Preview of Chapter 5 | Property-Level Pro Forma Analysis

Welcome to the sample lesson page for REFAI Certification Chapter 5 | Property-Level Pro Forma Analysis. REFAI is delivered on a state of the art, mobile-friendly learning platform. On desktops and tablets, you can collapse the navigation at the left if you prefer to not see it while learning.

Be sure to read these boxes to learn about all of the features of the course platform and the innovative REFAI teaching and learning approach.

Instructions are given for every lesson, ensuring you are progressing in the most efficient manner. The textbook is the backbone of the course, and chapter readings are required for more than 90% of the lessons.  There are graded quizzes for all of the lessons. Read below to see an example of lesson instructions.

The teaching and learning method for this chapter follows a new hybrid format. We would like you to read a book section, then watch the corresponding Lecture Video 1 segment related to that section (performing the hands-on Excel exercises as instructed in the video), and repeat.

For example, read pages 55 through the top of 57 (everything before the Vacancy section), and then switch to the video and watch the segments entitled Introduction, Overview of workbook structure, and Figure 5.2. Perform the hands-on exercises as shown in the video. When complete, return to page 57 in the book and read the Vacancy section, and when done, watch the segment entitled Figure 5.3, and perform the hands-on Excel exercises. Repeat this pattern for the balance of the chapter/video.

When you are done with the above:

  1. Watch Lecture Video 2
  2. Read the chapter overview and summary below
  3. Listen to the audio content and review the key terms
  4. Answer the questions
  5. Take the graded quiz in a single timed sitting, noting your score and the group average score
  6. Review the quiz commentary on the correct answers
    1. Send us a note at to request any required clarifications on course content.

REFAI lessons are massively multimedia. Each lesson includes at least one streaming lecture video by book authors Dr. Linneman or Bruce Kirsch. Some videos are traditional whiteboard style, while others feature Dr. Linneman in a studio environment. Video speed controls are available, and there are topic-by-topic hyperlinks for easy navigation.

Lecture Video 1 (sample)

  • Figure 5.3 | 05:34
  • Figure 5.4 | 08:56
  • Figure 5.5 | 10:54
  • Figure 5.6 | 11:33
  • Figure 5.7 | 13:25
  • Figure 5.8 | 14:47
  • Figure 5.9 | 19:49
  • Figure 5.10 | 21:31
  • Figure 5.11 | 22:00
  • Figure 5.12 | 22:53
  • Figure 5.13 | 27:10
  • Figure 5.14 | 38:04
  • Figure 5.15 | 39:03
  • Figure 5.16 | 41:19
  • Figure 5.17 | 45:59
  • Figure 5.18 | 55:28

Lecture Video 2 (sample)

  • Cash Flow vs. Net Operating Income | 06:15
  • Estimating Future Cashflow | 13:32
  • Stabilized NOI | 20:12
  • LTV | 23:10

Each lesson page includes a chapter overview and summary to help reinforce your learning from the textbook. A narration is provided. Audio speed controls are available for this and all other audio content.


Chapter 5 details how to complete a property-level pro forma analysis. The chapter starts with a discussion of how leases determine an asset’s value. Credit quality of tenants and lease expirations are highlighted as critical factors. The chapter then discusses how a pro forma’s time frame will depend upon the type of the investment and major events occurring at the property (i.e., a major tenant vacating the building in the 8th year). It is prudent to carry out an analysis several years after such an event. The chapter then goes through the major line items on a pro forma.


Listen to this narration if you prefer


Gross Potential Rental Revenue (GPR) is the revenue you would receive if the building’s leasable space was 100% occupied. Gross potential rental revenue is calculated as the base rent multiplied by the property’s total leasable square feet. There is some Vacancy in fully stabilized buildings that results from tenants moving in and out as part of turnover and some space that is non-leasable. Rent consists of both base rent and percentage rent (overage). Tenant Reimbursements are payments specified in the leases, made by tenants to the landlord for specified property expenses, including insurance, property taxes, security, and utilities. Ancillary Income comes from all other activities conducted at the property. Credit Loss/Bad Debt Expense must be included to reflect the anticipated non-payment of rent. It is commonly estimated at 1-2% of expected revenues. The loss/expense will rise in weak economies. Operating Expenses are the costs required to effectively operate the property. Reimbursable costs are initially borne by the landlord, but the landlord expects full reimbursement for these expenses (typically all property taxes and Common Area Maintenance costs for occupied space). Non-Reimbursable costs typically include insurance, utilities, and managerial services.

