Using the Value & Financing Section in the IntellCRE Analysis Form
Introduction
Hey everybody, Anton from IntellCRE here.
Welcome to this quick tutorial on how to use the Value and Financing section in the new analysis form.
This is one of the most important sections, where we are able to price our deal and confirm whether the price of the deal is going to work for us. We can look at sales comps, factor in financing scenarios, look at sensitivity, and declare our assumptions around the acquisition and the eventual sale of the deal.
Let’s jump right into it.
Sales Comparables
The first subsection is Sales Comps.
There are several ways to get sales comps into the system.
We can click Quick Suggest, in which case the AI algorithms pick the most relevant sales comps for the market. These are similar properties that were recently sold and match a very similar profile to the subject property.
Another method is to import comps. We can import a whole library of comps or create comps individually.
The third method is to open the Map View. Here, we can use filters and map features such as drawing a polygon to isolate a specific neighborhood where we want to look for comps. We review the results and click the plus icon to include a comp or the minus icon to exclude it so it does not clutter the view.
Once selected, sales comps appear in the Selected Comps tab. When finished, we click Save and Close, and this becomes our sales comp set.
Editing Sales Comp Data
Any sale comp in the sales comp set can be edited.
For example, if we call the broker and learn the actual cap rate for a deal, we can click the pencil icon, enter the cap rate, and update the values. Once edited, an orange icon appears on the comp, indicating that this comp has been manually edited.
Pricing Based on Sales Comps
After we have our sales comps, we can look at the averages, specifically the average price per unit, and we can also look at our subject property.
In case there is a listing price or a whisper price, and we have included that information earlier in the analysis form when choosing the buy use case, that price will be reflected here. If we are pricing the deal from scratch and are in the sell use case, and we have not included that information, the system will still price the deal for us.
The sales comps are being used by the system to show us a price estimate for the property, so we do not need to do the math ourselves. The system does the math and shows us a range, in this case between approximately $4.3 million and $4.8 million, indicating where this property should sit given the sales comps in the market.
Right below the sales comps, we see charts showing that the profile of these comps is very similar to the subject property, which gives us confidence that we are using good sales comps.
Acquisition and Sale Assumptions
Now in the section below our sales comps we find our acquisition and sale assumptions. This is how the section looks before we enable advanced options. After we enable advanced options, we have certain assumptions about the acquisition date, our working capital, and our acquisition fee. We can add any closing costs related to the acquisition.
On the sales side, we have other assumptions such as the hold term. Depending on the hold term, or how far out we want to model this deal, we have our closing costs. We can switch between the percentage or the total value. We also have assumptions around the exit cap rate, which is very important for investors and is probably the single most important assumption that we’re making, basically what the exit cap rate is going to be for this deal seven years down the road or five years down the road.
Exit Cap Rate Modeling
For this purpose, we have several calculations that we can use for the exit cap rate.
Rule of Thumb Method
You can use the rule of thumb, which is basically how institutions usually model deals. We look at the proforma cap rate, which we can see on the right sidebar here, and regard that as a stabilized cap rate for our deal. Then we add an increment of 0.1 to the cap rate for each year of the hold term.
In this case, that ends up being 0.7 added to 4.18, so 4.48 is our exit cap rate. This is the rule of thumb method.
Manual Method
The second method is manual. We can use the cap rate of our own choice.
IntellCRE AI Method
The third method is IntellCRE AI, which is our own proprietary algorithm where we look at historical data for similar properties in the same market that were traded several times over the past decade and then extrapolate the pure appreciation in that market and, based on that appreciation, model the exit cap rate.
If we choose the IntellCRE AI algorithm, we see that we get a slightly more accurate number here.
Exit Value Calculation
For the exit value, some investors model the exit value for their deal by considering the 12-month NOI after the sale. If we’re modeling this deal for seven years, they would look at the NOI in year eight and use that together with the exit cap rate to calculate the exit value.
Some tend to use the last 12 months of NOI in our hold period. They would look at the NOI for year seven and use that number.
We can switch between pre-sale or post-sale NOI that is being used to calculate the exit value.
Pricing Algorithms: Sales Comps and Cap Rate
As mentioned, we have our price estimate based on comparables enabled. If we don’t want to use it, we can disable it, or we can re-enable it.
There is one more algorithm that we can use for the pricing of this deal, and that is going to use the cap rate. Given that we know that similar properties in this market are trading at a certain cap rate, we can enable the minimum cap rate algorithm.
