Purpose
The purpose of this post is to provide a detailed walkthrough of the Commercial Development Model. This post will go over how to input data into the model as well as give an overview of the reports.
Inputs
Nearly all CRE Suite models have a single inputs tab that make it easy for the user to underwrite their deals. The user can navigate the tab using the Control Panel. For more information on the Control Panel, please see The CRE Suite: Understanding the Control Panel.
Financing Assumptions
In this section you will find a number of different loans for financing the project. The model starts with the Construction Loan and can be refinanced into the Permanent Financing. In order to use the Permanent Financing the Construction Loan Term must be shorter than the Month of Sale, otherwise the Permanent Financing inputs will not be visible to the user.
For more information on the Construction Loan, please see The CRE Suite: Understanding the Construction Loan.
The Permanent Financing has four inputs that are used to determine the amount of funding, these are the Maximum LTV, Perm Loan CAP Rate, Min. DSCR, and Min. Debt Yield.
Once entered, the model will calculate three different Max Loan amounts based on the DSCR, Debt Yield, and LTV. The model will then use whichever is the lowest amount as the funding.
You are NOT required to enter a Min. DSCR or Min. Debt Yield if you only want to use LTV to calculate the loan amount. Alternatively, the user can also manually enter the loan amount via the “Perm Loan Amount Override” input. As you may have noticed, the Permanent Financing does not have to be the same amount as the remaining balance of the Construction Loan. If the Permanent Financing amount is higher than the remaining Construction Loan amount, the balance will be paid out as distributable cash flow. A lower Permanent Financing amount may result in a capital call if there is not enough operating cash flow to cover the deficit.
The model also has two Mini-Perms which can be used to bridge the Construction Loan to the Permanent Financing. To use either or both of the Mini-Perms, the user simply needs to click the dropdown next to “used?” and select “Y” for “Yes, use this Mini-Perm”.
The Mini-Perm will automatically refinance the entire remaining balance of either the Construction Loan or the prior Mini-Perm. The Mini-Perms can be set to last the remainder of the project, or can be refinanced in the same manner stated above.
Mezz Debt is also present in this section which is explained in another post.
Disposition Assumptions
This section is where the user controls when to sell the property and for how much. The “Disposition” box is where the user can enter the Month of Sale and the capitalization rate. The model will automatically grab the Forward 12 NOI from the Month of Sale to capitalize and determine the sale amount. Alternatively, the user can also override the sale amount with the Sale Amount Override input. The user can also enter the Cost of Sale as percentage of the sale amount.
This model also allows for the sale of outparcels separate from the main property. These inputs can be found to the right of the “Disposition” box. The user only needs to enter the Sale Month, the Proceeds from the sale, and any Cost of Sale for the outparcel. The user can also apply some or all of the sales proceeds as a release towards the currently active loan. This is entered as a percentage of the Net Proceeds (after Cost of Sale).
Development Budget
For most deals, this section will be the most important as the majority of the model depends on this section. Because of this, we’ve created a separate post that goes into more detail. See The CRE Suite: Understanding the Development Budget.
One thing that is unique about the Development Budget in the Commercial Development model is that Tenant Improvements and Leasing Commissions are treated as line items here. The user controls the timing of these lines within the Development Budget, but the funding comes from the Rent Roll Assumptions explained below.
Rent Roll Assumptions
The Rent Roll Assumptions section is going to be your main revenue driver in the model. This sections allows the user to control how much revenue they’re expecting from their tenants, as well as control the exact month in which each tenant or block of tenants lease is expected to start. The user can also enter any Tenant Improvement Allowance and Leasing Commissions for each tenant, the cost of which will be reflected in the Development Budget automatically as mentioned above.
Reimbursements are a simple percentage input. The user just needs to enter the first month to start collecting reimbursements, and what percentage of Operating Expenses they will be collecting. This shortcut is intentional as most development pro formas are seeking to ramp up to a stabilized NOI and then sell/recap.
Other Income
This is a supplementary revenue section where the user can enter any other income items that are outside of the rent roll. Examples of common items found in this section include parking fees, & billboard income. Like in the Rent Roll Assumptions, the user can control the exact month that they want to start receiving revenue. The user can also input the duration of the line item if it’s anything less than the full life of the project.
Operating Expenses
This is where the user will input their operating expenses for the property. All expenses are entered in as $/SF amounts and can begin to accrue at different times as set by the user. The only exception to this is Management Fee which is a percentage of Effective Gross Revenue and will begin to accrue at the same time as revenue. Inflation can be set in one of two ways. The user can input an overall Expense Growth at the top of the section which will apply to all expenses, or they can manually enter different inflation rates for each expense.
In order for the individual inflations rate to be applied, the overall Expense Growth must be blank. If the user inputs zero into the Expense Growth, then ALL expenses will be set to 0% inflation. As with all CRE Suite modules, these various sections can be customized by a CREModels Analyst.
Reports
All reports have preset print areas so the user can easily print them off once they’ve finished inputting all of their assumptions. All reports can be customized with the users company branding (logos and coloring). To request your model branded, please contact CREModels.
Executive Summary
This tab is typically the front page of any reporting package as it gives a high level snap shot of the project as a whole without going into too much detail. On this tab the user will be able to find key project return metrics such as IRR and Return on Cost, their Sources and Uses, a consolidated 10 year cash flow, as well as some supporting charts and graphs. The loan assumptions are also present on this tab. The Permanent Financing will only appear if it is active for the deal (see Financing Assumptions above).
Annual Cash Flows
This tab shows the user a more detailed 10 year cash flow statement. The report starts with Total Acquisition and Construction Costs and flows down all the way to Total Levered Cash Flows. In between the user can see every expense line item on an annual basis as well as detailed debt cash flow for each source of debt.
Development Budget
Here the user can see a breakdown of the development budget on a monthly basis. The user can track every single development cost individually, or the development as a whole.
Rent Roll
This report is exactly the same layout as the Rent Roll Assumptions on the Inputs tab, but set up in a reporting format.