Before a project is fundable, the numbers have to tell a credible story. A pro forma is where that story lives. Experienced underwriters do not just read what the spreadsheet says. They test why the numbers make sense, where each assumption comes from, and whether the project can support the capital it is asking for.
Here is how to read a pro forma the way they do.
What is a pro forma?
A pro forma is a forward-looking financial projection for a project or business. It estimates what it will cost to build or acquire, what it will cost to run, what it will earn, and how cash moves through it over time. In real estate and project finance, it is the core document capital providers use to size and price their commitment.
1. Capital expenditures (CAPEX)
CAPEX is everything it takes to get the project built or acquired: land, hard costs, soft costs (design, permits, legal, financing fees), and equipment. Underwriters look for:
- A cost basis tied to real documentation, such as a FEED study, contractor bids, or a purchase agreement
- A contingency line sized to the project’s risk and stage of design
- Financing costs and interest during construction, which are easy to leave out
2. Operating expenses (OPEX)
OPEX is the cost of running the asset once it is built: staffing, maintenance, utilities, insurance, taxes, management fees, and reserves for replacement. Thin OPEX assumptions are one of the most common red flags. Underwriters compare them to comparable assets and question anything that looks unusually lean.
3. Revenue assumptions
Revenue is where optimism tends to hide. Every revenue line should have a source: market rent comparables, signed leases, an offtake agreement, or verifiable pricing data. Watch for:
- Lease-up or ramp-up periods that are faster than the market supports
- Rent or price growth that outpaces historical trends
- Occupancy or utilization assumed at full capacity from day one
- Revenue with no clear contractual or market support
4. Cash flow
Cash flow connects the pieces. In real estate, the central figure is usually net operating income (NOI): revenue minus operating expenses, before debt service. Underwriters then compare that cash flow to the capital’s obligations. A widely used measure is the debt service coverage ratio (DSCR), NOI divided by annual debt service. Many capital providers look for meaningful headroom above 1.0x, because a project that only just covers its obligations has no room for anything to go wrong.
5. Project economics
Finally, the pro forma should show whether the whole effort is worth it: total project cost against value created, and returns at the project and investor level. These figures can look very different depending on the metric used. Always confirm which return metric is being shown and over what time period.
6. The risks behind the numbers
The best pro formas do not hide risk; they quantify it. Underwriters look for sensitivity analysis showing what happens if costs rise, revenue falls, or the schedule slips. If the model only works in one scenario, it is not ready. We cover this in depth in building an underwriting-ready financial model.
A quick pro forma checklist
- Does every CAPEX line tie to a document or quote?
- Is contingency appropriate for the stage of design?
- Are OPEX assumptions benchmarked against comparable assets?
- Does every revenue line have a market or contractual source?
- Is the ramp-up period realistic?
- Does cash flow comfortably cover the capital’s obligations?
- Is there a downside scenario, and does the project survive it?
Pro forma FAQ
What is the difference between a pro forma and a budget?
A budget is a spending plan. A pro forma is a projection of the full economics: costs, revenue, cash flow, and returns over time.
Who prepares the pro forma?
Usually the sponsor or developer, often with a financial advisor. Capital providers then build or adjust their own version based on their underwriting standards.
Want a second set of eyes on your numbers before you go to market? Request a consultation, or explore our real estate funding solutions.
This article is for educational purposes only. It is not an offer, solicitation, or recommendation to buy or sell any security, and it is not tax, legal, or investment advice. All Phoenix Capital Solutions engagements are subject to due diligence, verification, and eligibility requirements. See our full disclosure.
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