We can play with the purchase cap rate and see how that is reflected in the price of the building. If the market cap rate in this market is 4.1, then given the operational data for this property that we have included in the income section and the expense section, there is an NOI and a proforma NOI, and these numbers are being used together with a minimum cap rate that we want to see for this deal in order to generate the price for this deal.
We’re between 4.1 and 4.5. The comps are telling us that we should be between 4.3 and 4.7. If we have both of these algorithms enabled at the same time, the colorful price estimate shows us the optimal value.
We should be between 4.2 and 4.6 million, with 4.4 being the optimal value. If we’re buying, we want to be on the lower end of this spectrum. If we’re selling, we want to justify being on the higher end.
This gives us insight into how much this deal should be worth based on what the market is telling us in terms of both cap rates and sales comps.
We can have this reflected in the property value. We can override all these numbers. We might want to look at how this deal looks at 4.2 million and then look at our return metrics on the right sidebar.
We can look at our decision criteria, which we can preset in the platform settings, and make sure that this deal is passing all decision criteria. If we see all green lights, this means the deal is interesting and worth spending more time on.
We can also click Set to Estimate to set the property value in line with the price estimate.
Returns and Metrics Overview
At this very view gives us a lot of insight because we’re seeing what the deal should be worth based on the comparables, what the deal should be worth based on the minimal cap rate or average cap rate in the market, and on the right sidebar we see all our returns and metrics such as GRM, cap rates, cash on cash return on investment, return on equity, IRR, equity multiple.
We can make sure that this is actually something that’s passing our criteria, and that this is or would be passing criteria for our buyers in case we’re the ones selling this deal, and we want to find, and we can find, the equilibrium, really the optimal price for this deal, or what the price should be.
Hovering over some of these numbers such as cash on cash, we can see what the cash on cash is year by year, whereas this proforma is going to be our annualized cash on cash number, annualized over the entire hold period.
Bottom Panel: Cash Flow and Analysis
Now a very important point to stress here is at the very bottom of my screen. You see there’s income totals, expense totals, financing, cash flow.
If we click on these, the bottom panel will roll out, and we can grab the panel by the upper edge and move it upwards and downwards.
So we can have simultaneously the view of the analysis form, we can be editing the numbers, and we can also be checking things like our detailed cash flow down below.
Any number that we change here, we’re going to see that being reflected in the cash flow analysis down here.
We can either look at the monthly or the annual version, and here we see each year what our cash on cash is, what our return on equity is, and so on.
Financing Scenarios – Existing Loan
After we’ve priced our deal, now it’s time to factor in any financing that we’re thinking of doing for this deal.
So is there an existing loan? If so, we simply enable the existing loan here and define the terms for the existing loan, things like remaining term, and then we’re going to model the situation of assuming a loan.
Now one very important point that we need to stress here is that whenever we’re using an existing loan, so we’re buying this property and assuming a loan, although the property value is, say, 4.4 million, that’s not the acquisition or the equity that we need in order to do the acquisition.
So what we want to do in this case, when we’re using an existing loan, is we want to use the acquisition cost field.
This is basically your acquisition equity, or equity required for the acquisition.
What we want to put in here is our property value minus the remaining principal.
So if the remaining principal is 1.98, acquisition cost is going to be 4.4 minus 1.98.
We put that number in as the equity that is needed in order to make this acquisition, and this is going to work out correctly.
Careful about this point.
Financing Scenarios – Acquisition Financing
Now what if we have traditional acquisition financing for this deal?
Then we basically enable acquisition financing.
And here is our interest rate, amortization, loan term, loan fees, and interest-only period.
We can switch between years or months depending on how granular we want to be.
On the right side, we have our LTV, our loan amount, down payment, and our DSCR.
Of course, this calculation can be automated so that you’re seeing what the maximum LTV is given the financial numbers for this deal.
In this case it’s around 44 percent, considering the target DSCR of 1.25, which most traditional lenders want to see.
We can of course start increasing or decreasing this number, and the other numbers will recalculate accordingly.
And the same we can do for the LTV.
So if I want to look at how this deal looks like at 40 percent LTV, the DSCR is higher, and the loan amount and down payment are both changing.
Seller Financing and Custom Loans
If we want to do seller financing or some other creative financing scenario, we can simply click seller financing.
In this case, we define what the monthly payment is going to be without interest, when the first monthly payment is due, and then the balloon payment.
And other things like amortization will be calculated automatically from those numbers.
If we want to do this as proposed financing, so we’re selling this deal, we’re not saying this is the loan that you’re getting, but this is how the loan would look like, we can even customize the name of this.
So let’s say this is a hypothetical loan or something like that.
If we’re all-cash buyers or we don’t want to use acquisition financing, we simply click Do Not Use.