Net Operating Income (NOI) is defined as total operating income less total operating expenses. It is important to note that Adjusted NOI differs from NOI by including deductions for Tenant Improvements, Leasing Commissions, and Capital Expenditures. Tenant Improvements are improvements made to make leased space operational and acceptable to the tenant. In order to entice a tenant to occupy the space, the landlord will often agree to pay part of the tenant improvements. The negotiations over how much, if any, tenant improvements the landlord pays for are dictated by market conditions. Leasing commissions are the fees you pay to a broker or leasing company (sometimes a separate firm which you own) that leases your space to tenants. The timing of some Capital Expenditures (cap ex) is predictable. Many property owners hold reserves for such annual expenditures, and incorporate a reserve for normalized capital expenditures.

It is important to note that depreciation is an accounting concept and does not relate to the physical capital expenditures needed in a financial reporting period. United States accounting rules do not allow land to be depreciated. However, structures and building improvements can be depreciated according to well defined schedules.

To determine Net Cash Flow, subtract total operating expenses, cap ex, TIs, and leasing commissions from total operating income. The resulting Unlevered Cash Flow reflects the net cash inflow from a property before any financing or tax liabilities. To estimate cash flows to equity, one needs to incorporate debt and tax liabilities into their analysis. Specifically, loan points, amortization, and interest payments resulting from the use of debt financing all have an impact on the calculation of after-tax equity cash flow.

Each lesson page features at least one short format audio interview recording of the book authors discussing key elements from the lesson.

Audio Interview

Each lesson page features a medium format audio interview recording of the book authors digging deeper into key insights from the lesson. A searchable audio transcript is also provided.

Chapter Insights (sample)

Chapter 5 Insights | Property-Level Pro Forma Analysis (sample)

BRUCE KIRSCH: Taking a look at the next chapter, Property Level Pro Forma Analysis– pro forma, it’s a future projection. So it’s a fictitious story about how things are supposedly going to play out at a particular property. And if we’re just limiting it to operations, not integrating, you know, what price will be buy, and what price are we going to sell.

Let’s just talk for the moment about, this is an operating asset. Or in the case of a for-sale project, this is the business model. You know, this is how we’ll be selling units, and these are our net cash flows.

But let’s focus for the moment on operating asset, because that’s the bulk of commercial. And there’s a lot of seemingly dry exercise to do here. There are conventions. There’s a lot of vocabulary to know.

What are the things that students should focus on here? Obviously, we go through this chapter, literally line by line, telling you, this is the business relationship that we’re trying to simulate. This is how you would construct a formula to reflect that relationship accurately.

And that is a mechanical process. But what are the real things that students should be seeing in these numbers?

PETER LINNEMAN: So I think there’s two levels, Bruce. I think one is, if you’ve never analyzed a business before, each line of this is new to you. You probably never thought about, oh yeah, the income comes from rent. It comes from percentage rent. It comes from ancillary income from parking.

If you’ve been associated with being around businesses, that part comes easier. Similarly on the cost side, if this is your first exposure to a business– oh yeah, they have to pay property taxes and insurance, and they have to have the utilities, and they have– so I think there’s one level is that you’ve never looked at a business before.

This is a good introduction to look at any business. Where does its income come from? Is that income contractual? Is it already subject to a lease that says, this is what they have to do?

Or do I have to go out and, quote, drum up new business? Do I have to lease space to get it? Or at what point does the lease expire and I have to get a new business?

And on the cost side, the same way. Do I have some costs that are contractually in place? And what happens when those contracts expire? And a classic example, a very classic example, is when you come to property taxes.

And I can look and see the property taxes are $1 million a year. But if I know when I buy it, the property taxes go up, because this community adjusts it whenever a new buyer comes in. I’ve got to say not was it $1 million a year, but what will it be when I buy it?

