Commercial real estate underwriting: a buyer's reference

How to check a broker pro forma in an OM: the Reddit question, answered

Check a broker pro forma by tying every projected line back to a document. In-place rents come from the rent roll, not the pro forma column. Vacancy, concessions and bad debt come from the T-12. Payroll, management fee, insurance and property taxes are the expense lines worth the most attention, and in some states a sale triggers a property tax reassessment. Then compare the exit cap to the going-in cap, and check whether reserves sit above or below the NOI being quoted.

Why the word Reddit is in the title. We assume it is in your search because you want an answer from somebody with nothing to sell. We are not that somebody: Altyst publishes this page and sells commercial real estate underwriting software. We also did not read Reddit to write it, and nothing here quotes, paraphrases or describes any post, comment, user or thread. The straight answer is below anyway, and every claim about anyone other than us links to the page we read it on, listed at the end.

The rule that does most of the work

Every number in a pro forma is either a fact from a document or an assumption about the future. Facts have paper behind them: the rent roll, the trailing twelve month operating statement, the tax bill, the insurance binder, leases, the property condition report. Assumptions do not: rent growth, forward vacancy, savings under new management, the exit cap. Sort the lines into those two piles before arguing about any of them. A pro forma is not dishonest for containing assumptions; it goes wrong when an assumption is printed in the same typeface as a fact.

Income lines

In-place rent against the rent roll

Sum the contract rents of occupied units on the current rent roll, multiply by twelve, and compare with the in-place figure in the OM. Things that break the tie-out: a rent roll dated months before the OM, an asking rent column read as contract rent, concessions never netted out, month-to-month premiums treated as permanent, employee or model units carried at market.

Gross potential rent is the scheduled rent for every unit, vacant ones included. Under the common convention each unit is carried at market rent, which is why an OM built that way subtracts loss to lease and vacancy below the top line. It is never unit count times average in-place rent. Labels vary by lender, so read the definition the document is using. In the Fannie Mae multifamily guide the first line is gross rental income, "actual rents in place for occupied units, plus market rents for vacant units based on a current rent roll (multiplied by 12)", and gross potential rent is that figure plus the rents of non-revenue units, such as model and employee units, where those were taken as an operating expense. Whichever convention is in use, check the loss-to-lease gap is not subtracted twice.

Fannie Mae's guide is quoted throughout this page because it is public, specific and easy to check. It is one lender's rulebook for agency multifamily loans, not a market standard, and the figures below come from its conventional loan underwriting table.

Loss to lease

Loss to lease is market rent minus in-place rent across occupied units. If the top line is priced at market and year one shows little or no loss to lease, the model assumes in-place leases are already at market or can be moved there at once. The rent roll settles it: how many occupied units sit below the market rent used, by how much, and when those leases expire. A unit cannot re-let at the new rent before its lease ends, so the expiry schedule sets the pace of any capture.

Vacancy, concessions and bad debt against the T-12

Work out the building's own realised shortfall: gross potential rent for the trailing months minus what was collected, over gross potential rent. That absorbs physical vacancy, concessions, non-revenue units and uncollected rent, and it is the number a submarket average has to beat. If the pro forma uses a lower rate, ask what changes, when, and who pays for it. For calibration, Fannie Mae's conventional table requires physical vacancy, concessions and bad debt together to equal the greater of five percent of gross potential rent or the difference between annualised trailing three-month net rental collections and gross potential rent.

Expense lines

Payroll

Compare each category with the T-12 and the year before it, stripping non-recurring items in both directions. Payroll is easy to understate, because the honest number is the loaded cost rather than salaries alone: Fannie Mae's payroll and benefits category takes in salaries, bonuses, employee benefits, payroll taxes, workers' compensation, contract labour and temporary help. Add any staff unit that shows up as forgone rent rather than as an expense. Fannie Mae adds the rents of non-revenue units, including employee and model units, back into gross potential rent for that reason.

Management fee

Use the market fee for third-party management even if you plan to self-manage, and check whether the figure shown is a related-party rate. Fannie Mae underwrites the greatest of three percent of effective gross income, the actual management fee, or the appraiser's concluded market fee. Its 2.5 percent alternative is conditional, and the conditions include an underwritten fee of at least $500 per unit and an original loan amount above $9 million.

Insurance

Get your own quote rather than inheriting the seller's premium, which reflects the seller's carrier, loss history and programme. For an acquisition, Fannie Mae's guide underwrites only premiums from the purchaser's carrier and disregards the seller's current premiums or estimates.

Property taxes at your price

One of the more predictable jumps in the model, and an easy line to leave at the seller's basis. Rules vary by state. In California, Proposition 13 requires the county assessor to reassess the property to its current fair market value as of the date ownership changed, so a long-held asset trading at today's price can carry a tax line unrelated to the T-12. Fannie Mae underwrites the greatest of the actual future bill covering a full calendar year, the prior full year's taxes multiplied by 103 percent, or, in California, special assessments plus the millage rate applied to the greater of the loan amount or the assessed value. Where a sale would trigger an automatic reassessment it requires the expected increase to be included, and it requires fully assessed taxes where an abatement expires within 36 months of origination.

