Issue #35: The Pro forma Proctology

Welcome back, everyone! This week finds me trying not to roll my eyes right out of my skull every time a developer suddenly "discovers" that rental might be worth considering.

SCENE: Industry mixer at an upscale bar downtown. I'm nursing a scotch when Brad, a local luxury condo developer, corners me by the appetizers.

BRAD: "Mills! Just the man I wanted to see. Have you heard about this GST exemption for rental projects?"

ME: "The one that's been around for almost 2 years? No, must have missed it."

BRAD: (missing my sarcasm entirely) "Game-changer, right? And get this—CMHC is practically giving away financing for rental."

ME: "Revolutionary. Almost like these programs were designed to address a housing crisis or something."

BRAD: "Exactly! I'm thinking of pivoting my Riverside Heights project to rental. The market's getting soft for $1.2M condos anyway."

I take a long sip. "Fascinating how rental suddenly looks attractive when you can't sell luxury units. If only there were some kind of... mathematical tool... that could have compared these scenarios from the beginning."

BRAD: (confused) "Like what?"

ME: "A pro forma, Brad. A pro forma."

The blank stare tells me everything I need to know.

Need help making sense of your development financials? Whether you're weighing rental vs. for-sale or just trying to understand why your numbers don't pencil out, LandLogic can help. Drop me a line at [email protected] and let's talk real estate development strategy that doesn't rely on market miracles.

Speaking of financial analysis, you'll never guess where my latest advisory conversation took place...but..

…before we get into that, I had a weird dream that I thought I would share…

Hopefully, it doesn’t mean anything; anyway, onto the main topic…

The Doctor’s Office Development

SCENE: My doctor's office. After “the examination”, I'm sitting across from Dr. Burly in his consultation room, both of us now in more comfortable positions than we were just minutes earlier.

[Is it normal for your doctor to ask you real estate questions during your annual… examination 🥵?]

Dr. Burly: (reviewing my chart) "Everything looks good. While I've got you here, I wanted to pick your brain about something."

ME: (adjusting my collar) "Sure, this is definitely better timing than your last attempt at real estate talk."

Dr. Burly: (chuckling) "Sorry about that. Professional hazard—I tend to multitask. Anyway, I've got this rental bungalow in Hillhurst. With the blanket rezoning, I can build four townhouses there. Seems like a risk-free investment."

ME: "Nothing in real estate is risk-free, Doc. Not even close."

Dr. Burly: "The process seems straightforward. Demo the bungalow, build the townhouses, sell them for a million each. Four million gross on a property I paid $600K for ten years ago."

ME: "Have you... put together a pro forma?"

Dr. Burly: (confused) "A what now? Listen, I did the math. It's simple arithmetic."

ME: "Simple like diagnosing a cold, or simple like performing neurosurgery?"

Dr. Burly: (laughing) "Fair point. So what's this pro forma thing?"

ME: "It's a comprehensive financial model that compares scenarios—like whether to build 'for-sale' townhomes versus holding rental units, or even just selling the land outright."

I pull out my tablet and sketch a quick outline of major development cost categories.

ME: "Let's break this down properly."

1. COST OF LAND
   Your land isn't just what you paid, Doc. It's what someone would pay you for it right now. In Hillhurst? Probably north of $1.2M. That's your real opportunity cost—what you're giving up by not selling and investing elsewhere. This is the single biggest blind spot for new developers.

2. COST OF CAPITAL
   Even if you're using your own cash, that money could be earning returns elsewhere—that's opportunity cost. More likely, you'll need construction financing at an interest rate of 8-9% (as a non-developer with a higher risk profile). On a $3M construction budget, that's up to $22,500 per month in interest. If your project slips six months? That's $135,000 in additional cost, straight off your bottom line.

3. JURISDICTIONAL REQUIREMENTS
   That blanket rezoning isn't the slam dunk you think it is. First, the City has recently rolled back blanket zoning in several areas, deferring to Local Area Plans as the overriding document. Hillhurst? You better check if you're affected. Second, you'll still need development permits, building permits, and possibly subdivision approval—each with their own fees, timelines, and potential complications.

4. OFFSITE COSTS
   Here's where Calgary developers get blindsided. Our levy system for sewers and utilities is primitive compared to other cities. What looks like adequate servicing on paper can turn into a nasty surprise when Water Resources tells you your four townhomes require upgrading the entire sewer line at the end of your street. I've seen $300,000 surprise bills show up right before permit issuance. And transportation improvements? Even worse, you might be on the hook for traffic signals or turn lanes that benefit the entire neighbourhood.

5. SOFT & HARD COSTS
   "Architecture alone will run you $60-80K. Engineering another $30-40K. Then add legal, accounting, marketing, and project management—easily another $75K. That's before you hammer a single nail. Then there's construction itself—coordinating framers, plumbers, electricians, drywallers, and dozens of other trades, each with their own supply chains and scheduling constraints. In today's market? Budget $250-325 per square foot for quality townhomes. And don't forget contingency—at least 10%, or you're gambling."

Dr. Burly: (looking increasingly concerned) "This sounds... significantly more complex than I anticipated."

