Commercial Real Estate Pro Forma Guide

What Is a Commercial Real Estate Pro Forma?

A commercial real estate pro forma is a financial projection model that estimates the future income, expenses, and returns of an investment property. Investors, developers, and lenders rely on pro forma analysis to evaluate whether a deal makes financial sense before committing capital.

Unlike historical financial statements that look backward, a pro forma looks forward. It projects how a property will perform over a specific holding period, typically 5 to 10 years. Every line item in the model tells a story about assumed rents, expected vacancies, operating costs, debt payments, and eventual sale proceeds.

Lenders use pro forma projections to determine loan sizing, debt service coverage ratios, and overall risk. A well-built pro forma separates serious investors from speculators and directly impacts your ability to secure favorable commercial financing.

The pro forma serves as the foundation for every major decision in commercial real estate. Whether you are acquiring a stabilized asset, pursuing a value-add strategy, or refinancing into a permanent loan, your pro forma must be accurate, defensible, and conservative.

What Revenue Components Belong in a CRE Pro Forma?

Revenue projection is the starting point of every pro forma. Getting this right determines the reliability of every calculation that follows. Commercial property revenue typically comes from three sources: base rental income, additional income, and reimbursements.

Base Rental Income (Gross Potential Rent)

Gross Potential Rent, or GPR, represents the total rental income a property would generate if every unit or space were leased at market rates with zero vacancy. To calculate GPR, multiply each unit's monthly rent by 12 months, then sum across all units.

For multifamily properties, this means accounting for different unit types and their respective rents. For office or retail properties, GPR is calculated using rentable square footage multiplied by the per-square-foot lease rate.

Other Income Sources

Beyond base rent, commercial properties generate ancillary income from parking fees, laundry facilities, storage units, application fees, late fees, pet rent, vending machines, and billboard or antenna leases. These secondary revenue streams can add 3% to 8% to effective gross income depending on property type.

Expense Reimbursements

In triple-net (NNN) leases common in retail and industrial properties, tenants reimburse the landlord for property taxes, insurance, and common area maintenance. These reimbursements must be modeled separately from base rent because they fluctuate with actual expenses.

How Do Vacancy and Credit Loss Affect Your Projections?

No property operates at 100% occupancy forever. Your pro forma must account for two types of income reduction: physical vacancy and credit loss.

Physical Vacancy

Physical vacancy represents unleased space. Market vacancy rates vary by property type, location, and economic conditions. A stabilized Class A multifamily property in a strong market might assume 3% to 5% vacancy, while a Class B office building could reasonably project 8% to 15%.

Always research local market vacancy data from sources like CoStar, CBRE, or Marcus and Millichap reports. Using national averages instead of local data is one of the most common pro forma mistakes.

Credit Loss

Credit loss accounts for tenants who occupy space but fail to pay rent. This typically ranges from 0.5% to 2% of gross potential rent. During economic downturns, credit loss assumptions should increase. Conservative underwriting usually adds credit loss on top of vacancy rather than combining them.

Effective Gross Income Formula

Effective Gross Income = Gross Potential Rent + Other Income + Reimbursements - Vacancy Loss - Credit Loss

This number represents the realistic revenue your property will collect. Every expense and return calculation flows from this figure.

What Operating Expenses Should Your Pro Forma Include?

Operating expenses fall into two categories: fixed expenses that remain relatively constant regardless of occupancy, and variable expenses that fluctuate with property activity.

Fixed Expenses

Property taxes represent the single largest fixed expense for most commercial properties, often consuming 15% to 25% of effective gross income. Insurance premiums are the second major fixed cost. Both require annual escalation assumptions, typically 2% to 4% for taxes and 3% to 5% for insurance.

Variable Expenses

Variable expenses include property management fees (typically 3% to 8% of EGI depending on property type), repairs and maintenance, utilities, landscaping, marketing and leasing costs, administrative expenses, and professional fees for legal and accounting services.

