Negative CFs funded by Equity - Modelling
Hi Everyone,
I'm currently working on a real estate acquisition model. We are here talking about a standing asset, which will directly generate CFs at Q1 (quaterly model). So my CFs pretty much look like this: Q0 initial cash out flow and then Q1 CF>0 Q2 CF>0 Q3 CF>0 etc.
But, as it appears I have some negative CFs (Unlev as well as lev) during three consecutive quaters, due to a tenant's departure and to CAPEX taking place during the vacancy period. The instructions I have are the following: "Assume that in any quarter, positive cash-flow is distributed to the Fund and that negative cash-flow is funded by the Fund's equity."
Now, I don't really understand how to model this additionnal contributed equity supposed to compensate for those negative CFs. Are we talking about adding additional equity and in this case how do I add it to my model? (the only times I had to model equity outflows, they were always taking place at Q0) Or am I suppose to use the precedently distributed CFs to fund these outflows? I guess I have to add an "Additionnal Equity Contributions" right after my "Debt lines" between my Unlev CFBT and my Lev CFBT, but still this remains quite obscure for me.
Did any of you guys have to deal with such a situation (I'm sure it's not a rare thing) and how should I proceed?
Hope I was clear enough & Many thanks in advance!
Lenders will either enforce (i) a cash trap, (ii) some sort of ongoing reserve during the periods of positive CF to cover the periods of negative CF, or (iii) capitalize the operating deficit into the sources and uses for the deal, which should be funded by a combination of debt and equity.
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