How Much Modeling is Done In Development?
I recently started as a development analyst at a smaller firm of about 40 people. I'm learning a lot but I'm really not doing that much modeling. It's more the creation of development budgets and draw schedules. The modeling that we do do really is pretty basic and just comes from templates..haven't made anything from scratch.
I'm curious if others (specifically in development) have had a similar experience? Am I at a disadvantage by not having as much modeling experience?
Thanks.
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You will likely never build a model from scratch whether you work in development or acquisitions besides for a test to get the job. The only way not having modeling experience hurts you is if you don’t know how to build or manipulate one. If you already know that information and just aren’t getting live reps using that skill set, you’ll be fine
This - very little modeling is done from scratch in the real world.
You will do lots of underwriting in development using existing templates assuming you work at an active shop, but yes, part of the job is development of budgets (this is the most critical part of the underwriting/modeling anyways) and ensuring timely draws. Like any job, every role has some boring work to do. On the acquisitions side 95% of the diligence process is mind numbingly boring.
Yes, but it's still important to understand how they work. Jump into the formulas a little. Likely won't need to build/edit the models very often, but you should be able to do so if needed.
Not much, and you're not at a disadvantage. Frankly, most development deals can have their returns modeled on the back of a napkin. The issues are far more tied up with the risks during construction; staying on time and on budget, which is why a lot of what you're doing is budgeting work.
Always remember, modeling doesn't actually provide any value. If you didn't even know how to open Excel you could be an excellent developer, because nothing you do on a screen actually translates to the physical asset. You still need to collect the checks, fix the leaks, and pay your taxes, and all of those things will have to happen regardless of the variance with what's in your underwriting. Unless you are a total asshole and a slumlord, you don't just stop abating black mold, because you've already exceeded your O&M budget for the year. You don't forego buying property insurance because your premium went up 10% and you only underwrote 3%
Ok let's not go overboard here - you can't say modeling doesn't add value. It does not literally add value to the asset, but it is critical to assessing a project and especially for fundraising. You cannot raise from sophisticated investors with a back of napkin analysis and you need to truly understand the project, market, and current economic conditions (e.g. material pricing, labour availability, etc.) and their impacts on your numbers and timing in order to go out and convince people to give you their money.
Back of napkin tells you a profit margin but it doesn't give you any sense of the impact of timing. Yes, there are plenty of small time developers out there that only care about dollars in, dollars out, and do just fine for themselves, but if you want to be a real player you need to be more sophisticated than that.
Honestly, is it? I guess if you're a bullshit artist raising money from idiots, it matters. How many people raise millions of dollars on the back of a crappy, over-aggressive underwriting? A ton. So if you want to argue that a model that looks nice can mask a crappy project, I agree. If you want to argue that a project with good fundamentals needs a great model, I don't agree.
You really don't, and I feel like all you have to do is read a Real Deal article to understand how this just isn't true. Plenty of people who don't understand any of those things raise plenty of money, so what is it really worth? The value is in the execution. If you want to argue that an LP puts a lot of value in a great model, maybe that is true - but as I'm saying, that also is a major indictment of your average LP.
I strongly disagree. Understanding staying on budget and on schedule has nothing to do with the complexity of your model; it's something good developers understand in their bones. Additionally, knowing the impact of timing doesn't help you deliver in that time frame! A developer who has no idea how badly a 6 month delay will hurt his returns, but still delivers his project on time, is going to be far more successful than the guy who has a flawless model and can tell you down to the cent how much it will hurt, but still ends up delivering 6 months late.
You genuinely do not need more sophistication than back of the envelope. Perhaps you don't literally provide a lender with said envelope, but they'll take your assumptions and plug them in to their own model, so no, you don't need to have some crazy ass underwriting. In fact, I feel (anecdotally) that there is an inverse correlation between the complexity and sophistication of the models I've seen and the experience and ability of the people putting them together. Developers who get the finance part but not the rest will obviously focus on what they know
Agree. most decisions made on back of napkin numbers and then something fancy is put together before talking with debt/equity
Can confirm what the fellow monkeys said. Worked as an Investment Analyst then Associate at a London shop mainly doing developments.