Net Operating Income Calculation

Net Operating Income (NOI) equals Effective Gross Income minus Total Operating Expenses. NOI is the single most important metric in commercial real estate valuation. It drives cap rate analysis, loan sizing, and property value. For a deeper breakdown, read our NOI calculation guide.

A common error is including debt service or capital expenditures in the NOI calculation. These items sit below the NOI line and should never be mixed into operating expenses.

Use our DSCR calculator to see how your projected NOI translates into borrowing capacity.

How Do You Model Capital Expenditures and Reserves?

Capital expenditures (CapEx) cover major property improvements that extend the useful life of building components. Unlike routine maintenance, CapEx items include roof replacements, HVAC system overhauls, parking lot resurfacing, elevator modernization, and facade repairs.

Replacement Reserves

Lenders require borrowers to set aside monthly reserves for future capital needs. Standard reserve requirements range from $200 to $500 per unit annually for multifamily properties, or $0.10 to $0.30 per square foot for commercial properties. These reserves accumulate in escrow accounts controlled by the lender.

Value-Add Capital Budgets

For value-add investments, the pro forma must include a detailed renovation budget with unit-by-unit or space-by-space improvement costs, a realistic renovation timeline, projected rent premiums after improvements, and carrying costs during the renovation period.

The distinction between operating expenses and capital expenditures matters for tax purposes as well. Operating expenses are fully deductible in the year incurred, while capital expenditures must be depreciated over their useful life.

How Should You Structure Debt Service in a Pro Forma?

Debt service is the total of all principal and interest payments on the property's mortgage. This section of the pro forma directly determines cash flow to equity and is the primary focus of lender underwriting.

Key Debt Metrics

Lenders evaluate three critical debt metrics when reviewing your pro forma. The Debt Service Coverage Ratio (DSCR) equals NOI divided by Annual Debt Service. Most lenders require a minimum DSCR of 1.20x to 1.25x, meaning the property generates 20% to 25% more income than needed to cover loan payments.

The Loan-to-Value ratio (LTV) compares the loan amount to the appraised property value. Typical commercial LTV limits range from 65% to 80% depending on property type and loan program.

Debt Yield equals NOI divided by the Loan Amount, expressed as a percentage. Lenders increasingly use debt yield as a sizing constraint, with minimum thresholds typically between 8% and 10%.

Modeling Different Loan Structures

Your pro forma should model the specific loan terms you expect to obtain. Fixed-rate permanent loans produce consistent debt service throughout the hold period. Floating-rate bridge loans require interest rate assumptions and potential rate cap costs.

Use our commercial mortgage calculator to model different loan scenarios and see how terms affect your cash flow projections.

Ready to discuss financing for your next acquisition? Contact our lending team to review your pro forma and explore loan options tailored to your deal.

What Cash Flow Metrics Matter Most to Investors?

After calculating NOI and subtracting debt service and capital reserves, you arrive at Cash Flow Before Tax (CFBT). This figure represents the actual money flowing to equity investors each period.

Cash-on-Cash Return

Cash-on-cash return equals Annual CFBT divided by Total Equity Invested, expressed as a percentage. This metric tells investors what percentage return they earn on their actual cash investment each year. Target cash-on-cash returns vary by strategy. Core investments typically target 4% to 6%, value-add strategies aim for 8% to 12%, and opportunistic plays may require 15% or higher. Learn more in our cash-on-cash return guide.

Internal Rate of Return (IRR)

IRR accounts for the time value of money across the entire holding period, including the eventual sale. It incorporates initial equity investment, annual cash flows, and net sale proceeds after paying off debt and closing costs. Most institutional investors target IRRs of 12% to 20% depending on risk profile.

Equity Multiple

The equity multiple equals Total Distributions divided by Total Equity Invested. An equity multiple of 2.0x means the investor doubled their money over the hold period. This metric complements IRR by showing total return magnitude regardless of timing.

