Back-of-Envelope Model to Know if a Deal Works

development models Jun 30, 2020



This is Part-1 of a 2-Part series going over models that you can use as a real estate developer to plan out projects. 

In Part 1, we are going over a one-pager model that you can use to determine if a deal is viable. 

Mason Fiascone - We're here with Marina and Greg, and I'm Mason with BullPen, and we’re here gonna talk you through a multi-family ground-up development model.


Marina has two different models to share, and Greg is gonna run through and ask a few questions, so Greg has experience and is gonna give the perspective here of a real estate developer, investor and coach, because that's where he's an expert. Taking people through these models and understanding them and pulling out the details, and so he's gonna do that with Marina.


Then Marina is a commercial real estate analyst that you can actually hire through the BullPen platform.


So you get on and find an analyst like Marina to help you level up your skills and match your deal flow with your analyst supply.


Marina has over 12 years of experience under writing ground-up development projects across different asset classes, and we're really excited today to tap into her expertise on multi-family, and specifically on ground-up.


So Marina, before we dive into your models here, why don't you tell us a little bit about your experience and what services you offer through BullPen.


Marina Gita- Okay, thanks Mason!


Hi, I am Marina. I have about 25 years of experience both in ground-up development as well as operations. I started my career as an accountant, as a CPA then I moved into asset management on the operating side, then got into ground-up development and re- developments I've been working on development as Mason mentioned for the past 12 years.


I've done all asset types from office, retail, residential, low-income housing, hotels, you name it. I've worked on partnerships as well as joint ventures, so I'm very well aware of working on land deals and working with waterfalls and all sorts of fun stuff.


I went to McGill University and I've been based in DC working on national portfolios for the past 25 years. And I've been consulting since August of 2019, full-time providing assets like what you'll see today, and also consulting with real estate developers and investors. For BullPen I offer customized models for redevelopment and ground-up development, as well as working with real estate investors looking at deals and analyzing them, looking at viability of deals, basically.


So today we're gonna look at a one-page summary that pretty much is used as a tool in the marketplace, so you can see if a deal actually works or not. And that you're gonna be able to download after you watch this.


And also, we're gonna be looking at a ground-up development residential model that can be customized in many different ways.


But we're gonna look at a ground-up development, and we're gonna walk through some tips and how developers look at projects. And then Greg is gonna ask me some questions, and hopefully we'll be able to cover quite a bit of ground with these two models for you.


So with that let’s get to started.


Greg Dickerson - Great, alright, well, why don’t you get your screen Maria. While you're getting that pulled up, so yeah, everybody, I am Greg Dickerson.


As Mason said I’m a real estate developer and I also coach and mentor people all over the country doing all kinds of different things from value add, opportunistic ground-up, my own investment thesis is opportunistic, and BullPen has been an extremely valuable resource for me and for my clients that I send them to for project-based stuff, as well as a complete outsourced virtual team to build out your organization to help you grow and scale and Mason will talk more about that at the end.


But right now, Marina, we are so glad to have you here today. Did I hear you right? You're going to give away this one page back-of-the-envelope model today with this video?


Marina – Yes, that’s right!


Greg – Good, so take it away.


Marina - So here we have our one-page worksheet. This is something that in different formats, all developers will look at before they spend too much money going down one avenue or another.


One thing that's typical in development is that you'll always look at different scenarios, whether you should do how big your apartment building should be, whether you should include low-income housing, if it's not required, sometimes it's required, sometimes you’ll add retail on the first floor. That usually bumps up your NOI.


But in this case, this back-of-the-envelope is just a quick way to look at how the deal works.


So what the assumptions are, is you look at your general assumptions about the building, so you'll have to know what FAR you're dealing with. Efficiency on residential projects, are usually from 85% to 90%. Retail and commercial buildings are usually higher, like 92%. You'll never see 100%. So that's what [the Efficiency is].


You'll have a possibly parking. Usually, different jurisdictions have rules about what the parking requirement is, especially if you're working in the city, so that's what [the Parking section] is. You would get this from your zoning.


