Certificate in Real Estate Development & Value-Add Investments Financial Modelling

Fundamentals of Real Estate Debt Finance

• The Real estate transactions’ capital stack
• The importance of debt in real estate transactions

Real Estate Market Analysis

• Understanding market trends
• Asset class demand pre- and post-COVID-19
• ESG, lenders’ and borrowers’ approaches
• Evaluating market conditions for financing decisions
• Geographic and sector-specific considerations

Types of Real Estate Debt Instruments

• Commercial Real Estate Loans

        -   Characteristics of commercial loans

• Risk-Return

        -   Loan structures

• Interest-only
• Constant amortisation and remaining balloon payment
• Annuity
• Cash Sweep

Development Financing

• Financing new development projects

        -   Strategy: Residential/ Commercial; domestic/ international

• Risks and considerations

        -   Developing entity, credit worthiness, project experience
        -   Land development risks
        -   Design Risks
        -   Entitlement risks
        -   Financing Risks
        -   Cost overrun/ delay risk
        -   Lease risk
        -   Sale Risk

• Phases of development financing

        -   Total Development Costs and Sources of Funds
        -   S-Curve and Debt Drawdowns

Key terms and covenants

• Maturities: Development facility vs Investment properties
• Financial covenants/ Default covenants
• Reporting covenants/ Information covenants

Analysing real estate debt

• Financial Analysis Techniques from an investment and lending perspective

        -   Property Investment
              -   Net present value (NPV) and internal rate of return (IRR)
        -   Lending
              -   Debt service coverage ratio (DSCR)/ Interest Cover Ratio (ICR)
              -   Debt Yield
              -   Loan-to-value ratio (LTV)

Risk Assessment

• Identifying and mitigating risks
• Sensitivity analysis
• Stress testing financial models

Commenting on Legal and Regulatory Framework

• Legal Aspects of Real Estate Debt

        -   Key legal documents (Loan agreement/ Security documents including Fixed charge/ mortgages deed, floating charge, pledges over rental income accounts)
        -   Foreclosure process and implications
        -   Lender liability and borrower protections

• Regulatory Environment

        -   Overview of relevant regulations
              -   Basel III
                    -   Output Floors
               -   Sustainable Finance Disclosure Regulation
                    -   Art. 8 and 9
               -   Shariah Finance

         -   Impact of regulations on real estate finance

Case Studies and Practical Applications

• Real-world example of a real estate debt financing transaction

Best practice in financial models

• Simple tips to help you become an efficient financial modeller
• How to avoid errors and present your models in a persuasive way

Implicit investment valuation methods

• Term & Reversion
• Layer / Hardcore
• Property yields
• Defining term and reversionary yields
• Calculating the equivalent yield

Build your cash flow from scratch

• Inputs: passing rent, estimated rental value, initial and exit yields, market growth, review cycles and most importantly, target returns
• Outputs: internal rate of return, net present value and worth
• Annual and quarterly discounted cash flows: modelling purchase price, passing rent, rent reviews, exit rent and exit price

Gearing / Leverage

• Adding senior debt “bullet” loan

Analyse the results

• IRR, NPV and Worth
• Data tables & sensitivity analysis
• Risk visualisation (charts)

Case study:

Single-tenant office building in the UK

Multiple tenant properties

• Modelling tenancy schedules and rents forecast
• Rent reviews, upward-only, break options, lease expiry
• Modelling hypothetical second leases
• Void period, rent free and estimated rental values

Time-varying rental growth

Net Operating Income Forecast

• Modelling capital expenditure for refurbishment and operating costs (letting fees, void costs, empty rates)

Investment decision

• When to accept the project and make investment recommendation

Case study

Multi-tenant office building in the UK

Residual Valuation Appraisal

• Property Yields
• Land Value
• Profit Appraisal
• Gross and Net Development Values
• Return on GDV, Cost and Equity

Pro-forma development cash flow

Inputs:

Timings: purchase date, works start date, planning, lead in, construction and refurbishment, void period, lease start, sale date

• Revenue: sales proceeds, estimated rental value per sqf, net internal areas, rental growth and target returns
• Development Costs: construction and refurbishment, site purchase and vacant possession value, contingency, professional fees, statutory costs, allowances and rights
• S-Curve vs. Straight Line

Outputs:

• Internal Rate of Return (IRR)
• Net Present Value (NPV)
• Maximum Bidding Price
• Total profit, profit on cost and equity multiple

Financial viability testing & risk analysis

• Data tables & sensitivity analysis
• Risk visualisation techniques

Case study: 

un-geared office redevelopment in the UK

Development finance

• Debt & Equity Structures
• Senior Debt
• Mezzanine Loan

Geared cash flow

Debt Types

• Rolled-up interest senior debt
• Equity first capital deployment waterfall
• Debt repayment structures for development finance

Joint-venture structures

• Equity waterfall structure
• Preferred returns
• Promote Cash Flow

Capitalised interest & circularities

Case study:

geared office redevelopment in the UK

Lead-in period

• Current in-place leases, operating expenses – vacancy costs, including rates and empty costs
• Site acquisition including options, pre-development and planning costs
• Equity and debt drawdowns, including mezzanine finance

Construction period

• Development hard and soft costs using S-curve, Straight line and Known curves
• Construction finance drawdowns following an equity-first model

Lease-up and stabilisation period

• New leases with gross and net lease clauses
• Tenant incentives such as rent-free and capital expenditure contributions
• Operating expenses – delayed rates, letting fees, service charges and void costs

Investment options modelling

• Lease re-gearing, hold or sell
• Re-develop, refinance and hold
• Re-develop, stabilise and sell

Sources of funds

• Calculating debt and equity peaks
• Modelling the debt repayment waterfall
• Calculating total cost of debt (interest and fees)

Carried Interest / Promote Structures

• Profit shares and preferred equity returns
• Equity returns based on different IRR tiers

Risk modelling and presentation

• Sensitivity analysis (2-way data tables)
• Scenario analysis
• Financial ratios: IRR, NPV, Residual Land Value, Profit on Cost, Profit on GDV, Equity Multiple