Understanding Real Estate Pro Formas

March 4, 2021

A version of this article was originally published on October 4, 2017.


Broadly speaking, a pro forma is a summary of financial projections or cash inflows for a business entity. While the Latin origin of the term may imply that the real estate pro forma is produced merely for appearance’s sake, this document is often scrutinized by lenders and investors. While conducting your own diligence on a CRE opportunity, understanding the pro forma will enable you to make a more informed investment decision.

Key Takeaways:

  • Real estate pro formas represent revenues and expenses of a property or portfolio or properties (often based on a variety of assumptions) producing a projected net operating income (NOI) over time. 
  • NOI is calculated by adding up the total gross revenues generated by a property, minus the sum of the total operating expenses for a given period of time.
  • Pro formas are the theoretic result of the implementation of business plans by owners,  sponsors, or operators, and thus do not necessarily match up with actual revenues and expenses.
  • As part of their due diligence, potential investors should examine a property’s pro forma to better understand potential future performance.

What are Real Estate Pro Formas?

In commercial real estate, a pro forma is designed to demonstrate a property’s projected net operating income for the anticipated lifetime of a project. The real estate pro forma serves as a key quantitative input to substantiate the investment thesis, demonstrating how the sponsor or developer arrived at their return conclusions. Simply put, the pro forma is a numeric representation of the business plan for a project.

Common Pro Forma Line Items

Each real estate investment’s pro forma is unique. The level of detail and number of assumptions required to produce a pro forma is one thing to consider when assessing the soundness of the business plan. Below are a few categories that typically appear on pro formas:


  • Net Rental Income: Rent x Occupancy Rate (computed on a per square foot / unit / room basis). For example, an 8,000 square foot property with market rent of $20 per square foot would result in $160,000 of net rental income assuming 100% occupancy. If the property is 90% occupied, net rental income would be $144,000.
  • Any other income the property produces: This might include income from items such as utility reimbursements, application fees, laundry, vending machines, etc. 


  • Fixed Costs
    • Taxes
    • Insurance
    • Property security
    • Property management
  • Leasing costs
    • Tenant improvements and upgrades
    • Leasing commissions paid to brokers
    • Marketing of units
  • Property improvements
    • Major remodeling (building, grounds, electric and plumbing systems)
    • Modernizing expenditures (WiFi, security systems, electronic entry)
    • Expansion of rentable square footage
    • Other major repairs
  • Capital Events 
    • Sales proceeds (for partial sales or sales of the entire property)
    • Refinancing proceeds (any proceeds in excess of the original mortgage – often after the implementation of some time period of the business plan or increase in cash flow at the property)

Sample Real Estate Pro Forma

In the example below, an operator estimates the property’s total revenue to grow from $152,507 in 2021 to $176,140 in 2024. During the same period, total expenses are anticipated to increase from $39,837 to $44,271, resulting in NOI of $131,869 by March 1, 2024. 

Pro forma sample

Example pro forma from an actual EQUITYMULTIPLE offering

Why This Matters

Pro forma calculations are formulated to memorialize (in numbers), the sponsor, owner, or operator’s expectations for a property. This numeric exhibit helps investors better understand the projected cash flows or returns produced by a property. In the example above, NOI increases approximately $20,000. Provided the property’s cap rate stays constant, the property value would then increase by the same percentage as the NOI (20%).

The Bottom Line

You may want to examine a sponsor’s pro forma as a step in your due diligence before investing. If the numbers do not make sense, are missing certain figures, or appear too conservative or aggressive, ask for an explanation or for supplemental information. As part of its investment process, EquityMultiple performs extensive underwriting and stress scenarios to a sponsor-provided pro forma; scrutinizing operating assumptions, projections of rent growth relative to market trends, and expense figures to assist investors in making an educated investment decision. 

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