Real Estate Debt Structures, Risk & Financial Modelling

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

Land Value: Asking price and purchaser’s 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

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

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