Pro Forma: The Institutional Underwriting Standard
A pro forma is not a single number — it's the year-by-year cash flow story that determines whether a deal pencils.
What Belongs in a Pro Forma
- Year-by-year NOI with assumed growth rate
- Annual debt service split between interest and principal
- Loan balance amortization across the hold
- Annual cash flow (NOI − Debt Service)
- Exit value at a target cap rate net of cost of sale
- Equity multiple and IRR over the projection period
The Three Critical Assumptions
- Exit cap rate — the largest single driver of IRR for stabilized assets
- NOI growth rate — typically 2.5–4% for stable markets; higher for value-add
- Loan terms — rate, amortization, and any IO period
Sensitivity testing across these three (especially exit cap) separates institutional underwriting from speculative projection.
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What is a pro forma?
A pro forma is a year-by-year financial projection for a commercial property — modeling NOI growth, operating expense escalation, debt service (interest + principal), loan amortization, and exit value at a target cap rate. It is the foundation of every institutional underwriting memo.
What is a typical pro forma hold period?
5–10 years is standard. 5-year holds match value-add business plans; 10-year holds match core/core-plus and reflect typical CMBS loan terms.
What assumptions matter most?
Exit cap rate (largest IRR driver), NOI growth rate, and loan terms. Sensitivity testing across these three is what separates institutional underwriting from back-of-envelope math.