Modeling difficulty by Asset Class
Wondering out of all the real estate asset classes on average what is the hardest and easiest assets to learn how to model?
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Multifamily is generally the easiest
Office/Retail aren't even that hard, they just take longer due to lease/reimbursement structures
I'm not sure if asset class is a determining factor in modeling difficulty. Building a rent roll is one of the most straightforward parts of a model. I think deal structure is going to add to complexity more than anything, especially if your firm puts deals together multiple different ways.
What different deal structures are you referring to? What are some ways to learn about the different kinds? TIA.
It just depends on how a firm capitalizes its deals - be it via discretionary capital/separate accounts/etc and then within the deal who is getting paid when and then there’s debt and that structure. Lots to think about.
Purely my own opinion from experience - only ranking what I've worked on.
First off, deal profiles are more important in determining the overall difficulty, from easiest to hardest: stabilized acquisition -> value add deal -> b-piece/structured debt investments -> (re)development projects.
Thereafter, I would rate the difficulty of asset classes: nnn/stn -> storage -> industrial -> multi -> retail -> office -> condo -> hotel -> mixed-use
What gives you the impression that condos are harder to model than office or retail?
Who even models condos? Very few institutional players. You'd likely just need to account for development costs in a similar fashion to a high rise multi development, followed by some sort of unit sale matrix similar to a MHC sellout.
I've seen condo deals get extremely complicated, including ones on nightmarish ground leases (which you also obviously have to model). First off, if you're looking at condo its most likely a development deal, which comes with its own complexities. There are many situations where deposits can be used to partially capitalize the construction costs and modeling that can become a pain depending on how nuanced the terms surrounding that are (i.le. which costs count and when can they enter the stack etc). You're also gonna have many tranches of capital in most deals including land loan to construction and then there is usually mezz involved in the final stack as well. You have to model the sellout schedule monthly which can also have timing implications based on when you are allowed to start closing on units (which can happen before completion and therefore affects reserves). You get the point. These can get crazy from a modeling perspective, whereas office is an argus dump into an existing template (whether its acquisition or development, done both).
Modified gross leases when you don’t have the base years and have to figure out re-leasing scenarios. Especially when the entire building has direct tenants who have leased to sub tenants, who have taken over different spaces when you have no stacking plan.
100%
Either retail or disorganized family-owned assets with a lack of documentation
One thing I’ve found is that deals tend to evolve in complexity as the check size goes up. For example, underwriting of a NNN Cracker Barrel is going to be very straightforward, with maybe a slight bit of complexity surrounding the lease renewal assumptions and some sensitization of financing and exit cap. A system-wide sale leaseback of 100 Cracker Barrels (like the one Oak Street just executed) will involve a shit ton of credit underwriting, commercial due diligence, etc etc.
Seems to me like this is a trend across all property types, and I think it’s tough to organize any meaningful hierarchy by property type. Principals will find a way to add complexity the more money they spend, whether it’s to cover their ass, justify their role as GP, gain an edge in a competitive sector, etc etc etc.
Additionally, as was mentioned above, the cooperation of the owner and the quality/organization of their materials makes a huge impact as well.
With complexity, call me crazy - but manufactured housing. Manufactured housing is a mix between rental, and in a sense, ‘condo’ as you can sell off new/used homes via Rent to Own or outright sales. Additionally you only capitalize income from tenant owned homes. So basically you have multiple cash flow statements which get combined. On top of that you have toggles in the model to sell homes via rent to own or outright sales - you can also finance all of this in different capitalization methods. Assuming you sell homes rent to own, timing is a factor as well because homes will convert from rentals to tenant owned homes, therefore going into capitalized NOI, in different months. I probably butchered explaining this, but there is a lot going on.
As clarification, you can capitalize the lot rent of any occupied site. If the home itself is leased, the lot rent needs to be separated out, with home rent recognized separately.
I definitely second your nomination of MH though. Add to your points the fact that rental income from the homes is non-reitable, so you typically have a separate entity operating home sales and leasing as a TRS (taxable reit subsidiary). There are also significant complexities regarding financing, terminal value, and depreciation of the homes themselves as well. Can go from extraordinarily simple to extraordinarily complex depending on how involved the operator wants to get with the physical homes themselves.
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