar if you were diligent.
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