Concord Eastridge, Inc.

Finance Presentation Lesson #1

REAP 062206

Copyright 2013 Robert Paul Ellentuck

Overview
Building a Development Proforma
Cost and Operating Assumptions Proforma

Developing an Operating Proforma

Rent Roll Operating Assumptions Operating Statement

Initial Property Valuation (Cap Rate)

Stages of Financial Analysis

3 stages of financial analysis
Front-end, Back of the Envelope (Am I interested in this deal?) Discounted cash flow (Does this deal meet my requirements?) Back-end, based upon transaction structure (What do I get, net, if I do this deal?) Free & Clear (All-Cash) return Return on equity-leveraged (Equity Dividend Rate) Discounted Cash Flow (un-leveraged and leveraged) Internal Rate of Return (un-leveraged and leveraged)

Traditional financial analysis tools

Financial Analysis and Real Estate Financial Decisions

Starting point for all financial analysis of real estate is Net Operating Income (NOI.)
NOI is the source of economic returns for both equity investors and mortgage lenders
Potential Gross Income (Vacancy Allowance and Credit Loss) Effective Gross Income (Operating Expenses) Net Operating Income
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Grocery Center
Grocery Center
Major Assumptions Development Program Lot Size Retail Space Parking (Surface) Number 6.0 54,982 250 Unit Acres Sq. Ft. Spaces

Development Cost Assumptions Land Costs Hard Costs Site Development Costs Hard Construction Costs Parking Costs (Surface) Soft Costs

Price Per Unit $1.00 $2.00 $80.00 $1,500.00 30%

Unit Land Sq. Ft. Land Sq. Ft. Bldg. Sq. Ft. Per Space of Hard Costs

Developer Profit Assumption (NOI/ Total Cost) Developer Profit Threshold Lease Revenues Anchor Retail Space (NNN) In Line Retail Space (NNN) Expenses Retail Space Occupancy Rates 8% of Total Costs

$10.00 $20.00

Sq. Ft. Sq. Ft.

$6.75 90%

Sq. Ft. of In Line Space

Notes Soft Costs include architecture, engineering, permits, impact fees, financing, legal, interim property taxes, and developer overhead Assumes developer provides a bare retail shell and tenants would pay for buildout of retail space or negotiate an improvement package as part of an increase in their rental rate.

Grocery Center
Grocery Center
Pro- Forma Analysis Development Costs Land Hard Costs Site Development Hard Construction Costs Parking Costs (Surface) Subtotal Soft Costs Total Development Costs Development Feasibility Rent Revenue Grocery Store In Line Space Reimbursements Total Gross Revenue Less Vacancy (1) Effective Gross Income Less Operating Expenses Net Operating Income (NOI) Return On Costs Notes (1) Vacancy is 10% of In Line Space rent and 10% of allocated Reimbursements on a prorata basis for In Line Space Sq. Ft. 51,674 3,308 $261,360 $522,720 $4,398,560 $375,000 $5,296,280 $1,588,884 $7,146,524 Total $516,740 $66,160 $371,131 $954,031 $8,849 $945,182 $371,131 $574,051 8.03%

54,982

Operating Assumptions

Budget Statement & Inc. & Expense

Rental Income
Rental Income
Base Rent
Supermarket Anchor: 51,674 square feet $9.68 per square foot per year $500,204 $500,204 12 = $41,684 per month

Subway: 1,500 square feet $20 per square foot per year $30,000 $30,000 12 = $2,500 per month (Beginning May 2004)

Dry Cleaners: 1,808 square feet $15 per square foot per year $27,120 $27,120 12 = $2,260 per month

Percentage Rent
Percentage Rent
Grocery Store Anchor: (Sales Breakpoint = $14,000,000) Sales = Breakpoint = $20,000,000 $15,000,000 $5,000,000 1.25% $62,500 Annual Percentage Rent $62,500 12 = $5,208 per month

Subway: (No Breakpoint; % Rent on Gross Sales) Sales = $750,000 1.00% $7,500 Annual Percentage Rent $7,500 12 = $625 per month (Beginning May 2004)

Dry Cleaners: (Natural Breakpoint using Base Rent) Sales = Natural Breakpoint = $723,200 $ 400 per sq ft $542,400 $27,120 base $180,800 5.00% $9,040 $6,587 1808 sq ft $9,040 5% per cent 12 = $753 per month

Total Monthly Percentage Rent =

$5,962 for Jan-April 2004, excluding Subway for that period

Expenses
Expenses
Common Area Maintenance (CAM):
54,982 square feet $5.75 ( includes utilities, security, maintenance and on-site management) $316,147 $316,147 12 = $26,346 Monthly CAM Expenses

Real Estate Taxes:

Gross Value x 40%= Gross Assessment x Millage Rate = 54,982 square feet $150 Value per square foot $8,247,300 Gross Value $8,247,300 x 40%= $3,298,920 x $32,989 12 1.00% = = $32,989 Taxes Due

$2,749 Monthly Real Estate Taxes

Insurance:
54,982 $0.40 per square foot $21,993 Annual Insurance Costs $21,993 12 = $1,833 Monthly Insurance Costs

Summary: (monthly)
CAM Real Estate Taxes Insurance Total $26,346 $2,749 $1,833 $30,927

Recoveries (monthly)
Recoveries - (monthly)
Pro Rata Calculations: Square Feet Pro Rata % Recoveries - (monthly) CAM Taxes Insurance Expenses: $26,346 $2,749 $1,833 Total Monthly $30,928 (Annual) Total $371,131

Supermarket 51,674 54,982

93.98%

$24,760

$2,584

$1,723

$29,067

$348,801

Subway 1,500 54,982 = 2.73% $0 $0 $0 $0 $0 $0 (Subway pays no recoveries.)

Dry Cleaners 1,808 54,982

$0 = 3.29% $866 $90 $60 $1,017 $12,204

Total Recoveries

100.00%

$25,627

$2,674

$1,783

$30,084

$361,005

IRV
Income = Rate x Value Rate = Income Value

Value = Income Rate

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Estimating Property Value, Method I

Direct Capitalization-determine value by converting first year NOI into value using a rate
Capitalization rate is extracted from analysis of recent sales of comparable properties

Example:
NOI = $626,839 Capitalization rate =8% Estimated property value = $626,839 / 8% = $7,835,488
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