ANALYSIS

What Is a Proforma Cap Rate (And Why Sellers Use It)

Updated March 2026

Actual vs. Proforma

An actual cap rate (also called trailing or historical) uses the property's real NOI from the past 12 months divided by the asking price. A proforma cap rate uses projected NOI — what the property could earn under ideal conditions. Sellers almost always present the proforma number because it's higher. 'This property has a 9% proforma cap rate!' might really mean a 6.5% actual cap rate.

Where the Gap Comes From

The proforma assumes market-rate rent (the current tenant might be paying below market), full occupancy (no vacancy allowance), stabilized expenses (ignoring the \$8K roof that's due next year), and sometimes optimistic rent growth. Each assumption inflates NOI. A proforma projecting \$12,000 NOI vs. actual trailing NOI of \$8,500 creates a 40% gap — and a wildly misleading cap rate.

When Proforma Is Legitimate

There are valid reasons to look at proforma: the property has a below-market lease expiring in 3 months (you'll raise rent to market), there's a fixable vacancy (a rehab that will attract a tenant), or recent improvements that haven't yet shown up in the trailing numbers. In these cases, the proforma tells you what the property will earn once stabilized. But you should buy at a price based on actual numbers and create value getting to the proforma.

The Rule

Never pay a price based on proforma NOI. Always negotiate based on actual trailing NOI. If the seller says 'but the proforma shows 8%!' — respond with 'great, then you won't mind waiting until those numbers are real before we close at that price.' This single negotiating principle will save you from overpaying on every deal you ever evaluate.