How to Build a Real Estate Proforma: Step-by-Step Guide

A proforma is the financial blueprint for every commercial real estate investment decision. It projects revenue, expenses, and returns over a hold period so you can answer one question: is this deal worth doing?

Whether you’re underwriting an acquisition, presenting to investors, or evaluating a refinance, the proforma is where assumptions become numbers. This guide walks through each section of a commercial real estate proforma, explains what goes where, and shows how the pieces connect.

What Is a Real Estate Proforma?

A proforma is a forward-looking financial model that projects a property’s income, expenses, and investment returns over a defined hold period (typically 5–10 years). It includes:

1. Revenue projections — Rent rolls, vacancy, other income
2. Expense projections — Operating costs with inflation
3. Net Operating Income (NOI) — Revenue minus expenses
4. Debt service — Mortgage payments on financed properties
5. Cash flow — What the investor actually receives
6. Return metrics — IRR, NPV, cash-on-cash, equity multiple
7. Exit analysis — Reversion value at sale

The proforma is NOT a budget or historical statement. It’s a projection based on assumptions you control — and the quality of those assumptions determines the quality of the analysis.

Step 1: Build the Revenue Side

Start with the Rent Roll

The rent roll is the foundation. For each tenant, you need:

• Suite/unit number and area (SF)
• Current rent rate ($/SF or total monthly)
• Lease start and end dates
• Rent escalations (step increases, CPI adjustments)
• Renewal probability
• Recovery structure (NNN, modified gross, full service)

Example: 20,000 SF Office Building

Suite	Tenant	Area (SF)	Rent ($/SF)	Lease End	Escalation
101	Acme Corp	8,000	$22.00	Dec 2028	3% annual
201	Beta LLC	5,000	$20.00	Jun 2027	3% annual
301	Vacant	4,000	—	—	—
401	Delta Inc	3,000	$24.00	Mar 2030	$0.50/yr

Calculate Potential Gross Income

For leased suites, use contract rent. For vacant suites, use market rent from comparable properties:

Source	Calculation	Annual
Suite 101	8,000 SF × $22.00	$176,000
Suite 201	5,000 SF × $20.00	$100,000
Suite 301 (market)	4,000 SF × $19.00	$76,000
Suite 401	3,000 SF × $24.00	$72,000
PGI		$424,000

Apply Vacancy and Credit Loss

Even with signed leases, budget for vacancy between tenants and the occasional missed payment. A typical market vacancy factor is 5–10%:

$$ext{Vacancy Loss} = \$424{,}000 \times 5\% = \$21{,}200$$

Add Other Income

Include parking, storage, signage, antenna rent, late fees, and any other non-rent revenue:

Item	Annual
Parking (10 spaces × $150/mo)	$18,000
Storage rental	$3,600
Total Other Income	$21,600

Effective Gross Income

$$\text{EGI} = \$424{,}000 - \$21{,}200 + \$21{,}600 = \$424{,}400$$

Step 2: Model Operating Expenses

Categorize Every Expense

Group expenses by type and identify which are fixed (don’t change with occupancy) and which are variable (scale with how much space is occupied):

Expense	Annual	Type	Recoverable?
Real estate taxes	$52,000	Fixed	Yes (NNN)
Insurance	$12,000	Fixed	Yes (NNN)
Utilities	$24,000	Variable	Partial
Management (5% EGI)	$21,220	Variable	Yes
R&M	$15,000	Variable	Yes
Janitorial	$10,000	Variable	Partial
Landscaping	$5,000	Fixed	Yes
Administrative	$3,000	Fixed	No
Total Operating Expenses	$142,220

Apply Inflation Over the Hold Period

Expenses don’t stay flat. Apply annual inflation rates — typically 2–4% depending on the category:

Year	Taxes (3%)	Insurance (4%)	Utilities (3%)	Mgmt (3%)	Other (2.5%)
1	$52,000	$12,000	$24,000	$21,220	$33,000
2	$53,560	$12,480	$24,720	$21,857	$33,825
3	$55,167	$12,979	$25,462	$22,512	$34,671

This is where spreadsheets get tedious fast. Each expense line needs its own escalation rate, frequency, and start date — and they all compound independently.

Step 3: Calculate NOI

$$\text{NOI} = \text{EGI} - \text{Operating Expenses}$$

Year 1:

$$\text{NOI} = \$424{,}400 - \$142{,}220 = \$282{,}180$$

Project NOI for each year of the hold period, incorporating rent escalations on the revenue side and expense inflation on the cost side. NOI should generally grow over time in a healthy market.

