NOI Vs Levered Free Cashflow
Re: Real Estate Development - Financial Modelling
May sound stupid, but I cannot seem to wrap my head around the difference between Net Income and Levered Cashflow.
So we are simply developing and then selling everything we have developed, there is no operating income.
We have...
- Gross Revenue (GR)
- Other Income (OI)- made pre or during construction from the property
- Total Development Costs = TDC
- Selling costs - (SC)
- Finance (Interest & setup costs only) Costs - (FC)
Gross Profit = GR + OI - TDC
EBIT = Gross profit - SC
Unlevered Cashflow (UFCF) = EBIT (because there are no taxes or depreciation)
Net Income [Profit/Loss] Before Tax = UFCF - FC
Here is where I am confused.
Levered Cashflow (LFCF) = Net Income After Tax - Debt Principal Repayment
-- But we've already deducted Total Development Cost (TDC) from Gross Revenue (GR) earlier. TDC covers all capital uses, including land and construction costs, which are funded by both debt and equity. For example, if land costs $100 and construction costs $100, totalling $200 which is made up of $150 debt and $50 equity, and we've already subtracted this from GR, aren't we deducting it twice?
Gross Revenue $1,000
Other income $140
TDC = $200 (Land $100 + Construction$100) = ($150 debt + $50 equity)
Selling Costs $60
Finance Costs$75
Gross Profit = $940 ($1000 + $140 - $200)
EBIT = $880 ($940 - $60) = UFCF [Tax = 0]
NET Income After Tax & interest = $805 ($880 - $75) -- Shouldn't this be distributed to investors?
Debt $150 - Hasn't this debt already been deducted from GR as part of TDC?
Levered CF = $655 [$805 - $150] -- Isn't this begin deducted twice?
My confusion is what will I distribute to equity investors? Net income that is left over after TDC has been deducted and tax has been paid etc. or Levered Cashflow where we further first deduct the principal repayments, which form part of debt which is already included in $200?
I would appreciate it if someone could clarify this for me—many thanks for considering my request.
Your post is a little scrambled but I'll try my best to answer. TDC is made up of equity and debt. Lets say a property's TDC is $20M, has a 60% loan to value, and a 3% interest rate.
40% of the property is equity you put in, 60% is debt that you will have to make payments on throughout the investment life of the project. Once the project gets built, you will lease up and obtain revenue from rents and "other income". From there you subtract operating expenses to get NOI. NOI is the cash flow the property is generating without taking into account debt service. From there you would take out capital expenditures, if any, and debt service to get levered FCF.
The reason it's separated is because capital expenditures and the capital stack for the project is largely deal specific and discretionary. NOI and cap rates are used to make things "apples to apples", similar to EBITDA or an EBITDA multiple. Also those metrics (EBIT/EBITDA) aren't used to value real estate, so leave that out you'll just get more confused.
Then you keep the property till it's full and lets say it has an NOI of $1.25M. Assuming a cap rate of 5% (like an EBITDA multiple) the property would be worth $25M. You then sell, pay off the rest of the debt, and keep the profits based on how much equity you own.
I think I did not explain my query clearly or perhaps I titled it incorrectly.
As I mentioned in my post, "So we are simply developing and then selling everything we have developed; there is no operating income."
In my query, there is no leasing involved at all; there is no operating income. I am simply referring to net income.
Bro I honestly have no idea what you're talking about. You mentioned revenue and EBIDTA multiples in the original post making it unclear. I'm assuming that you're talking about merchant developers? Not an expert, but I'm sure that a contract is made beforehand with the buyer with an agreed upon purchase price. Then it's just Price - Costs.
Then why are you asking about NOI?
I think the source of confusion here is you are talking about operating statement terminology (Gross Revenue, Other Income, Net Income, Levered Cash Flow) and then specifically stating that there are no operations but you are in fact talking about a sale.
If you are literally building a project and then someone is buying it off of you pre leasing and pre stabilization, then your calculation is as simple as this:
$ Sale Price
-$ Total Outstanding Debt
-$ Cost of Sale
-$ Return of Equity
-----------------------
$ Profit
You would then distribute that profit according to your JV agreement with the investors. Using the numbers from your example, it would be
$1,000 Sale Price (Or is it $1,140? What is "other income" here?)
-$150 Debt
-$60 Cost of Sale
-$50 Return of Equity
--------------------------
$740 Profit, distributed accordingly
Find me a deal that I can build for $200 and sell for $1,000 please.
Anyhow, NOI doesn't matter because you have no operations. The O stands for operations. It would be negative I suppose, but you'd have a line item or line items in your dev budget to account for that. Same with financing costs (which amusingly wouldn't be 50% of the entire loan.) Taxes would also be part of your dev budget, because you have no operations, so you wouldn't be accruing them or paying them out of operations.
Levered Free Cash Flow also doesn't matter because the only month in which you'd have free cash flow is your terminal month, when you sell the deal.
I appreciate you clarifying this for me. Yes, I think I messed up explaining it properly. It is straightforward: develop/build and sell.
Dicta quia qui cum commodi consequatur est voluptatem. Sit quis dolorem commodi non ratione sapiente dolor quo. Quos explicabo veniam ratione rerum.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...