So, my question revolves around drawing down an interest reserve dynamically. Let's say we have in one cell an interest reserve of $XM. I also have a negative cash flowing asset that needs to draw upon the interest reserve when there are negative shortfalls due to debt service. At some point, the reserve runs out, and our net income resumes having negative cash flow.
To tackle this, I have utilized the formula in my pro formas: MIN(negative cash flow, Interest reserve - (sum(all previous interest reserve draws).
While this accomplishes what I need it to do, sometimes in larger models with a lot of iterative calculations the formula will have a hard time figuring out how to utilize the last bit of reserve without going over. (will not utilize full remainder of reserve).
Have you utilized or have used any other formulas that accomplish an interest reserve draw with a fixed reserve amount?
And a bonus question, how would you tackle dynamically topping up the reserve when the reserve balance falls below a certain threshold? Let's say in this case once the reserve falls below $100K, you top up the reserve with a 500k out of new equity.
Again, the formula above works, but looking to see if others have better ways of doing it / using multiple rows to simplify the calculation.
Ah, the dynamic interest reserve drawdown, a classic conundrum! Your approach is pretty solid, but I understand the need for a more efficient solution, especially in larger models.
For the first part, you might want to consider using an IF statement to check if the remaining reserve is less than the negative cash flow. If it is, then use the remaining reserve; if not, use the negative cash flow. This should help you utilize the full remainder of the reserve without going over.
As for the bonus question, you could use a similar approach. Create a formula that checks if the reserve balance falls below $100K. If it does, add $500K to the reserve. This could be done using an IF statement as well.
Remember, the key to simplifying these calculations is to break them down into smaller, more manageable parts. You might end up with a few extra rows, but it'll be worth it for the clarity and ease of use.
And remember, always test your formulas thoroughly to ensure they're working as expected. Happy modeling!
Sources: Tutorial: How to Model a Real Estate Development Construction Loan, How do you compute IRR without any negative cash flows?, Modeling ground lease payments into a pro forma
No
Dude we just had an entire thread on this
I would break it out into as many lines as possible (also makes it easier to audit). The lines would be:
Beginning interest reserve balance
Additional Interest Reserve funded (If(beginning reserve $100k, $500k, $0)
Interest Reserve Used (min(beginning interest reserve + additional interest reserve, cash flow,$0)
Ending Interest Reserve Balance
Then next column would pick up the ending reserve as the beginning reserve and so forth. Just make sure you account for the $500k funding in the waterfall appropriately.
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