REFM's Demystifying The Excel Pro-Forma: What It Is And How You Can Begin To Master It

Real Estate Financial Modeling’s

Demystifying The Excel Pro‐Forma:What It Is And How You Can Begin To Master It

www.GetREFM.com

Copyright © 2009 – 2013 by Real Estate Financial Modeling, LLC. All Rights Reserved.

CLICK TO EDIT MASTER TITLE STYLE

GetREFM.com

Goals

1. Identify the major components of the pro‐forma and their functions

2. Illustrate the relationship of the components to one another

3. Learn the “Cardinal Rules” of modeling with Excel

4. Learn Best Practices for inheriting a model

2


GetREFM.com

The Framework

3

Today (Time 0)

The Future


GetREFM.com

Commercial Real Estate Transaction Flow

4

Equity and debt capital fuel a real estate transaction

Operation of the asset/sale of unitsgenerate positive

cash flow

Operating/sale cash flows fund

repayment of debt & return of equity

Excess cash flow = profit to equity

investors

Projecting into the future


GetREFM.com

What is Financial Modeling?

Forecasting of future financial outcomes (calculations) based on current assumptions (inputs).

5


GetREFM.com

A Pro‐Forma Is A Projection Model

A story about a financial transaction that attemptsto predict how and when cash will be:

• Invested in the transaction and repaid

• Borrowed for the transaction and repaid

• Generated by the transaction and spent/paid.

6


GetREFM.com

Pro‐Forma Fundamentals

7

A Pro‐Forma does three things relative to thedollars going into, out of, and being applied within a specific real estate transaction:

1. Identifies the purpose of the monies

2. Quantifies the amounts a) Applies expense inflation and income

growth factors as applicable

3. Times the flows


GetREFM.com

Pro‐Forma Fundamentals

8

Example: Real Estate Taxes paid twice a year: Jan. and July

When? Why?

Time 0 Time 1 Time 2 Time 3 Time 4How? How Much?


GetREFM.com

The Importance of Timing

• Owners generally do not want to spend money before they absolutely have to

• Vendors and service providers generally want to get paid as soon as possible (and are typically paid monthly)

• Investors want to get paid based on the transaction documents, whose profit‐sharing terms have been architected based on their investment timing objectives

• Lenders want to match the lengths of their assets and liabilities (thus pre‐payment penalties)

• Internal Rate of Return (IRR) metric depends partly on the timing of cash flows

9


GetREFM.com 10

Time Value of Money / Discounted Cash Flow (DCF) Model

Assumptions:

Dry Cleaner, Sandwich Shop, Bakery/Café, Convenience Store Year 1 Year 2 Year 3

Cash InvestmentExpected Annual Net Operating Income (NOI) from Base Rent

Base Rent Adjustment for Inflation due to Escalation Clauses 3.00%Percentage Rent

Expected Return with Escalation and Percentage RentYear Over Year Growth

Cash on Cash Return

Expected Net Sale Amount, Inflation Adjusted

Expected ValueNet Cash Flow (Return on Investment)

Discount Rate 7.00%Present Value

Net Present Value of Expected Values $196,760.85Using NPV function $196,760.85

$451,954.00

Today (Time 0) End of Year 1

$60,747.66

End of Year 2 End of Year 3

($1,000,000.00) $65,000.00 $67,300.00 $1,319,654.00

6.50% 6.73% 6.97%

$1,250,000

$65,000.00 $67,300.00 $69,654.00NA 3.54% 3.50%

$0.00 $1,800.00 $3,654.00$5,000.00 $5,500.00 $6,000.00

Discounted Cash Flow Model

Year 1 Year 2 Year 3Percentage rent estimated at $5,000 in Year 1

$58,782.43 $1,077,230.76($1,000,000.00)

Purchase of newly-built 4-Tenant Retail Strip Center:

No financing used (purchase is all cash)Leases are Triple Net (NNN), meaning Tenants pay all expensesLeases total $60,000/year, and have a 3% annual escalation clause Today (Time 0)

$60,000.00 $60,000.00 $60,000.00($1,000,000.00)


GetREFM.com

Transaction Types

1. Acquisition/Disposition (sale) of an existing income‐producing property:Apartments, Office, Industrial, Hotel, Retail, Self‐Storage