Had to build a model from scratch for a new fund (We would act as GP somehow doing the Structuring+Debt Financing if any+Origination+Dev management+Operations and were looking for a LP to provide capital). Team was proud and impressed when the model was completed but honestly not a single investor or advisor was, it was just another model.
On a daily basis I can confirm that 90% of my screening appraisals were extremely simple, land costs, build costs (incl. contingency), values, Rent yields, Opex, Financing costs, Profit, Profit on Cost. I even had a really tiny excel for the CEO called the "fag packet" allowing him to say yes or no without having me burning calories for nothing.
When it came to actual projects execution, as previously mentioned, sinews of war were phasing / budgeting...
Don't want to sound like a dick but I don't get the idea of seeing REPE far more modeling heavy, we had partnerships, "complex" waterfalls, multiple tranches of funding, Inflation factors, phasing... My flatmate is at a pure value-add REPE shop and they're just populating the exact same inputs on a model on a daily basis with a clear strategy/risk adjusted returns in mind. Would be great to get the insight from someone who has done both! (Maybe because my role was more on the investment side than dev?)
Working at a developer now, previously worked REPE. This is 100% accurate - basically everything is already a template.
It's important to understand how the models work, insure they're accurate and have appropriate assumptions (rents, costs, op-ex, timing, etc.), and why certain inputs have the impact they do. But as others have noted LPs aren't signing off on a deal because of the complexity or sophistication of a freaking excel workbook. From the developer/operator side, you underwrite the deal in your model and send it off to LPs/Lenders knowing they're just going to dump your assumptions into whatever excel template they have. It's far more important to have reasonable assumptions in the underwriting than a model that can accommodate 200 different structures/sensitivities.
Everywhere I've worked has their own version of the "fag packet" in the model to send to the MD/C-Suite level folks: just a single tab that shows the high-level metrics of whatever deal it is. Talking 10 benchmarks at the most...size, timing, YOC, IRR, residual assumptions, etc.
Only thing I'd add is that I do spend a little more time on the development side actually manipulating/changing models than I did w/REPE simply because of the complexities of development compared to value-add/existing assets.
Not as important as people make it out to be imo
The only time you would likely build a model from scratch is if you work for a small shop or just a completely new asset class or project (or fund). Most cases, you can probably piecemeal from other models to build one. You’ll likely never have to open a blank Excel workbook and start there.
If you think people at BX, Hines, Starwood, etc are spending hours a day building models from scratch, you’re fooling yourself.
So I worked at a shop that was heavy on the financial modeling side of things and find it valuable, but the real value of a financial analyst to me isn't necessarily the financial modeling, but rather these key points:
Yes, putting the packages together is valuable, but that's besides the point. Advanced financial modeling certainly can help for presenting to investors and investment committees, but as some others have already mentioned, you can still get approvals/funding without an in-depth financial model - this isn't rocket science. Most astute developers I know can pencil a deal quickly because they know the levers of the deal that make it feasible: land, due diligence costs, all construction costs, lease-up costs, market rents. The math is pretty basic. Investors invest because they like and trust a person or buy into the vision of a deal, not because they have a beautiful financial model. The financials can certainly lend credibility, but nobody cares about the perfectly crafted financial model - they care about the one page summaries that make it make sense.
So really it's up to you if you want to dedicate the time and energy to learning financial modeling from scratch. I'm a big fan of having that skill in your toolkit because in my experience it prove advantageous and allow you to gleam insights that others might miss, but it is not a 100% requirement to be a successful real estate investor.
I work for a developer and we definitely dont create models from scratch. we have templates..dont get so caught up in the modeling but instead learn the entire development process. its way more important than excel
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