Monday, July 11, 2016

Back of the Envelope Pro Forma

Sometimes before fully analyzing a deal via ARGUS or a complicated excel model (similar to the one we built here), you'll want a quick, dirty way to filter out bad deals. The goal of the initial filter is to save your valuable time by limiting the deals you underwrite. Here's a link to an example of a quick back of the envelope pro forma that we sometimes use at our company for that initial filter. Notice how simple, quick, and easy to use it is. It only has a couple of inputs and shouldn't take more than 15 minutes to populate and spit out some rough metrics.

The model linked here was used to analyze a vacant building which is why we have carrying cost reserves, debt service reserves, and such high TI's and LC's per square foot budgeted for the project. Note that we also have $0 of net cash flow being added to the project profit. That's because we were assuming we'd sell the building as soon as it was leased up. For a building that's not vacant, in the cost section you should budget what costs would be necessary to stabilize the building and bring it up to market.

For example, say a 100,000 square foot building is 70% occupied. Let's assume a market TI per square foot is $20 and we'll have to pay about $5 per square foot in leasing commissions for new deals. That $20 and $5 is only over 30,000 square feet though, so to convert them to a number over the entire building square footage we'll take 30,000 and divide it by the total building square footage, 100,000, and then multiply that fraction by $20 and then multiply the same fraction by $5. We get $6 in TI's over the entire building square footage to get the building stabilized. Then we get $1.5 in LC's over the entire building square footage to get the building stabilized.

To reiterate, this is just a quick back of the envelope calculation. When we first look at a deal, we run some numbers through here. If the equity multiple is 1.5x or more we'll generally take it to the next level of underwriting and do a full ARGUS run. Please don't go around making multi-million dollar offers on properties without doing a more thorough underwriting!

No comments:

Post a Comment