How do you manage risk and uncertainty in your pro forma assumptions?

1 Identify key variables

First identify the key variables that influence your pro forma assumptions, such as market demand, rental rates, vacancy rates, construction costs, interest rates, inflation, taxes, and contingencies. These variables can vary depending on the type, location, and scale of your project, as well as the economic and regulatory environment. You should research and analyze the historical and current data, trends, and forecasts for these variables, and use credible sources and methods.

2 Use sensitivity analysis

Next use sensitivity analysis to test how your pro forma assumptions change with different scenarios of the key variables. Sensitivity analysis allows you to measure the impact of changes in one or more variables on your project's net operating income (NOI), cash flow, return on investment (ROI), and internal rate of return (IRR). You can use spreadsheets or software tools to create sensitivity tables or charts that show the range of possible outcomes and the probability of each outcome.

3 Apply risk adjustment

Apply risk adjustment to your pro forma assumptions to reflect the level of uncertainty and volatility of the key variables. Risk adjustment is a technique that modifies the expected values or discount rates of the variables to account for their riskiness. For example, you can use higher vacancy rates or lower rental rates for a project in a less stable or competitive market, or you can use higher interest rates or lower loan-to-value ratios for a project with more financing risk.

4 Compare alternatives

Compare alternatives to your pro forma assumptions to evaluate the trade-offs and opportunities of different options. For example, you can compare different financing options, such as debt, equity, or hybrid, and their impact on your project's leverage, cash flow, and risk. Or you can compare different design options, such as unit mix, amenities, or sustainability features, and their impact on your project's marketability, operating costs, and value.

5 Update regularly

Update your pro forma assumptions regularly to reflect the changes in the market conditions, project performance, and stakeholder expectations. Updating your pro forma assumptions allows you to monitor and adjust your project's budget, schedule, and quality, as well as to communicate and negotiate with your lenders, investors, partners, and customers. You should review and revise your pro forma assumptions at least quarterly, or more frequently if there are significant events or issues that affect your project.

6 Seek feedback

Seek feedback from your peers, mentors, advisors, or consultants on your pro forma assumptions. Seeking feedback can help you validate your assumptions, identify gaps or errors, and improve your analysis and presentation skills. You should seek feedback from people who have relevant experience, knowledge, and perspective on your project type, market, and objectives. You should also be open to constructive criticism and suggestions, and be ready to explain and justify your assumptions.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?