OK, so it becomes a disciplined, systematic thought process, of where is a business getting its income? How much of that income is subject to contracts versus I’ve gotta get contracts, so to speak? And you take a hotel or an apartment, I gotta get a lot of contracts all the time. Nothing wrong with that, but I just understand that, as opposed to an office building, where 90% of my income may be contracted for the next four years.

Right, big difference. And expenses, one of the line items that matter. How do I analyze the property taxes, utilities, and so on?

So I think the big element is being systematic. And I think the second, you know, these little quotes that came from my class that we start each chapter with, you just have to understand, these numbers are your serious best effort. They’re making you think about, what really is the business I’m in?

The rows and columns are just a discipline of understanding what the business I’m in, what are the rents and costs, and the encumbrances and obligations? They’re never going to happen, almost never going to happen, but if you don’t do this analysis, you will not understand the business you’re signing up for.

Once having done the numbers, 90% of the exercises over someone’s life, once you’ve studied for the exam to the point you know the material, the exam is almost superfluous, because you know the material. What else can I do? You know the material, right?

It’s getting you to know the material, that’s what this serves. That would be my number one guidepost on this.

In more than 90% of the lessons, the lesson page has at least one downloadable Excel file in which you will perform hands-on exercises.

Excel Figures

All lessons include a section for key terms from the subject chapter.

Key Terms (sample)

Click or press on the term to see the definition. Repeat to hide.

Spoken Glossary Available On Amazon Alexa

Already using Alexa? Just say “Alexa, Open Commercial Real Estate Glossary”

If not, download the free Alexa app below and then add the “Commercial Real Estate Glossary” skill by clicking here, and then say “Alexa, Open Commercial Real Estate Glossary”


The revenue you would receive if a building’s leasable space was 100% occupied, and all square footage was leased at market rent.

A fully-occupied building except for an expected “systemic” level of vacancy.

Churn in property occupancy when a tenant lease expires and they vacate.

Income generated from all other activities conducted at the property other than rental of suite square footage.

Financial analyses that change one or more assumptions to explore the impact of these changes on calculated outputs.

The first year’s rent for a leased space.

A form of additional rent that specifies the percentage of the tenant’s gross sales revenue that the landlord receives in addition to the base rent and escalations; helps to align retail tenant interests with those of the landlord.

A predetermined revenue threshold over which a percentage of incremental sales are paid to the retail landlord.

The costs required to effectively operate and maintain the property.

Operating expenses initially borne by the landlord that are paid for at least in part by one or more tenants.

The amount per $1,000 used to calculate real estate taxes. The millage rate is multiplied by the property’s assessed tax value to generate the tax liability.

Operating costs without the negotiated right to reimbursement from tenants.

The sum of all reimbursable and non-reimbursable operating expenses.

Total Operating Income less Total Operating Expenses; summarizes the property’s ability to generate income, irrespective of capital structure.

Funds set aside that provide for the periodic major repair or replacement of building components that wear out more rapidly than the building itself. Senior lenders require minimum capital reserves be set aside and maintained to ensure continued property competitiveness.

Interior space physical improvements made to make tenant space habitable, useful, and pleasant.

Tenant improvement scope of work budget provided by the landlord.

An accounting method that reduces taxable income based on IRS rules, such as depreciation of capital expenditures.

More than 90% of the lesson pages have questions for use in preparing for the Quiz.


1. How does gross potential rental revenue differ from net rental revenue?

2. How does forecasted depreciation relate to actual capital expenditures?

3. What is a common source of differences between reported cap rates?

4. What occurred during the early 1980s to encourage excessive investment in U.S. real estate?

All written online course content can be translated using Google Translate.

All lessons give a set of traditional lecture slides for your use.

Chapter Slides


There are graded quizzes for all of the lessons. Quizzes have a minimum of 10 questions. This is where the link to the graded quiz would sit. All quiz question solutions are given after you complete a quiz. There are also optional duplicate review quizzes that are ungraded, which you can use an unlimited number of times to study for the midterm and final.