Updated · Part of the CRE investment glossary
What a pro forma includes
A real estate pro forma is the business plan in numbers. It usually projects each year of the hold and shows:
- Income: gross potential rent, vacancy and credit loss, concessions and other income such as parking, laundry or utility reimbursements.
- Operating expenses: taxes, insurance, utilities, repairs, payroll, management and replacement reserves.
- Net operating income (NOI), the line most other numbers depend on.
- Capital spending: the renovation budget and when it is spent.
- Debt service and cash flow after debt.
- The sale: exit year, exit cap rate, selling costs and loan payoff, and the IRR and equity multiple that result.
Pro forma vs T-12
The T-12 is history: what the property collected and spent over the last twelve months. The pro forma is a forecast: what the sponsor expects after taking over and carrying out the plan. A sound pro forma starts from a normalized T-12 and explains every change.
The gap between the two is the business plan. Each dollar of NOI the pro forma adds over the T-12 should trace to a stated reason, such as higher rents after renovation or lower vacancy, and each dollar it removes to a cost the seller did not carry, such as reassessed taxes.
| T-12 | Pro forma | |
|---|---|---|
| Period | The last twelve months | Future years of the hold |
| Source | The seller’s books | The sponsor’s assumptions |
| Answers | What did the property earn? | What could it earn under the plan? |
| Main risk | One-time items, seller accounting | Optimistic assumptions |
How projected NOI is built
Each projected year follows the same structure as the T-12, so the two can be compared line by line:
Pro forma NOI = gross potential rent − vacancy and credit loss + other income − operating expenses
- Gross potential rent: units × projected monthly rent × 12.
- Vacancy and credit loss: a percentage of gross potential rent.
- Operating expenses: exclude debt service, capital spending and depreciation.
Worked example: T-12 to stabilized pro forma
A fictional 50-unit property. The T-12 shows average rents of $1,200 a month and 8% vacancy. The sponsor plans renovations that support $1,300 a month and expects vacancy to settle at 5% once the work is done. The sale triggers a tax reassessment that adds $25,000 a year, and a new insurance quote adds $5,000.
Stabilized NOI comes out $54,600 above the T-12, about 14% higher. At a 6.0% cap rate that difference is worth $910,000 of value ($54,600 ÷ 0.06), which is why each assumption behind it needs a source.
| Line | T-12 | Pro forma | Driver |
|---|---|---|---|
| Gross potential rent | $720,000 | $780,000 | 50 units × $1,200 → $1,300 × 12 |
| Vacancy and credit loss | −$57,600 (8%) | −$39,000 (5%) | Assumed to settle at 5% |
| Other income | $30,000 | $36,000 | Assumed new fee income |
| Effective gross income | $692,400 | $777,000 | |
| Operating expenses | −$300,000 | −$330,000 | Taxes +$25,000, insurance +$5,000 |
| NOI | $392,400 | $447,000 | +$54,600 |
Common pro forma errors
Most bad projections fail in the same few places:
- Renovated rents in year one for units that have not been renovated or re-leased. Rent increases arrive as leases turn.
- Property taxes left at the seller’s assessment when the sale may trigger a reassessment.
- Insurance at the seller’s premium instead of a current quote.
- Vacancy below both the T-12 and the submarket with no plan that explains it.
- No management fee because the seller self-managed, or no replacement reserves.
- Rent growth above expense growth in every year of the hold.
- An exit cap rate at or below the going-in cap rate.
Broker pro forma vs your own
An offering memorandum often includes the listing broker’s pro forma. It is written to sell the property and shows what a buyer could earn, not what the seller earned. Underwriters rebuild the projection from the T-12 and rent roll and treat the broker’s numbers as one opinion.
Investors reading a sponsor’s pro forma can ask the same three questions: what is the T-12 NOI, what changes and why, and what do returns look like if rents grow more slowly or the exit cap is higher.
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.