Two NOI figures can describe the same building and differ by a large margin. The difference is what each one assumes.
In-place NOI
In-place NOI is what the property earns under its current leases and operations, usually built from the rent roll and the trailing twelve months. It is a statement of fact about the present, with normalizing adjustments for taxes, insurance and one-time items.
Pro forma NOI
Pro forma NOI is a projection: the income the property could earn after assumed changes, such as rents rising to market, vacant units leased, a renovation completed, or expenses reduced. A stabilized pro forma assumes the building has reached its target occupancy and rents.
Why the gap matters
- Price. A cap rate quoted on pro forma NOI is lower than the same price on in-place NOI. A buyer paying a price based on a pro forma is paying today for improvements that have not happened.
- Debt. Lenders size on their own underwritten NOI, which is typically close to in-place and often below the seller's, so a loan sized on a pro forma may not exist.
- Comparability. Cap rates from different sources are only comparable if the NOI basis is the same.
How to read the gap
Ask what must happen for the pro forma to be true, who pays for it, how long it takes, and what evidence supports it. A bridge from the in-place figure to the pro forma, line by line, turns a claim into something that can be checked.