How to Build a Commercial Real Estate Pro Forma

To build a commercial real estate pro forma, start with gross potential rent, subtract vacancy to get effective gross income, then subtract operating expenses to arrive at net operating income (NOI). Everything below NOI — debt service, reserves, capital expenditures — comes after.

A pro forma is just a disciplined income statement projected forward. The danger is not the arithmetic; it's the assumptions. Brokers tend to show a pro forma with thin vacancy, optimistic rent growth, and expenses that conveniently exclude reserves. Your job as the underwriter is to rebuild it with defensible inputs.

Work top-down. Gross potential rent (GPR) is what the building would collect at 100% occupancy and market rent. From there, apply a vacancy and credit-loss allowance that reflects the actual submarket, not a placeholder. The result is effective gross income (EGI) — the revenue you can realistically bank. For a deeper walk-through of the income side, see the effective gross income glossary entry.

Then subtract operating expenses: taxes, insurance, management, utilities, repairs, and administrative costs. The output is net operating income (NOI) — the single most important line in the whole model, because it drives valuation through the cap rate. Keep capital reserves and debt service below this line; mixing them in inflates NOI and overstates value. For how this fits the broader workflow, see the underwriting pillar.

Worked example — bottom-line NOI

The math: EGI = GPR − vacancy = $1,200,000 − $84,000 = $1,116,000. NOI = EGI − operating expenses = $1,116,000 − $502,200 = $613,800.

The discipline: a pro forma is only as honest as its vacancy and expense assumptions — rebuild both before you trust the NOI.