How Do You Build a Sensitivity Analysis for CRE Investments?

A single-scenario pro forma is not enough. Sensitivity analysis tests how changes in key assumptions affect returns, revealing the risk profile of your investment.

Single-Variable Sensitivity

Test each major assumption independently by creating scenarios where one variable changes while others remain constant. The most impactful variables to test include exit cap rate (plus or minus 50 to 100 basis points), vacancy rate (plus or minus 2% to 5%), rent growth rate (0% to 5% annually), interest rate changes (plus or minus 50 to 150 basis points), and operating expense growth (2% to 5% annually).

Multi-Variable Scenario Analysis

Create three to five complete scenarios that combine multiple assumption changes. A standard approach includes a base case using realistic market assumptions, a bull case with strong rent growth and compressed cap rates, a bear case with elevated vacancy and expanding cap rates, and a stress case with recession-level assumptions.

Breakeven Analysis

Determine the exact point at which your investment stops generating positive cash flow. Calculate the breakeven occupancy rate (the minimum occupancy needed to cover all expenses and debt service) and the breakeven rent level (the minimum average rent needed at current occupancy to cover obligations). These breakeven points help you understand your margin of safety.

Need help structuring a pro forma that meets lender requirements? Schedule a consultation with our commercial lending specialists today.

How Do Lenders Evaluate Your Pro Forma?

Understanding the lender's perspective dramatically improves your chances of securing favorable acquisition financing. Lenders scrutinize pro formas differently than equity investors because their primary concern is downside protection, not upside potential.

Underwriting Adjustments

Lenders rarely accept borrower projections at face value. They apply their own underwriting adjustments including market rent verification through independent appraisals, vacancy assumptions that meet or exceed market averages, management fee floors (typically 5% minimum even if actual fees are lower), replacement reserve requirements regardless of property condition, and expense ratio benchmarking against comparable properties.

Stress Testing

Lenders run their own stress tests on your pro forma. They want to confirm the property can service debt even under adverse conditions. Common stress scenarios include a 10% to 20% decline in NOI, interest rate increases of 200 basis points, and vacancy spikes to 15% to 20%.

Documentation Requirements

When submitting a pro forma to lenders, include historical operating statements (minimum 2 to 3 years), a current rent roll with lease expiration schedule, market comparables supporting your rent assumptions, a detailed capital expenditure budget with contractor bids, and third-party market reports supporting vacancy and growth assumptions.

Prepare your pro forma package thoroughly before approaching lenders. A well-documented projection with conservative assumptions signals experience and reduces perceived risk.

What Are the Most Common Pro Forma Mistakes to Avoid?

Even experienced investors make pro forma errors that can lead to poor investment decisions. Recognizing these pitfalls upfront protects your capital and credibility with lenders.

Overly Aggressive Rent Growth

Projecting rent increases of 5% to 7% annually when the market historically supports 2% to 3% growth inflates returns and creates unrealistic expectations. Always anchor rent growth assumptions to historical market data and current supply pipeline analysis.

Ignoring Lease Rollover Risk

Properties with concentrated lease expirations face significant re-leasing risk. If 40% of your leases expire in the same year, your pro forma must account for potential downtime, tenant improvement costs, and leasing commissions during that period.

Underestimating Operating Expenses

New investors frequently underestimate property taxes, insurance increases, and deferred maintenance costs. Using actual comparable property operating data rather than industry averages produces more reliable projections.

Unrealistic Exit Assumptions

Assuming cap rate compression at sale is speculative. Conservative underwriting uses an exit cap rate 25 to 75 basis points higher than the going-in cap rate to account for property aging and market uncertainty. Read more about cap rates in our cap rate guide.

What Tools and Resources Improve Pro Forma Accuracy?

Building accurate pro formas requires reliable data sources and proper tools. The quality of your inputs directly determines the quality of your projections.

