Introduction to Financial Models

• Definition and importance of financial models in real estate.
• Best practices in creating financial models
  • Phase 1: Understanding the business case
  • Phase 2: Creating a robust model layout
  • Phase 3: Developing accurate formulas
  • Phase 4: Revising the model structure
  • Phase 5: Testing the model rigorously
• Golden rules of financial modelling

Introduction to Real Estate Development

• Overview of how to analyse development opportunities
• Identifying and evaluating development potential
• Feasibility analysis based on Profit on Cost
• Residual Land Value based on Profit on Cost
• Residual Land Value and Land Market Value

Development Valuation

• Development appraisal fundamentals:
  • Residential and Commercial Property Valuation
  • Net initial yield (NIY) and gross internal area (GIA) analysis
  • Gross Development Value (GDV), Net Development Value (NDV)
• Residual Land Valuation (RLV)
• Advanced Excel tools for valuation:
  • Goal Seek
  • Solver

Affordable Housing and Levies

• Section 106 (Lump Sum)
• Required affordable housing units and associated calculations

Development Costs

• Efficiency rate: Gross Internal Area (GIA) versus Net Internal Area (NIA)
• Hard Costs: Construction and refurbishment, site purchase and vacant possession value, contingency
• Soft Costs: Professional fees, Planning obligation fees, statutory costs, allowances and rights
• Finance Costs: Nominal finance costs
• Land Value: Asking price and purchaser’s costs

Pro-Forma Real Estate Development Cash Flow

Development Cash Flow Modelling

• Inputs, assumptions, and timeline management
• Hard and soft cost analysis
• Sources and uses of capital

Sources of Investment Capital

• Financing phases:
  • Preliminary phase
  • Construction phase
  • Lease-up and fit-out phase
  • Stabilisation phase

Development Debt Finance

• Equity first capital deployment waterfall
• Debt repayment structures for development finance
• Rolled-up interest debt structuring (PIK – payment in kind)
• Senior and mezzanine finance structures

Joint-venture structures

• Equity waterfall structure
• Preferred returns
• Promote cash flow and hurdle rates

Joint Ventures and Promote Structures

• Structuring joint ventures
• Understanding promote cash flow, hurdle rates and distribution

Leveraged and Unleveraged Real Estate Development Returns Profile

Creating and interpreting returns profiles

• Internal Rate of Return (IRR) using XIRR
• Net Present Value (NPV) using XNPV

Residual Land Value (RLV)

Analysing and deriving the maximum bid price for land purchase based on leveraged and unleveraged target returns

RLV based on Profit on Cost, IRR and NPV

Multiple tenancy properties

When to accept the project and make investment recommendation

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

OPEX and CAPEX modelling

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

Investment decision

How to make the optimal investment decision based on IRR, NPV, Profit, Return on Equity (ROE) and Equity Multiple

Capital Structure, Sources of Debt Finance and Lending Criteria

• Capital structures: debt & equity
• Explanation of different debt & equity structures
• Sources of debt fund & lending criteria

Senior debt repayment modelling

• Interest Only
• Constant Amortisation
• Fully-Amortising Constant Payment
• Partially-Amortising Constant Payment
• Rolled-Up (Capitalised) Interest (Payment in Kind – PIK)

Debt covenants modelling and analysis

Leveraged return analysis based on IRR, NPV and Equity Multiples (MOIC)

Interest Coverage Ratio (ICR), Debt Service Coverage Ratio (DSCR), Loan to Value (LTV), Debt Yield (DY)

What happens when covenants are breached

Cash sweep

Revolving debt facilities

Finding maximum borrowing amount and highest LTV

Dynamic debt modelling using varying debt structures

Value-Add Strategies Modelling: Investment Options

• Acquire, lease re-gearing, hold or sell
• Acquire, re-develop, refinance and hold
• Acquire, re-develop, stabilise and sell
• Hold vs. sell decision

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

Sources of funds

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

Refinacing strategy

• Determining optimal refinance date
• Quantitative analysis of refinancing strateg

Joint-Venture Structures

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

Risk modelling and presentation

Financial ratios analysis: IRR, NPV, Residual Land Value, Profit on Cost, Return on Equity and Equity Multiple

Sensitivity analysis

Scenario analysis