Typical timing of residential building is anywhere from... I've seen 18 months to 36 months. The timing of a project is important because the longer you hold on to the project and your money is out there, the lower your IRRs could be.


So you want that to be as consistent as possible. So you don't want your money to be sitting out there very long.


Something that was pointed out in working for REITs, especially, they would always look at their cost of capital.

So on top of looking at what your returns are, they would say from 7% to 10% is my cost of capital that I have equity out in the market that I'm just... not producing income on yet.


So there was always pressured to get your project done... just as an aside.


So anyways, we’ll get back to this model.


[The next section is] Leasing and Revenue Assumptions.


They're very high level in this model, you'll see that we have parking revenue that you can get from, what are the per space rents going in the market that you're looking at.

So you'll just plug that in [in this section].


Anything in blue is where you input information. Everything else is calculated for you.


And as you can tell in the spreadsheet, there's not that much that you're inputting.


Your expenses you can get from a broker or by talking to other real estate personnel in that area. You have a typical per unit amount in operating expenses for residential.


Annual [expense] growth and is anywhere from 2% to 3%, I've just plugged in two and a half in this section.


Your financial assumptions, you could usually get that from just talking to a loan officer.


A loan-to-cost is typically from 60% to 80%.


Interest rates, it'll be the going rate in your market.


Fees you can actually use 2.5% or a little bit higher. I think the highest I've seen is 9%. Keep in mind, if you're working on low-income housing, it'll be a higher number because there's so much that goes on with financing a low income housing that it really beats up your fees and taxes.


Below [Financing Assumptions] , you'll have your Escalation.


Cash-on-Cost section is the typical return that you'll be looking at to see if this deal is viable.


Under Residential Income Data Input, you have just basic information about the building.


You could plug in estimates about how much you think the studios or the one bedrooms what your square footage will be.


An average amount of rent that you think you will generate. And of course, the number of units. You’ll see in this example this building is actually 260 units.


And off to the right, you have all your calculations with just a couple more inputs.


You'll need to know what your parking costs will be. That varies from 45,000 per space to... I've seen it up to 80,000 per space depending on how low you're going.


And this is something that someone like Greg could help you with, where he’ll know because he's working in the market and he's been doing this for so long, he'll have a gist of how much buildings cost in general.


Another thing to keep in mind is escalation in construction costs.


I'm sharing the GC Fees. You want to have these numbers pretty high 'cause you're making such a high guess estimate here, but you definitely want your hard cost contingency on top of anything that you're estimating as a cost, and also, you know, you want your non-GP hard costs covered as well.


I am estimating some soft costs debt service during lease-up is also important.


You wanna make sure that during the time that you're leasing up a project that you have it covered in your development cost.


This is something that a bank would cover for you.


And then you also have your hard cost escalation. And what's neat about this is that it actually calculates an implied land value for you.


So you've input all your development costs, and now down below, this is all automated, it'll show you what you can afford to pay and land in order to make this deal pencil.


Greg - Yeah, that's really cool right there. So you don't need a land cost.


So where does it get that number... is that a derived return metric, you're plugging in somewhere?


Marina - It's actually backing into it. Yes, so what I'm doing is I'm saying that I want a yield of 6.5%, which are plugged in [the Implied Land Value Analysis section].


And this will also show you how... depending on the yield, how the land value will go up or down per square foot.


Greg - Yeah, that's really cool, right there, and we can put in whatever number we want to give us a strike price on the land.


Marina - Exactly, exactly. Yeah, this is really neat 'cause really, it comes down to your land. So if you can save some dollars on your land, your deal will look a lot better. Do you have any other questions on this model?


Greg - No, no, I think that was a great run down on this model. And we'll just go back through a couple of things.


I love your institutional set of goggles on looking at this from an institutional perspective. So for everybody watching, there's a couple of things that are really great about having that perspective.


