Choosing the real estate deal that meets your objectives – whether for investment or for space use – is best identified by modeling each transaction; deals are often compared side-by-side. (Modeling is often carried out to test feasibility, and again during formal due diligence.) Any property investor, owner, or space user should have a strong idea of the attributes required [for economic success] to support closing the deal. Sample investments include house flips, multi-family, and commercial property. Sample space uses include user acquisitions, divestiture, commercial lease, net lease, and capital lease.
Mobility of Work Prompts Prem to Cloud
Mobility of workers prompted demand for transaction modeling from premise-based software in a traditional cube or office location (client/server) to anywhere from the cloud (SaaS). Broadband internet facilitated SaaS; the vendor manages all updates, access controls and data security. Any property investor or owner evaluating acquisitions, sales, and leases regularly should have a subscription to cloud-based modeling software (a/k/a SaaS).
Assumptions Drive Outcomes of Modeling
Financial projections don’t lie, yet the accuracy per projection is dependent upon on the integrity of the assumptions made. Real estate options should not be limited to discussions supported by rough back-of-the-envelope analysis. Small business operators may run transaction models themselves, any larger operator may retain an analyst in-house or outsource those tasks as needed.
I have invested in user training and used my share of modeling software; basic, mid-tier, and institutional quality. Small businesses are attracted to simplicity of use, adjustment of assumptions, and presentation. As noted above, assumptions made drive the accuracy of outcomes derived from financial projections. Assumptions are as follows:
Acquisition. Assumptions for property purchases include price, loan-to-value, loan terms, closing costs, income, expenses, NOI, capital improvements and/or expenses, NPV, IRR, cash-on-cash return, earnings before and after income tax liabilities, income taxes, profit distribution terms.
Sale. Assumptions for property sales include income, expenses, NOI, cap rate, acquisition cost, sale price, loan satisfaction, capital gains taxes, net proceeds of sale, income tax on accumulated depreciation, profit distribution terms.
Leasing. The objective is to identify the effective rent you would pay each month vs. the face rate in the lease. Assumptions of lease deals include rent, rent concessions, rent escalations, utilities, increases in property taxes, office cleaning, water and sewer, contribution to tenant improvements, relocation costs (furniture and technology), professional fees (i.e., legal and accounting). Intangibles (e.g., loss factor) and tangibles (e.g., free rent, escalations, and layout via Tenant Improvements (TI)) become a baseline [of costs and concessions] to add to relocation expenses.
Professional Advice Provides Comparative Analysis
A good deal per market conditions may not meet your investment goals or economic (and layout) needs of your business. Evaluate your options via formal transaction modeling (e.g., Pro-Calc, ROI Muse, planEASe, or Argus) that is presented by an established and mature real estate agent. They will present a comparative analysis of multiple deals in a structured matrix. This approach will help you vet the right deal(s) to pursue; arrange opportunities in succession of preference. Be prepared to select opportunities that meet your needs; be prepared to choose none (starting over) if your terms cannot be met. (Tip: Your real estate agent can suggest enough lead time for the search, secure, and build process to afford you leverage to negotiate for a space at your pace.) (Note: It’s not likely you would accept accounting or legal advice from an inexperienced CPA or attorney, why accept real estate advice from an inexperienced real estate agent?)
Closing Comments: Goals
The goal of transaction modeling is to compare projection results in a structured matrix. This approach will help vet deal terms that meet your specific needs, then arrange opportunities in succession of preference. Be prepared to select opportunities that meet your investment objective or space budget; THEN be prepared to choose none (starting over) if your terms cannot be met. Your real estate agent can suggest enough lead time for the search, secure, and build process to afford you leverage to negotiate for an investment or space at your pace. If your activities to evaluate real estate opportunities could benefit from cloud-based transaction modeling software, please fill out “Request a Consultation” at the base of the Consulting page of this website. Please write “RE Modeling SaaS” in the subject line, paste the email signature of your broker of record or COO in the message body. I reply within 48 hours to schedule a call [with your executive and financial analyst] to discuss the specific modeling needs of your organization; training of use per FinTech SaaS is available from RiSe Solutions. Feedback for this post is welcome within LinkedIn (smbciociso). Thanks for listening. ###.