Refinance and Additional Financing
And of course, once there is a loan there, either existing or acquisition, we can also use the refi.
We define when the refi is going to happen, what’s the cap rate for the refi, and what the fee for the refi is.
If we want to model any bridge loans or any additional financing or anything like that, we can use additional financing.
And of course, this is just going to be without the DSCR.
This is just going to be a loan amount and down payment.
And this is going to be offset, so depending on when in our whole term we are thinking of doing this additional financing or bridge loan, we can model that here.
Sensitivity Analysis
So that’s everything regarding the financing scenarios.
Now sensitivity analysis should be part of our value and financing section.
You will find the results of the sensitivity analysis down here in the bottom panel.
Let’s say we do sensitivity analysis with respect to exit cap rate and the purchase price.
What this means is that we’re making some very important assumptions in the underwriting, and we want to look at if some of those crucial assumptions have been slightly different, or the reality is slightly different.
So the exit cap rate is not 4.9, but it’s 5.15.
How would this deal look like in terms of the return metrics and the exit value?
So this is precisely what’s happening here.
So we have the 4.9, which is the exit cap rate that we’re working with.
And here we’re seeing the sensitivity.
So if it’s slightly higher, 5.15, 5.4, 5.65, how would that change our numbers?
And then also going to the left, if it’s slightly lower.
And the increment for these steps here is basically 0.25.
We can change the increment.
We can even change the number of steps if we don’t want to have seven different scenarios but only five or nine.
Now for the purchase price sensitivity, we have a certain property value here.
And we can look at how this deal would pan out if this was slightly higher or slightly lower.
In the same fashion as with the exit cap rate, we have the sensitivity with respect to the purchase price down here.
And of course, the sensitivity analysis that we choose to enable here, later on when we’re building the report for this property, we’re going to have the option of including that sensitivity in any of our reports.
Equity Waterfall Modeling
And finally, we have an option to model an equity waterfall.
So if we’re doing a syndication, real estate partnership for this deal, there’s an LP that comes in with a certain percentage of the equity, then there’s LPS that come with a significantly higher portion of the equity.
We can define our waterfall acquisition, asset management, and waterfall disposition fees, which are usually paid to the GP by the LPS.
We define our hurdles.
So as with any equity waterfall, the GP is promising a certain minimal return in terms of the IRR, a project-level IRR.
So let’s say we’re promising a minimal return of 8 percent IRR.
So that is the first hurdle, or the preferred return.
And there is no GP promote or no promoted interest for the GP in case that the project underperforms or performs at the 8 percent IRR level.
So the way the cash flow from the project would get distributed among the GP and the LPS would be precisely given by this equity split.
But the moment that the project proforma better, so it actually hits higher returns, higher IRR, let’s say IRR between 8 and 11, we’re entering hurdle two.
Where suddenly the GP has a promoted interest because the project is performing better than the minimal returns.
And what happens is that any cash flow, any dollars that are above the 8 percent preferred return, do not get distributed according to the original GP-LP equity splits.
Instead, the split shifts.
And how it shifts is reported down here.
So if we’re in hurdle two, the GP promoted interest is 20 percent.
So 20 percent out of what would have been the LP profit now goes to the GP.
And so the split for the cash flow in hurdle two becomes 24 percent for the GP and 76 percent for the LP.
And in a similar fashion, if the project performs even better and we enter hurdle three, with a higher GP promote, the GP and LP cash flow split shifts further in favor of the GP.
And then in hurdle four, further and further in favor of the GP.
And so the result of this is that there’s a project-level IRR, which in this case is about 12.23 percent.
Which is great, because our minimal target is 12.
So this would put us in hurdle three already in this real estate syndication.
And so the result of this deal would be that the LP is going to have an IRR of about 11.46 percent, which is far better than the minimal 8 percent, but slightly lower than the project-level IRR of 12.23 percent.
And the GP’s IRR is almost 23 percent.
And also here we have the equity multiple for the GP, for the LP, and this is the promoted interest that the GP would earn because of this deal.
Assumptions and Narrative
Finally, if we want to include any narrative for the deal, or any comments, like we’re using these sales comps but they’re slightly nicer than our property, that’s why we’re actually going to work with a slightly lower price per unit for our property than the sales comps are telling us, any comments like that we can enter them here.
And they’re going to be part of the Financial Assumptions page once we generate the report.
Closing
So after we have all of this, we can proceed to creating the deal.
I hope this was helpful.
And if you run into any questions, feel free to use the support icon here to let our team know.
I’ll see you in the next tutorial.
