How to Build a Commercial Property Pro Forma in Canada

1. Separate actual, contractual and projected figures

Start by tagging each line as actual, contractual, market-derived or assumed. Current rent may be supported by a lease and billing record, while renewal rent, downtime and future operating costs are projections. Blending them without labels makes the model difficult to audit.

Use a source column, effective date and note for each major input. A pro forma prepared for acquisition should remain reconcilable to the rent roll, leases, historical statements and due-diligence findings.

• Source and effective date
• Actual versus projected
• Recurring versus one-time
• Recoverable versus owner-retained

2. Build potential and effective gross income

Gross potential rent represents rent at the modelled occupancy and rate assumptions before vacancy and credit loss. Add separately supportable income such as parking or signage rather than burying it in base rent.

Apply vacancy, collection loss, free rent and known downtime explicitly. A single vacancy percentage can be useful for a first pass, but a tenant-by-tenant lease schedule is more informative when rollover is concentrated.

• Contract rent
• Market-rent assumptions
• Vacancy and credit loss
• Other recurring income
• Inducements and downtime

3. Reconcile operating expenses before calculating NOI

Net operating income is property income less operating expenses before financing. CMHC's published research definitions distinguish NOI from debt payments and capital expenditures. Keep mortgage principal, interest, income tax and major capital items below the NOI line.

Normalize expenses using invoices, tax notices, insurance information, service contracts and historical statements. For net-leased property, test which costs are actually recoverable under the executed leases and which remain with the owner.

• Property tax
• Insurance
• Repairs and maintenance
• Utilities
• Management and administration
• Non-recoverable lease costs

4. Place capital and financing below NOI

Replacement reserves and major capital expenditures affect cash available to the investor even when they are not treated as operating expenses in the NOI definition. Show them separately so cap rate and cash flow are not confused.

Annual debt service belongs below NOI. The resulting cash flow before tax can be compared with the cash invested, while NOI can be compared with price, value, debt and annual debt service through separate ratios.

5. Run downside cases instead of one forecast

Test vacancy, rent, recovery, expense and financing assumptions independently. A model should show which variable changes the result and where the property stops covering operating costs, reserves and debt service.

Do not import a generic cap rate, lender ratio or expense percentage as if it were a rule. Appraisal Institute of Canada standards emphasize property- and market-specific evidence when income, expenses, capitalization rates or discounted cash-flow assumptions are used in professional valuation.

• Lease rollover
• Expense inflation
• Unrecovered costs
• Capital events
• Debt renewal
• Exit assumptions

6. Use the pro forma as a diligence index

Every material cell should point to a record or an open question. If a rent assumption cannot be traced to a lease, market study or written premise, it should remain visibly unverified.

The model is not an appraisal, lending decision, tax forecast or investment recommendation. Use qualified accounting, appraisal, legal, engineering, environmental and lending professionals for conclusions within their scope.