Pro Forma vs Underwritten NOI: Haircuts, Sizing & Differences
Understand pro forma vs underwritten NOI differences in commercial real estate. See how lender haircuts, vacancy floors, and reserve deductions reduce loan proceeds.
Pro forma NOI represents borrower-projected operating income under ideal future assumptions. Underwritten NOI represents lender-adjusted income based on historical trailing collections (T3/T12), institutional vacancy floors (typically 5%–10%), and mandatory capital replacement reserve deductions. Lenders size maximum loan proceeds primarily from underwritten net cash flow rather than unadjusted pro forma claims.
Pro Forma NOI vs. Underwritten NOI at a Glance (Illustrative Benchmarks)
[!NOTE] The figures below represent common institutional underwriting guidelines (such as Fannie Mae, Freddie Mac, and CMBS rating agency criteria). Actual underwriting adjustments vary by asset class, property vintage, and lender credit policy.
| Underwriting Line Item | Borrower Pro Forma Basis | Lender Underwritten Basis (Illustrative) | Impact on Loan Sizing |
|---|---|---|---|
| Gross Scheduled Rent | Future market projections & unexecuted leases | In-place contractual collections (T3/T12 trailing collections) | Eliminates speculative rent growth |
| Vacancy & Credit Loss | 2% – 3% (current physical occupancy) | 5% – 10% (underwriting guideline floor) | Haircuts effective gross income |
| Miscellaneous Income | Full projected application/parking fees | Discounted or excluded without documented 2-year historical proof | Reduces qualifying cash flow |
| Management Fee | Self-managed or nominal 1% – 2% | 3% – 5% contractual market benchmark | Increases recognized operating expenses |
| Replacement Reserves | Excluded from ordinary OpEx | $0.15 – $0.35/SF deducted for Net Cash Flow (NCF) | Direct reduction from loan proceeds ceiling |
Start with the evidence
Gather the current rent roll, signed leases, trailing operating statements, collections history, tax and insurance information, management costs and planned capital work. Record the period and source of each figure. A projection should not be presented as collected income.
The actual versus underwritten NOI guide explains the income perspectives. This page focuses on documenting the bridge between them.
Build the bridge without double counting
| Line | What to reconcile | Common question |
|---|---|---|
| Potential rent | Lease terms versus projections | Are assumed increases supported? |
| Vacancy, concessions and credit loss | Rent not expected to be collected | Has any loss already been deducted from reported rent? |
| Other income | Supported recurring receipts | Is the item recurring and separately documented? |
| Operating expenses | Property-level recurring costs | Are property taxes, insurance and management included? |
| Operating NOI | Effective gross income less operating expenses | Is debt service or capital spending incorrectly included? |
| Reserve deduction | Separate underwriting adjustment if required | Does the lender use post-reserve NCF for this test? |
There is no universal vacancy factor or haircut established by this worksheet. Ask the lender to identify the applicable source or program rule for each adjustment.
How lenders recast the rent roll
Commercial underwriters do not accept a borrower's pro-forma rent roll at face value. Under institutional agency guidelines such as Fannie Mae Form 6626 (Multifamily Underwritten NCF), underwriters apply rigid recasting rules:
- In-Place Collections Test: Lenders benchmark trailing 3-month (T3) or trailing 12-month (T12) collections rather than projected or unsigned leases.
- Above-Market Rent Haircuts: If in-place leases exceed submarket comparables, lenders haircut revenues down to the appraiser's market rent benchmark.
- Concession Amortization: Any upfront tenant rent concessions (e.g., one month free on a 12-month lease) must be straight-line amortized across the lease term as a revenue deduction.
- Underwriting Vacancy Floors: Even if a building is 100% occupied, institutional agency and conduit guidelines require a minimum underwriting vacancy floor (typically 5.0%, or actual submarket vacancy if higher).
Separate NOI from NCF
Ordinary operating NOI is before debt service and capital expenditures. A lender may define a separate income measure after a reserve allowance. Fannie Mae's underwritten NCF guidance, for example, deducts the required replacement reserve amount from NOI regardless of the actual deposit arrangement. That is a specific definition, not a reason to call every reserve payment an operating expense.
Read the reserve and capital-expenditure guide before reconciling the lines. Do not deduct both an allowance and the same expenditure without checking the intended treatment.
A reproducible example
In our hypothetical worksheet, $1.8 million of scheduled rent less $90,000 of vacancy and credit loss plus $40,000 of other income produces $1.75 million of effective gross income. Deduct $625,000 of operating expenses to obtain $1.125 million of operating NOI. A separate $25,000 reserve allowance leaves $1.1 million of post-reserve income.
The full loan-sizing example uses that post-reserve income in both tests. Its assumptions are educational inputs, not evidence of a required vacancy or reserve amount.
Measure the effect of an adjustment
If accepted annual income falls by $100,000, a 9% debt-yield target reduces the DY-only loan ceiling by $100,000 Ă· 0.09, or $1,111,111. At a fixed 1.25x DSCR and unchanged loan constant, the DSCR ceiling also declines. Actual proceeds change according to the binding constraint; if a lower LTV ceiling still governs, the modeled loan might stay unchanged.
Prepare a lender-ready reconciliation
For each adjustment, show the original amount, proposed change, accepted amount, supporting document and effective date. Separate current income from stabilization and exit scenarios. Unresolved assumptions should stay visible instead of being silently blended into one NOI number.
Download the NOI reconciliation and loan-sizing workbook. Enter supported amounts in the NOI tab, then examine their effect on the loan-sizing tab. The NOI calculator provides a quick online check; the underwriting checklist helps organize the evidence.
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