Pro Forma as Forecast

A pro forma is a forecast built from assumptions about rents, costs, financing, and operations. It will differ from what happens; the useful questions are how far it may be wrong, in which direction, and whether the project can withstand the difference.

A forecast needs its cash flows

Three illustrative unlevered scenarios, not measured probabilities: downside combines lower annual NOI growth, a higher exit cap and a higher entry cost; upside reverses them. Base initial cost is $10M, first-year NOI is $600k, annual NOI growth is 3% and exit cap is 6%. All NOI is paid at each year-end; net sale cash is next year’s NOI divided by the scenario cap rate, less 2% selling cost. IRR includes the initial cost, every annual NOI distribution and the final net sale cash. Debt, taxes and additional capital spending are absent. The chart repeats that cash-flow calculation for each possible exit year. Its band is an assumed scenario range, not a confidence interval.

Scenario analysis can make that uncertainty concrete. A project that works only under optimistic rent and cost assumptions has a different risk profile from one that remains viable under a downside case. A waterfall then shows how those outcomes are distributed across lenders and equity, making clear who absorbs losses first.

The forecast is a decision tool, not a promise. Its assumptions and risk allocation should remain visible as the project changes.