What Assumptions in a Property's Forecast Deserve Independent Validation?
Short answer. Check assumptions behind net operating income, financing needs, and exit value. Review rents and occupancy. Check concessions and expenses. Review capital work, interest rates, and timing. Compare each assumption with operating records or outside evidence. Model the effects if an assumption proves too optimistic or the project takes longer.
Validate the forecast inputs that drive net operating income, cash needs, and property value. I compare recorded results with projected results, then ask what evidence supports each change. A forecast becomes more useful when you can trace each major assumption to operating records or independent market evidence.
Separate Collected Income From Projected Income
Request the rent roll, signed leases, collection records, vacancy history, concession details, and lease expiration schedule. Compare contracted rent with cash collected. Separate occupied units and signed leases from vacant space assigned an assumed market rent. Check renewal options and scheduled increases against the lease language. For loss to lease, request the calculation and comparable rents behind it.
Ask, "Which rent assumptions are supported by signed leases?" and "What evidence supports the rent assigned to vacant space?" Review other income, including utility reimbursements and fees, against lease provisions and collection history. Treat income as recurring only when records show it has been collected on a continuing basis. Check whether a high occupancy assumption is supported by the property's own history and local demand. Confirm that the forecast has evidence for this assumption.
Look for Expense Omissions and Category Shifts
Compare projected taxes with the likely tax basis after acquisition, and request a property tax estimate based on the proposed price. Ask for current insurance quotes or support for the premium used. Compare repairs and maintenance with invoices and the property's age and condition. Review utility bills and property management costs. Check other recurring operating expenses too. If the sponsor describes the property as self managed, include a realistic cost for that work.
Ask, "Which expense lines are below recorded levels, and why?" and "Are any recurring costs classified as capital work or excluded from the forecast?" Check the capital expenditure schedule against inspection findings and contractor estimates. Planned improvements can reduce income during work or require space to sit vacant. A meaningful increase from trailing net operating income needs a specific plan and schedule. Estimate the cost separately. If support for these assumptions is absent, treat the forecast increase as unresolved.
Check Financing, Timing, and Exit Inputs
Review the interest rate, loan floors or caps, maturity, and covenants. Check the refinance assumptions used in the forecast. Recalculate coverage when rates rise and income falls. Find the occupancy level at which net operating income no longer covers debt service, then estimate how long reserves can cover a cash shortfall. For a development or repositioning plan, include added construction cost and carrying time before projected income begins.
Check the exit price against relevant sales and test a higher exit capitalization rate. Ask, "What has to be true for this sale price to be achievable?" and "Could the investment still meet its obligations if a sale or refinance takes longer?" The direct deal IRR and MOIC calculator can show how changes to income and timing affect return estimates. It can also show the effect of sale proceeds. For team roles in ongoing oversight, see the property operating processes guide.
Checklist
- Reconcile rent assumptions with leases and collection records.
- Support vacant space rents and lease up timing with outside evidence.
- Compare taxes and insurance costs with records. Review repairs and management costs too.
- Review capital work against inspection findings and contractor support.
- Recalculate debt coverage under weaker income and higher rates.
- Stress timing and exit value, and record unsupported assumptions.
Read next: What should a family office check in a property's rent roll and lease agreements?
If you find yourself in the unenviable position of already having committed to these types of agreements with your family office employees, then the best path forward is to address the problem with the individual(s) and explain that changing the compensation structure will enable you to reward their successes more, and they will ultimately earn more if the firm does better.
Sources: Family Office Club investor due diligence framework, The Single Family Office. Informational only, not financial, legal or tax advice.