Another granular 'nerd-out' question pertaining to modeling complex mixed use development projects. Here goes:
Say we're underwriting a new vertical deal with multifamily, retail, and office uses. I start by underwriting each one standalone. Done. In reality, doesn't this get treated as one big project, with one loan (not three) and one equity investor (not three)? My question has to do with treatment of the "circular" functions--interest carry, financing fees, contingency, and development fee.
Pulling the draws for every other project cost from the individual models into the roll up is easy enough, but one loan for the whole project drives a different $ value of interest carry than the sum of the interest carry from the three individual standalone models. Same goes for contingency, financing fees, and developer fee--all driven by total project cost and/or total loan proceeds. If solving for unlevered and levered IRR/EM is the goal, we're done, but when it comes to creating a master sources and uses table (and then backsolving for what each of the three product's $ value for interest carry, contingency, developer fee etc.., based on the new total capitalization (one loan scenario), is it correct to allocate the circulars based on their old pro-rata share of the three model summation?
It also gets tough to decipher what the true UIRR/LIRR of each product type is, based on said share of overall project costs (using one loan scenario) given early sales are paying down principal and we're now viewing the deal through the 'one project' lens. If I haven't completely lost you, and you've dealt with this before, I'm all ears on whether I'm looking at this the right way or if there's another technique folks have used to underwrite. Thanks.
Bump
Bump.
Not really my expertise, but what is the issue with building out one model? Unsure what benefit there is to three different models under the assumption it is on property that will be sold as such.
If three & a rollup are 100% necessary then why not build the master model then backout the interest / carry afterwards?
This might oversimplify for you/not be helpful, but when I've had to do this I've made the assumption that you can get some sort of hold-back/earn-out arrangement done where you fund the projects separately even if its under the same 'blanket loan'. I.e., you basically just do pro-rata figures based on the same overarching loan pool. In my experience it's similar to how you would structure a portfolio loan, with different provisions for substitution/early release of component properties. Doing it this way, it allows you to stagger the delivery/construction timing which is most realistic, which should get you to the right spot for interest carry.
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