Step 4: Add Debt Service

If the acquisition is financed, calculate annual mortgage payments:

Loan Detail	Value
Purchase Price	$4,000,000
LTV	70%
Loan Amount	$2,800,000
Interest Rate	6.5%
Term	30 years, amortizing
Annual Debt Service	$212,370

Debt Service Coverage Ratio (DSCR):

$$\text{DSCR} = \frac{\$282{,}180}{\$212{,}370} = 1.33\times$$

Above the typical 1.25× minimum — the loan works.

Step 5: Calculate Cash Flow

$$\text{Cash Flow Before Tax} = \text{NOI} - \text{Debt Service} - \text{Capital Reserves}$$

Line Item	Year 1
NOI	$282,180
Less: Debt service	($212,370)
Less: Capital reserves	($8,000)
Less: Leasing costs	($5,000)
Cash Flow Before Tax	$56,810

Cash-on-Cash Return:

$$ext{CoC} = \frac{\$56{,}810}{\$1{,}200{,}000 \text{ equity}} = 4.73\%$$

Step 6: Model the Exit

At the end of your hold period, project a sale price using the terminal cap rate and the final year’s NOI:

$$\text{Sale Price} = \frac{\text{Year 7 NOI}}{\text{Terminal Cap Rate}}$$

If Year 7 NOI is $320,000 and you use a 7.5% terminal cap:

$$\text{Sale Price} = \frac{\$320{,}000}{0.075} = \$4{,}266{,}667$$

Subtract selling costs (typically 2–3%) and the remaining loan balance to get net sale proceeds.

Step 7: Calculate Return Metrics

With cash flows for each year plus the net sale proceeds at exit, you can calculate:

Metric	Value	What It Tells You
IRR	12.4%	Annualized return accounting for timing
NPV (at 8% discount)	$287,000	Value created above your required return
Equity Multiple	1.92×	Total return per dollar invested
Cash-on-Cash	4.7% → 6.8%	Annual cash yield (grows with NOI)

If IRR exceeds your hurdle rate and NPV is positive, the deal creates value. If not, either the price is too high or the assumptions need work.

The Problem with Spreadsheet Proformas

Building a proforma in Excel works — until it doesn’t:

• Lease rollovers: When Suite 201’s lease expires in Year 2, you need to model vacancy months, new market rent, TI costs, and leasing commissions — then recalculate everything downstream
• Step increases: Different tenants have different escalation schedules that compound independently
• Variable occupancy: Expenses like utilities and management fees change as occupancy changes
• Recovery calculations: NNN, base year stop, and modified gross recoveries each require different expense tracking
• Scenario analysis: Changing one assumption (cap rate, vacancy, rent growth) requires recalculating the entire model

One mislinked cell can cascade through years of projections without any visible error.

Automating the Proforma

Compass builds the proforma automatically from your property inputs. Enter your rent roll, expenses, and financing — and get a complete operating statement with annual and monthly projections, return metrics, risk scoring, and exit scenario analysis.

The ML-powered forecasting engine handles:

• Rent escalations with step increases and market resets
• Expense inflation with per-category rates
• Tenant lifecycle projections (renewal probability, vacancy duration, market re-leasing)
• Variable occupancy impact on expenses and recoveries
• Debt service with amortization schedules
• Multi-scenario exit analysis with optimal year identification

No formulas to maintain, no cells to audit, no version control headaches.

Key Takeaways

• A proforma projects revenue, expenses, NOI, cash flow, and returns over a hold period
• Start with the rent roll — it drives everything else
• Separate fixed vs. variable expenses and apply category-specific inflation
• NOI should exclude debt service, capex, and income taxes
• Model the exit using a terminal cap rate on projected NOI
• IRR, NPV, equity multiple, and cash-on-cash together give the complete return picture
• Spreadsheets work for simple deals but break down as complexity grows

Related Articles

• What Is NOI in Commercial Real Estate? — The complete guide to net operating income
• Mastering IRR and NPV — Deep dive into the return metrics your proforma produces
• What Does a Good IRR Look Like? — Benchmarks by property type and risk profile

Explore Compass

• CRE Proforma Software — Generate institutional-grade operating statements automatically
• Excel to Proforma — Import your existing spreadsheets into a live model
• DCF Analysis Software — IRR, NPV, and exit scenario optimization
• Plans & Pricing — Start your analysis for free