Below the NOI line

NOI excludes debt service, so DSCR is NOI divided by annual debt service and debt yield is NOI divided by the loan amount, both off the same NOI. Capital reserves are where conventions diverge: some statements report NOI before any replacement reserve and deduct it below the line. Say which you mean, because a reserve moved across that line changes the cap rate you appear to be buying at. Fannie Mae deducts a replacement reserve from underwritten NOI to reach underwritten net cash flow, with a minimum of $200 per unit per year, and includes it whether or not the escrow is funded.

The exit

Compare the exit cap with the going-in cap implied by the price. An exit cap below the going-in cap assumes you sell at a richer price per dollar of income than you paid, which is a view on the market rather than a fact about the building. Test it at the going-in cap and at fifty and a hundred basis points above, and check which year's NOI the sale is priced on, whether that NOI is before or after reserves, and whether selling costs are deducted at all.

A five-minute tie-out

  1. Rent roll annualised against the OM's in-place rent.
  2. T-12 effective gross income against the pro forma, with the gap explained line by line.
  3. NOI divided by price, against the cap rate the OM states.
  4. NOI divided by annual debt service for DSCR, NOI divided by loan amount for debt yield.
  5. Expense per unit and expense ratio, pro forma against T-12.
LineThe checkDocument that settles it
In-place rentAnnualised contract rents for occupied units against the OM figureCurrent rent roll
Gross potential rentEvery unit counted, vacant ones included at the stated conventionRent roll, unit mix
Loss to leaseUnits below the market rent used, by how much, expiring whenRent roll with expiries
Vacancy, concessions, bad debtThe building's realised shortfall against the pro forma rateT-12 and monthly collections
PayrollLoaded cost: wages, benefits, payroll taxes, contract labour, staff unitsT-12 and staffing plan
Management feeMarket third-party rate, not a related-party rateManagement agreement, appraisal
InsuranceYour own quote, not the seller's premiumBroker quote
Property taxesAssessment after transfer, plus special assessments and expiring abatementsAssessor rules, current bill
Replacement reservesPer unit per year, and whether they sit above or below the quoted NOIProperty condition report
Exit capRelation to going-in cap, which year's NOI, and sale costsYour stated assumption

None of this needs software. A rent roll, a T-12, a tax bill, an insurance quote and a spreadsheet do the whole audit, and doing it by hand once teaches you which lines in an OM carry weight.

Questions people ask next

What is the difference between the T-12 and the pro forma?

The T-12 is what the property did over the last twelve months, as recorded. The pro forma is what somebody projects it will do under new ownership. One is evidence, the other is an argument, and the audit is asking the argument to show its evidence.

My rent roll total does not match the OM's in-place rent. What is usually wrong?

Check the as-of dates, then whether the market rent column was read as contract rent, then whether concessions were netted, then how non-revenue, down and model units were treated in each document. Any one of these produces a gap that looks like a disagreement about value and is really a definition mismatch.

Should I use the broker's exit cap?

Use your own and run the broker's as a scenario. An exit cap tighter than the going-in cap is a view on future pricing rather than a property fact, and since the sale price is NOI divided by that cap, moving it moves the reversion and with it the projected return.

Do replacement reserves come out of NOI?

It depends on the convention, which is why you state yours. Some presentations report NOI before reserves and deduct them below the line to reach net cash flow. Compare two deals only when both use the same treatment, and remember a lender may hold you to a floor of its own: Fannie Mae's conventional table deducts at least $200 per unit per year whether or not the escrow is funded.

Do I need underwriting software to do this?

No. These are arithmetic checks against documents you already have. Software earns its place when rebuilding the same spreadsheet every deal costs more than a licence. On what the dedicated valuation tools cost, Altus Group says ARGUS Enterprise is now part of ARGUS Intelligence Platform, that every tiered subscription to that platform includes it, and that pricing is flexible and tiered rather than listed.

Who publishes this

Altyst is browser-based commercial real estate underwriting software. It reads an offering memorandum, rent roll, T-12, lease or a pasted listing link and builds an editable model through to DCF, IRR, DSCR and exit assumptions, exported to Excel, PDF or PowerPoint. The AI does extraction only; the arithmetic runs on a deterministic engine, so every figure traces to a document or to an assumption you can edit. Plans are $12 a month for 5 deals, $24 for 15, $99 for a five-seat team at 75 deals, with per-deal overage. No free tier, no free trial, which is why the useful part of this page is on the page. Free without an account: ten calculators, a ten-year multifamily model in Excel, a glossary.

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