ME: "That's because it is. In development, you can do everything right and still get hammered by factors beyond your control: market shifts, interest rate changes, material price fluctuations. Your $4M revenue projection? Better stress-test that. What if the market only supports $950K per unit? Or $900K? Your margin can evaporate quickly."

Dr. Burly: "So when I hear about those big development projects..."

ME: "They're not making anywhere near the total project value in profit. On a project your size, a 15% profit margin would be considered good. That's $600K on your $4M revenue—if everything goes perfectly. But with typical delays and surprises, many projects end up in the 5-8% range."

Dr. Burly: "Maybe I should stick to medicine."

ME: "Or at least let LandLogic review a proper pro forma before you decide. We'd compare your current rental income to both a for-sale scenario and the option of simply selling the land."

Dr. Burly: (thoughtfully) "That actually makes a lot of sense. How would we start that process?"

ME: "Let me ask you this: is your primary goal wealth preservation, income generation, or capital appreciation?"

Dr. Burly: "Income for retirement, primarily."

ME: "Then we might find that optimizing your current rental or selling to invest in multiple rental properties could better meet your goals than development. But we'd need the numbers to tell us that story."

THE BOTTOM LINE: No serious developer would start a project without a comprehensive financial model, yet I meet doctors, lawyers, and other successful professionals every week who think real estate development is just simple arithmetic.

It's not. It's a complex dance of costs, timing, market factors, and execution that requires careful modelling and constant monitoring.

If you or someone you know is considering their first development project, do yourself a favour: get a real pro forma together first. It might save you from a financial examination that's even more uncomfortable than my doctor's appointment.

Now, let's look at what's happening in the real estate development world this week...

AI In The Fine Print

Last week, we talked about using AI with your lawyer, not instead of your lawyer. Well, here's an interesting parallel I stumbled across this week – an actual AI clause in a consulting agreement.

My first thought? Am I working with dinosaurs? Because this was the first time I've seen one.

Curious, I conducted some deep research with ChatGPT on incorporating AI clauses into consulting agreements (link to output). [Roy, please excuse my primitive prompt, I had a deadline here.] After all, I use AI in virtually every aspect of my business these days – from drafting emails to analyzing market data.

Summary from Chatgpt:

The legal consensus is pretty clear: being transparent and incorporating relevant contractual clauses means you can leverage AI's benefits while staying onside of legal and ethical obligations. This approach, while not mandated by law, is quickly becoming the de-facto standard for prudent business practice in the AI era.

Here's an example of an AI clause you might consider for your own agreements. Note that this doesn't absolve anyone of liability, but it does create clarity around AI usage:

Other Stuff I Saw This Week

🏗️ From Rubble to Rebuilding

An Australian company has developed container-sized factories that transform war debris into interlocking building blocks for Ukraine's reconstruction. One unit produces 8,000 blocks daily – enough for three houses weekly. Makes me wonder about incorporating disaster resilience into our local developments.

Watch the Video

📈 Saskatchewan Leads Nation in Housing Starts Growth

Saskatchewan topped all provinces with a staggering 96.5% increase in urban housing starts in Q1 2025 compared to last year. In March alone, they saw a 160.8% year-over-year jump, with multi-unit dwellings surging 193.3%.

I'm only including this because Kirsten was born 10 feet from the world-famous Moose's ass in Moose Jaw.

Read the Full Article

🏌️ Delacour Plans Resort-Style Golf Community

Talk about déjà vu. A new Calgary-based developer just acquired 315 acres east of Calgary for a resort-style community with golf course views and large lots. The project will feature 50-65 foot wide lots with homes ranging from 1,500 to 3,500 square feet, starting around $700K. I'm almost certain I was involved in this exact parcel back in 2008 when I was with [REDACTED]. The 480-lot approval looks familiar, though they're now targeting a much more upscale product with the "elevated barn" aesthetic. The cycle of development continues—what's old is new again.

Read the Full Article

📉 Trade War Casts Shadow Over Real Estate

RBC Economics reports trade war concerns are chilling Canadian real estate. Fraser Valley sales down 26%, Toronto 23%, and Calgary 19% year-over-year. Only Edmonton (1%) and Montreal (12%) saw growth. Meanwhile, listings are up everywhere – Calgary's increased 27%. Despite the downturn, we're still performing above our decade average, but the trend is concerning.

Read the Full Article

👉 Facing development challenges that keep you up at night? Whether it's navigating byzantine zoning bylaws, optimizing your pro forma, or finding that perfect strategic positioning in a crowded market, I've seen it all in 30 years in the development trenches.

Here's how I can help:

• Strategy Sessions: One conversation could save you six figures in avoidable mistakes

• Deal Analysis: Get a second set of experienced eyes on your numbers before you commit

• Development Roadmapping: Clear, actionable plans that anticipate the potholes ahead

• Stakeholder Navigation: Learn how to speak the language of planners, politicians, and partners

Don't waste time reinventing the wheel. Every month you spend figuring things out on your own is another month of carrying costs eating into your returns.

Hit reply with "DEVELOPMENT 911" and we'll set up a quick call to discuss your specific challenges. No obligation, no sales pitch – just straight talk about your project and how I might be able to help.

Alternatively, reply with your biggest current development headache, and I'll send you my quick take on the perspective at no charge.

See you next Friday.

Cheers,

- Greg

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