Pro Forma Versus Actual, And The Gap Between

Marketing materials for property routinely present two sets of numbers. One records what the building has done and the other describes what it might do, and they are frequently displayed together.

The two documents answer different questions

Actuals are historical. They are produced from bank statements, rent receipts and invoices, and they can in principle be verified line by line against source documents.

A pro forma is a projection. It states what income and expenses would be if a set of conditions held, and those conditions are assumptions rather than observations.

Neither is dishonest by nature. The failure occurs when a projection is priced as though it were a record, which transfers the value of unperformed work to the seller.

Where the gap usually comes from

The largest single source is rent. A pro forma commonly applies market rent to every unit, including those occupied by tenants paying below it on leases with time remaining.

The second is vacancy, where a projection often uses a stabilised figure while the property has been running above it, sometimes for structural reasons that will persist.

The third is expenses. Projections tend to normalise costs downward, assuming better purchasing or lower management fees, without accounting for the reassessment and insurance changes a sale can trigger.

What the gap costs the buyer

If a price is set on projected income, the buyer pays today for improvements they have not yet made and may pay for the capital required to make them as well.

The work also takes time. Bringing rents to market requires waiting for leases to expire, turning units and absorbing vacancy, all of which happen after closing.

That timing gap is real money even when the projection is eventually achieved, because the cash flow arrives later than the price assumed and the debt service does not wait.

Reconciling one to the other

The useful exercise is to build a bridge: start from actual net operating income, add each projected change as a separate line, and state what has to happen for it to occur.

Every line in that bridge should have an owner, a cost and a date. A rent increase attached to a lease expiry can be scheduled; one attached to nothing cannot.

Lines that cannot survive this treatment are usually the ones that will not happen. Removing them produces a projection that is smaller and considerably more likely to hold.

Using a pro forma properly

A pro forma is a plan, and it is genuinely useful as one. It records what the buyer intends to do and provides a benchmark to measure execution against later.

What it should not do is set the purchase price. The price belongs on the actuals plus whatever premium the buyer chooses to pay for the opportunity.

Keeping the two documents separate throughout the process preserves that discipline, because once they are merged into a single figure the distinction becomes impossible to recover.