Number One: Your investors, the way they're gonna scrub a deal that you're looking at like this, these are the things that they're gonna look for and the questions they are gonna ask


And Secondly: Your lenders. So this is just back-of-the-envelope. When we get into the deeper model, your lenders are gonna have more of an institutional view point when they're looking at your assumptions that you need to defend.


So right now, what this is... we're trying to decide, Okay, do I move forward with this project?


And if I do, how much do I pay for the land? So this is a really awesome tool to help us get down there, and a couple of things you're gonna need.


So you don't need a land cost necessarily, but it’s ok to have one in mind. You're gonna need your construction cost information, which you're gonna get from your general contractor or your CM firm construction management firm, depending on the magnitude of who you're hiring.


Like you said, site work, site development cost, parking.


Parking is it surface parking? Underground? Podium construction? That can vary greatly from 230 grand up to 100 grand right?


It depends on where you are...what type of site that you're dealing with and the type of construction you have to do and how deep you're going, and how tall the building is.


So those are a lot of variables there. So that's really great that you've got that.


You're gonna need your loan terms, so you're gonna obviously wanna talk to your lender, so you can plug those loan terms in, and then your time frames and things like that in order to put this together.


So I think this is an awesome tool.


And I think that was a great walk-through, so I think we're ready to go to the next model unless there was something else you wanted to add.


Marina - The only thing I would add is also be careful with your assumptions, 'cause if you wanna make sure that your revenue and your expense growth - you're better off saying that they're the same.


'Cause if you start showing that you're gonna have really high revenue growth, but your expenses are not growing at the same rate, lenders may look at that and say, “What are you doing there?” “How do you know you're gonna have less expenses?”


Which may be the case, they're usually maybe a percentage off, but that's something to look at and also make sure that you have a vacancy allowance as well.


You don't wanna go in there saying, “Oh yeah, I'm gonna be 100% leased up. I'm not gonna have any down time.”


As I mentioned here, where you have your debt service is covered, they wanna see that. Don't go in there with no contingencies, you wanna make sure you have contingencies, even in your full model, you'll always have your contingencies


I think that's about it.


Marina – Yeah, contingency, escalation. So just so people understand, contingency is for unforeseen events that just pop up in construction, anything can and does happen. So that goes under contingency.


And then you have escalation. So escalation is when you're cost come in a little higher than expected due to inflation.


What’s shown is a 18-month to three-year to-five-year project. You're gonna have escalation and construction costs.


So you wanna have a factor in there for inflation and that's totally different than contingency.


And then back to your point about operating costs, expenses, revenue, rent expenses, things like that, you can get that information from property management companies, local brokers in the area of things like that.


So these are all real numbers. You're not just pulling numbers out of the air.


You're doing your due diligence, you're talking to brokers, property manage the companies, general contractors, construction management firms, architects, engineers, everybody involved with the project, so that you could put together a real model even at this level of feasibility, so that you know your assumptions are worthy of the next step.


Marian - Exactly.


Greg - Yeah, awesome.


Marina - Yeah, and just one more point about this area here, with your residential income. You don't necessarily have...I know you can see that I have detail here, if you even have an average square footage and an average rent for that area, you could pretty much manipulate at this level to where it kinda makes sense that it's gonna work out to that average and that average net square footage.


So don't get too caught up in what this detail is, it's really about what you're feeding into the numbers which in the [Residential Income Data Input section].



Greg - Yeah, I love that you've got it broken out by the square foot by the month and by the unit, so... that's awesome.


Marina - Yeah. Okay! So let’s get started with the Ground-Up Development Model.


Greg – Cool and while she’s switching over I think that’s an extremely valuable tool. Again, there will be a link posted wherever we share this video so that you can download that spreadsheet from BullPen that one-pager that will prove extremely helpful.


I get that question a lot from people: “How do I know how much I can pay for land?”, “How do we even start the process of figuring out what the development is going to cost?”


And all that kind of stuff. And a lot of that information from the one-pager can be used when you go to build out your full model as well. So you have to compile all that information anyway – the full model will give us that deeper dive.


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