A pro forma is a financial projection, not a promise. Sophisticated investors immediately flip to the assumptions tab and stress-test every line item.
Revenue assumptions are routinely overstated. Never accept “market rents” without verifying actual comps and current occupancy. Apply 5–10% vacancy even if sponsor shows 100% pre-leased. Challenge rent growth rates above 2–3% annually unless ironclad leases support it.
Expense ratios tell more than absolute numbers. Class A multifamily should run 35–40% expenses-to-revenue; anything above 45% signals poor management or deferred maintenance. Scrutinize “replacement reserves”—many sponsors underfund at $200–$250/unit/year when $400+ is realistic.
Debt assumptions are critical. Interest-only periods mask true leverage risk. Model scenarios with rates 200–300 bps higher and shorter I/O periods.
Exit cap rate is the biggest lie in most pro formas. Sponsors assume exit caps equal or below entry caps despite historical evidence caps rise 50–150 bps over hold periods. Stress-test returns with exit cap 100 bps higher—many “15% IRR” deals collapse to single digits.
Cash-on-cash return means nothing without understanding preferred returns and promote structure. A 8% pref with 80/20 split after looks very different from 8% pref with 50/50 split.
Finally, reverse-engineer the IRR. What price would need to be paid today for projected cash flows to actually deliver advertised returns? Often reveals 20–40% overpaying versus realistic valuation.