Underwriting Help
So a MD from a large brokerage (think JLL , Cushman, CBRE etc.) asked me to underwrite an old deal they did pretty much as a test. They sent me the model they use, the assets past year financials (rent roll, debt quotes, and income statement), and location market data. My question is where should I begin as I am a bit confused. Am I just inputting the income state lines into the model and then the model will generate the next month /years pro forma? Or should all the inputs be new things I calculate? Thanks in advance for any help.
Categorize historical financials to line items (revenue, vacancies, opex, etc.) and figure out what that looks like in Year 0. Grow it through Year X applying some growth assumptions.
You’re definitely definitely going to want to find out whether or not they’re sending the model as a example or a tool to help you with valuation.
I feel like a brokerage would just want you to analyze the deal by inputing data into their current model. If that’s the case, then find the value of the property by determining NOI and apply a reasonable cap rate to it based off the asset class and market. Input the financing assumptions and see if it would check out with lenders basic criteria. Try to find any potential hiccups in a deal and think about how the landlord could maximize their property’s value.
If they want you to build out your own model than they’re probably just making sure your competent in excel. In that case focus less on property assumptions and more on creating a sophisticated spreadsheet with correct formulas. Use the example model as a format guide and to see what KPI’s the MDs are looking at.
Thanks so much for the response. Yea they just want me to analyze it with their in house model. Its a student housing asset, So im assuming I use the last school years ( sept. 2019-August 2020) income statement as my inputs? Or do I need to use the last months ( August 2020) inputs and then apply growth assumptions based on market data?
Both
If it’s a cash flowing asset and doesn’t have a value add component to it, use last years income statement to find out NOI. Do some market research, look at comps, and apply a cap rate that you think it would transact at. The cap rate is the tricky part, you need to be able to justify why you chose it. This is going to determine a reasonable sales price.
Input all the assumptions into the pro forma that projects out future cash flow as well. The assumptions might already be in place but if they aren’t don’t worry too much about making the right growth assumptions. They won’t expect you to be an expert.
Input all the lending assumptions into the model as well. Make sure the property will meet the lenders basic requirements like debt to income ratio.
At the end of the exercise you should ultimately be able to speak to why the property would transact at the sales price you came up with. The pro-forma and lending portion is really just to make sure the investments future outlook checks out number-wise.
Prefect will do, they want it for 2020-2021 school year so I started the model date Sept 20 and ended it Aug. 21 The income statement ends on August 2020, so im going to use all the inputs from that month and then find the growth assumptions to add to that for the rest of the year. Will find an exit cap rate for 2021 like you said. Thanks man
Please don't use a T1 to extrapolate for a full year, use the full T12
It's for a broker so take the 2019 financials, increase all income items by 5%, decrease all expenses by 5%, then slap a cap on it. They'll hire you right away!
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