Market Data Sources

CoStar Group provides comprehensive property-level data on rents, vacancy, sales comparables, and market forecasts. CBRE and JLL publish quarterly market reports with submarket-level statistics. Local MLS and tax assessor databases offer property-specific historical data. Census Bureau and Bureau of Labor Statistics data inform demographic and employment trend assumptions.

Financial Modeling Tools

While Excel and Google Sheets remain the standard for custom pro forma models, purpose-built platforms like ARGUS Enterprise, RealPage, and Buildout offer institutional-grade underwriting capabilities. Regardless of the tool, your model should be transparent, auditable, and easy for lenders to follow.

Professional Support

For complex deals, engage a commercial appraiser for independent value opinions, a property inspector for capital needs assessments, a CPA for tax projection modeling, and a commercial mortgage broker who understands lender underwriting requirements.

Ready to put your pro forma into action? Contact Clearhouse Lending to discuss financing options and get expert guidance on structuring your next commercial real estate investment.

Frequently Asked Questions About CRE Pro Formas?

What is a pro forma in commercial real estate?

A pro forma is a forward-looking financial projection that estimates a property's income, expenses, debt service, and investment returns over a specific holding period. It serves as the primary tool for evaluating whether a commercial real estate investment meets return requirements and qualifies for financing.

How many years should a commercial real estate pro forma cover?

Most pro formas project 5 to 10 years of operations plus an assumed sale in the final year. The holding period should match your investment strategy. Value-add deals typically use 3 to 5 year projections, while core investments may model 7 to 10 years.

What vacancy rate should I use in my pro forma?

Use local market vacancy data for your specific property type and submarket. Stabilized multifamily properties typically assume 3% to 7% vacancy, office properties assume 8% to 15%, and retail properties assume 5% to 10%. Always add a credit loss factor of 0.5% to 2% on top of physical vacancy.

How do lenders stress test a pro forma?

Lenders apply their own conservative assumptions to your projections. They typically increase vacancy rates, apply management fee minimums of 5%, require replacement reserves, and test debt service coverage under scenarios with 10% to 20% NOI decline and interest rate increases of 200 basis points.

What is the difference between NOI and cash flow in a pro forma?

NOI equals revenue minus operating expenses and does not include debt service, capital expenditures, or income taxes. Cash flow (before tax) equals NOI minus debt service and capital reserves. NOI measures property-level performance while cash flow measures investor-level returns.

Should I include depreciation in my pro forma?

Depreciation is a non-cash expense that does not appear in the operating pro forma but is critical for tax projections. Include depreciation in a separate tax analysis section to calculate after-tax cash flows and after-tax IRR. Straight-line depreciation for commercial buildings uses a 39-year schedule (27.5 years for residential rental property).

How do I project rent growth in a pro forma?

Base rent growth assumptions on historical submarket data, current supply and demand dynamics, and economic forecasts. Conservative pro formas typically assume 2% to 3% annual rent growth for stabilized properties. Avoid projecting rent growth that significantly exceeds historical local averages without strong supporting evidence.

What makes a pro forma "bankable" for lenders?

A bankable pro forma uses conservative, market-supported assumptions backed by third-party data. It includes at least 2 to 3 years of historical operating statements, an independent appraisal, detailed rent rolls, and capital expenditure budgets. The projected DSCR should exceed lender minimums by a comfortable margin, typically 1.25x or higher.

Sources?

1. National Council of Real Estate Investment Fiduciaries (NCREIF). "Property Index Returns and Performance Metrics." ncreif.org.
2. Mortgage Bankers Association. "Commercial/Multifamily Mortgage Debt Outstanding." mba.org.
3. CBRE Research. "U.S. Cap Rate Survey and Market Outlook." cbre.com/research.
4. Urban Land Institute and PwC. "Emerging Trends in Real Estate 2025." uli.org.
5. Federal Reserve Bank. "Senior Loan Officer Opinion Survey on Bank Lending Practices." federalreserve.gov.