Pro Formas

October 4, 2017

Broadly speaking, a pro forma (“as a matter of form” in Latin, and sometimes written as ‘proforma’) is a summary of cash inflows and expenditures by 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 documentation is often carefully scrutinized by lenders and equity investors in a real estate project, and is an important concept for you to be aware of.  

In the world of real estate investing, a Pro Forma is a document showing the net cash flow of a property, accounting for the income and expenses throughout the lifetime of a real estate project. The real estate Pro Forma therefore serves as the quantitative backing for the investment thesis, showing how the sponsor or developer arrived at return projections via a comprehensive accounting of cash flow and expenses. As such, the pro forma is often synonymous with “the business plan” for a project.

Here are a list of common and critical components that often appear as line items on a proforma:


  • Net Rental Income
    • Potential gross income = (Rent/SF) x (Rentable SF)
    • – (Vacancy Rate) x Potential Gross Income
  • Any other income the property produces (Ex. utility rub back income from tenants)
  • Income from a capital event (Ex. a Sale (or “reversion”)  of the asset  (only in the last year and when partial sale occurs during the term of the investment or a refinancing of the current loan obligation)


  • Fixed Costs
    • Property taxes
    • Hazard insurance
    • Property security
    • Property management
  • Leasing costs
    • Tenant improvements and upgrades
    • 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

Net operating income (or NOI) is calculated as gross revenue that a property (or properties) generates, less operating expenses. A real estate pro forma is therefore an itemized breakdown of net operating income across each time period of the investment.  

pro forma example

Example pro forma from an actual EQUITYMULTIPLE offering

As an individual investor, you may want to examine a sponsor’s pro forma as a step in your diligence before investing. EquityMultiple and some other platforms perform intensive diligence on sponsor pro formas, scrutinizing operating assumptions, projections of rent growth relative to market trends, and expense figures. This should provide some comfort as far as the underwriting of return projections. If key figures from the real estate pro forma are missing, or seem much higher or lower than your expectations, you should ask the platform’s underwriters and/or the sponsor directly for an explanation.  

We’ll take a closer look at more in-depth real estate pro forma considerations later in this series in the context of specific property types.


Further Reading: Eric Bowlin of IdealREI provides further numeric examples of the real estate pro forma.



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