Introduction: Using the Expenses Section
Hey everybody, this is Anton from IntellCRE and welcome to this quick tutorial where we’re going to explain how to use the expenses section in the new analysis form.
Before starting an analysis, we’re prompted with boxes where we can upload financials, our T12s, OM, rent rolls, profit and loss. If we haven’t done so already, we can always do the uploading in the section.
This is how the expenses section looks before it has any data in it.
Manual Expense Input
There are a couple of ways we can get the data in.
We can do the manual input of the data using the Type In Expenses option.
For example, we can enter utilities and provide the current value for utilities, such as $2,000 per year.
We can work with different bases. We can work on an annual basis, monthly basis, per square foot, per unit basis, or on the basis of percentage expressed using gross operating income or percentage of the property value.
We also have pro forma expenses here that can be the same or different from current expenses.
For each expense item, we can use a different basis, and we can also set defaults if we like to work with certain expenses using certain bases. These defaults can be set in the platform settings.
Property Taxes
Property taxes are at the very top and are handled separately.
We can provide the annual value, such as last year’s property taxes.
If we don’t know what the taxes are, we can estimate them using the price estimate for the property. This functionality is shown in the auto-estimate feature.
At the very bottom, we see expense totals for current and pro forma expenses expressed using all mentioned bases. We also see what that looks like as a percentage of gross operating income (GOI).
Advanced Expense Options
We can enable advanced options for expenses.
One option is setting separate growth rates for separate expenses. When enabled, we get a growth rate for every expense individually.
For example, utilities might grow at 8% while other expenses grow at 3%.
We can also offset pro forma expenses by a number of months. This is applicable when a property is undergoing major renovation, not fully operational, or when modeling a ground-up development where current expenses don’t exist and pro forma expenses begin later.
Auto-Estimate Expenses
Now let me reset this section one more time and show you the auto-estimate expenses feature.
In cases where we don’t have the data around the expenses and we want to quickly run the deal through the platform and see how it looks, to do a quicker and dirtier version of the underwriting, we can use the auto-estimate expenses feature here.
What that does is it looks for live operational data for similar properties in the same market, and it’s using that data to come up with estimates for what the individual expense categories would look like.
So we can use this if we don’t have data on our current or pro forma expenses.
Uploading a T12 or Financials
Now let me reset this section one more time and show you the third way how we can get the expenses in.
Of course, this is the most convenient and the quickest way to do this.
We can just upload a T12, either in a spreadsheet or a PDF format, and we can have all the data automatically imported into the form.
This is what we want to do every time that we have such a document handy.
Property Taxes and Estimates
For property taxes, there are several ways to work with them.
If we know last year’s property taxes, this is the number that we’re basically looking at.
If we don’t have this information available, then the platform can provide an estimate by looking at an estimated value or estimated price for the property and then looking at the millage rates or the effective tax rate in that market, and then solving that equation for us to figure out what the taxes are going to be.
Advanced Tax Modeling
Another thing that we can do, if we need to model taxes with more flexibility, is enable advanced tax modeling.
In this case, we can play with various reassessment scenarios.
For example, if I choose reassessment to be in year two, I can see how the assessed value is changing for year two.
We also have a cash flow preview here for the taxes.
We can play with other factors such as tax credits or reassessment upon sale.
This is our annual tax growth rate, which is set at the legal maximum to be conservative.
That’s pretty much it for taxes.
Construction, CapEx, and Renovation Projects
Once we have situated our operating expenses, it’s time to look at whether we want to do any construction, capex, or renovation projects at the property.
If that’s the case, we’re going to use the construction expenses subsection.
In this section, we can model any number of projects, either capex or renovation projects, simply by providing the project name.
For example, unit rehab.
Let’s say we have some legacy units at our property and we want to model a project where we’re rehabbing these units.
Project Budget, Timeline, and Impact
We provide the project budget.
This could be a total budget or on a per-unit basis.
For example, $20,000 per unit.
Then we provide the timeline for the project.
Let’s say this is going to take six months to complete.
Then we decide whether this project affects vacancy.
If we want to model the vacancy that we’re going to have because of this project on top of any economic vacancy, we use the affects vacancy checkbox.
Another question we need to ask is whether there is a rent premium or rent increase associated with this project.
If the legacy units have been renovated and that allows us to charge higher rent, we use the rent increase checkbox.
Assigning Projects to Specific Units
If this is not a project that we’re doing for all units at the property, but only a subset of units, we use the three dots at the end of the row and select Edit Units.
Here we see the rent roll at the property.
We can filter the rent roll.
For example, show me all the units that are one bedroom.
Now we have six out of ten units.
Then we apply another filter.
Show me all the units where the current rent is below $1,900.
The result is five units.
These are the legacy units at the property.
Now we can either assign them individually to this project or assign them all at once.
We edit renovation for five units.
Now we’ve included these five legacy units in this unit rehab project.
The total project budget is $100,000 at $20,000 per unit.
CapEx vs Renovation Projects
We can add more projects.
We can add a capex project.
The difference between a capex project and a renovation project is that it doesn’t have a timeline.
The cash flow for a capex project happens right after acquisition.
Examples include adding solar panels or installing EV chargers.
Funding Sources for Projects
Now finally here we can choose the payment source, or where the money for these projects is going to come from, and we have three options: cash flow, working capital, or raised.
Now let me explain the difference between these three, because we see a lot of confusion around this point.
When we use cash flow as the source for this project, basically if this is a cash-flowing property, there is a certain cash flow every month. The system is going to try to use that cash flow to cover the costs of these renovation or capex projects.
And if at any point that cash flow at the property is not enough, then it will automatically start calculating how much working capital we need on top of that.
And you will see this reflected in the value financing section in the acquisition and sale, and in particular in the working capital.
So here we see that the system is calculating that we’re going to need thirty-something thousand more on top of whatever the cash flow is going to be at the property in order to cover this one hundred thousand renovation project.
The second option is working capital.
So we don’t want to use the cash flow at the property. We just take the costs and we want to have them before or as we’re doing the acquisition. We want to have them sitting in the bank account for this deal.
So when we choose working capital, you’re going to see that the entire cost of the project, one hundred thousand, is already down here in our working capital in our acquisition and sale.
Now the third option is raised.
And now one has to be careful, because if we choose raised, then we have to manually factor in the costs for all these projects further down in the analysis.
So this would be perhaps in the acquisition and sale section.
You see now we have no working capital, and so we either manually declare that this is the working capital that we’re going to need, or we include it as an additional acquisition closing cost, or there are several places where we can have this included.
Of course, if we’re doing a certain financing to cover the costs, we just need to keep that in mind.
Closing
So having said that, this is everything that you need to know in order to effectively use the expense section to model the expenses at your deal, at your property, and model them in accordance with what your strategy is for the deal.
So if you run into any additional questions, don’t hesitate to use the support button here to let our team know so we can assist you as quickly as possible.
That’s it. See you in the next tutorial.
