What it is
A pro forma is a forward-looking financial model of a property. It projects income, operating expenses, net operating income and often cash flow after debt service over a hold period, typically three to ten years. Where the T-12 says what happened, the pro forma says what the sponsor expects to happen.
What's in it
A typical commercial real estate pro forma includes:
- Revenue assumptions. Rent growth, lease-up pace, renewal probability, market rent for vacant space, and other income.
- Vacancy and credit loss. Usually a percentage of gross potential rent.
- Operating expense assumptions. Growth rates per line item, plus any expected changes such as a tax reassessment.
- Capital plan. Renovation budget, timing and expected rent premium.
- Debt. Loan amount, rate, amortization or interest-only period.
- Exit. A sale or refinance at an assumed exit cap rate.
| T-12 | Year 1 | Year 3 | |
|---|---|---|---|
| Effective gross income | $3,412,000 | $3,548,480 | $3,801,200 |
| Operating expenses | $1,265,200 | $1,303,156 | $1,383,400 |
| Net operating income | $2,146,800 | $2,245,324 | $2,417,800 |
The figures are illustrative.
How lenders treat it
It depends on the loan.
- Permanent lenders mostly underwrite in-place NOI. The pro forma is context, not the basis for loan size.
- Bridge lenders underwrite the business plan. They size partly on in-place income and partly on projected stabilized income, and they test whether the exit refinance works.
- Construction lenders rely on the pro forma for stabilized value, alongside LTC.
In every case, the lender will rebuild the projection with its own assumptions. Your job is to make yours easy to check.
What makes a pro forma credible
- Start from actuals. Year 1 should be traceable to the T-12 and rent roll.
- Support rent assumptions with comps. Market rents you can't back up get discounted.
- Show expense growth. Flat expenses for five years is a red flag.
- Be conservative on the exit. An exit cap rate at or above the going-in rate is easier to defend.
Common mistakes
- Presenting pro forma NOI as current NOI. It erodes trust immediately.
- Hockey-stick rent growth. Aggressive growth in years one and two with no capital plan behind it.
- Underwriting the renovation premium before the renovation is funded.
In the package
Show the T-12, Year 1 and stabilized columns side by side, with assumptions listed. Dori populates your own underwriting model from extracted actuals and benchmarks expenses against comparable assets, so the starting point is solid before you project anything.