2. Renovation and continued operation of an income‐producing property/Re‐positioning of existing property

3. Land entitlement, subdivision and sale of lots to builders

4. Ground‐up new property development‐ Unit sales: Detached Houses, Townhomes, Condominiums‐ Income‐producing property

5. Refinancing of property

6. Mortgage Note Purchase

11


GetREFM.com

Pro‐Forma Overview – Apartment Building Ground‐Up Development

12


GetREFM.com

Pro‐Forma Components – Apartment Building Ground‐Up Development

1. Assumptions Tab

13


GetREFM.com


2. Lot and Building Characteristics

• Describes the zoning and physical characteristics of the land and structure you intend to develop and build

‐ Calculates the Square Footages of the various uses associated with the structure, both Gross and Rentable

‐ Calculates the number of parking spots and levels of parking

14


GetREFM.com


15

2. Lot and Building Characteristics example


GetREFM.com


3. Capital Structure

• Describes the different sources of funding that will pay for the development of the project

‐ Equity (Cash, Land, Tax Credits)

‐ Debt (Land loan, Construction loan, Mezzanine loan, Permanent loan)

16


GetREFM.com


17

3. Capital Structure example


GetREFM.com


4. Unit and Mix Details

• Describes the types of apartment units, the number of each, and the expected rents for each unit type

‐ Studio‐ 1 bed / 1 bath‐ 1 bed /1.5 baths‐ 2 beds /2 baths

18


GetREFM.com


4. Unit and Mix Details example

19


GetREFM.com


5. Sources and Uses of Funds Tab

• Describes how the development budget is spent (used) across the various cost categories over time

‐ Land Acquisition, Hard Costs, Soft Costs, FF&E, Financing

• Matches Sources of funding to these costs

20


GetREFM.com


21


GetREFM.com


5. Sources and Uses of Funds Tab partial snapshot

22


GetREFM.com


6. Cash Flow Tab, part 1

• Describes the dynamics of cash relative to the newly developed Asset, with Growth factors taken into account

‐ Revenues received‐ Operating expenses paid‐ Real estate taxes paid

• Calculates Net Operating Income

23


GetREFM.com


24


GetREFM.com


25


GetREFM.com


6. Cash Flow Tab, part 1 partial snapshot

26


GetREFM.com


6. Cash Flow Tab, part 2

• “Levers” (adjusts) the cash flows produced by the building by accounting for all of the Equity and Financing cash flows in the transaction, resulting in a Net Levered Cash Flow line

• Net Levered Cash Flow is “what you make” (pre‐income tax) on the transaction

27


GetREFM.com


28


GetREFM.com


6. Cash Flow Tab, part 2 partial snapshot

29


GetREFM.com

Pro‐Forma Components – Income‐Producing Property Acquisition

30

Development Project

Time 1 Time 2 Time 3 Time 4 Time 5 Time 6 Time 7 Time 8 Time 9Revenues 0 0 0 0 XXX XXX XXX XXX XXXExpenses YYY YYY YYY YYY YYY YYY YYY YYY YYYPre-Tax Profit YYY YYY YYY YYY ZZZ ZZZ ZZZ ZZZ ZZZ

Existing Commercial Building

Time 1 Time 2 Time 3 Time 4 Time 5Revenues XXX XXX XXX XXX XXXExpenses YYY YYY YYY YYY YYYPre-Tax Profit ZZZ ZZZ ZZZ ZZZ ZZZ


GetREFM.com

Pro‐Forma Overview – Apartment Building Acquisition

31


GetREFM.com


1. Assumptions partial snapshot

32


GetREFM.com


33

2. Sources and Uses of Funds for Acquisition example


GetREFM.com


34

3. Rent Roll example


GetREFM.com


35

4. Historical Operating Statements partial snapshot


GetREFM.com


36


GetREFM.com


37

5. Cash Flow partial snapshot


GetREFM.com

“Cardinal Rules” of Financial Modeling

1. Garbage in, garbage out Do your assumptions have current and reliable bases?

2. Annotate as much as you can bear (Alt+I+M)Change is the only constant – keep a running record

3. Learn and use keyboard shortcuts4. Save multiple copies of all models5. Always sanity check your outputs

Ask yourself out loud: Do my numbers make sense?6. "Pay now or pay later"

38


GetREFM.com

Best Practices When Inheriting A Model

1. Find the buried bodiesa) Unhide all hidden Sheetsb) Unhide all hidden rows and columnsc) Ungroup all grouped rows and columnsd) Temporarily paint each sheet so you can find any

invisible text

2. Audit every cell and every formula and be sure you can explain every formula to someone else

3. Don’t lose contact with the original builder of the model!

39


GetREFM.com

Excel For PC Keyboard Shortcuts

40

Business

REFM's Demystifying The Excel Pro-Forma: What It Is And How You Can Begin To Master It