1. (Crash-Course in understanding the Allen Weiss Excel Pro Forma Model) J. Gunderson Dec12

2. An Excel model takes user defined inputs and produces output based on the rules built into the model by the model builder. Excel models can be very simple to very complex. Models are typically deterministic (discrete results). This lesson focuses on the Allan Weiss deterministic model – fixed outputs given user specified inputs.

3. The pro-forma has the following sections: Acquisition Cost Financing Assumptions & Projections Capital Investments & Development Operating Revenue (Rents, Fees, etc.) Operating Expenses (Cost of operating) Net Operating Income (Revenue less Expenses) Before Tax Cash Flow After Tax Cash Flow Sale of Property Returns & Key Ratios

4. The property acquisition section should include the purchase price. Plus Inspection Fees Legal Fees Financing Fee & other costs associated with closing the transaction

5. The financial structure of the investment (transaction) is defined in this section. Model inputs include: Debt and Equity ratios (% borrow, % equity invested) Loan APR (expressed annually = 12*monthly interest rate) Amortization (number of years the loan is based on) Term (duration of loan) Model outputs in the section include: Monthly Payment (excel PMT function). Annual Payment (monthly x 12) Projections are made on how revenues and expenses will grow over time. In general the growth formula: Current # =(Previous #)*(1+% growth-rate) Financial projections can be VERY sensitive to growth rates.

6. Some projects include additional investments that can be “capitalized”. Often these are improvements of real property, additions, expansions, etc. Construction & Development can be generally covered by 3 cost types: Hard Cost (Materials, Construction Labor) Soft Cost (Engineering, Architecture, Permitting, Inspections, Surveys, Construction Loan, Financing, Marketing, Development Fees, etc.) Budgeted Contingency (5-10%)

7. Gross Scheduled Revenue The value of all units at market price, per SF Vacancy Typically shown as a % of Gross Schedule Revenue Viewed as an expense. Low = 3%, High = 10%, Most L = 5% Gross Rental Income Scheduled Revenue less Vacancy expense Other Income Coin laundry, utility & oper exp reimbursements, extra (non- rental revenue generated from the property) Gross Effective Income Equal to the sum of all revenues less vacancy expense.

8. Operating Costs is the pro-forma region that is most property specific. Typically expense types: Repairs and Maintenance (Older buildings > Newer Buildings) Property Management Fees (5%+/- of GEI) Mgmt/Admin (Who does all the monthly administration of ownership) Marketing (Realtors, leasing, media adv., etc.) Legal (Lease reviews, evictions, etc.) Property Taxes (city specific) Insurance (Property and even Owner specific) Utilities (Common Areas + Utilities paid by owner) Assessment and Association Fees ….any expense generated by Operating Expenses can be driven by footage, # of units, % revenue, or fixed. The driver is referred to as the “allocation basis”.

9. Net Operating Income = NOI Revenue less Expenses NOI per SQFT Divides the calculated NOI by Net Leasable Sq-FT Beware: rents are based on net rentable SF, over 15-20% lesss than the total built space.

10. BTCF is the actual cash the owner will receive but before income taxes are due. If a property is financed the property owner will pay loan payments (Debt Service) with the NOI received. NOI should be minimally 1.15-1.2 X debt service BTCF = NOI – Debt Service Debt Service = loan payment (principle + interest) NOT Equal to the Taxable Income.

11. ATCF is the cash flow enjoyed by the owner after all expenses and taxes are paid. Calculation of Taxable Income: Start with BTCF and ADD back in the principle paid. (both the interest and principle was subtracted to get BTCF, but only interest in tax deductible) Subtract Depreciation (Property Cost Basis / # years) Depreciate Residential over 27.5 years Depreciate Commercial over 39 years For mixed use a composite pro-rated by sq-ft. Multiply the tax rate (owner/partner specific) by Taxable Income to get Income Taxes due by each partner. ATCF equals BTCF less Income Taxes

12. Sale calculations become increasingly complicated with the inclusion of tax credits, tax incentives, and conditional grants. Sale Price will equal the final year NOI divided by the estimated future market cap rate. Loan balance is due on sale. Equal to the beginning loan balance less the sum of principle paid. Gain on Sale is equal to the Sale Price less the Cost Basis at sale. The cost basis at sale is the property’s cost basis (purchase price + capital improvements) less accumulated depreciation over the holding period. If Gain on sale is positive, capital gains tax is due. 15% Capital Gains tax is due on gain up to the amount of accumulated depreciation. Likely to be 20% in 2013. Ordinary income tax is due on gain in excess of depreciation. (Section 1250) Profit = Gain less Income Taxes

13. IRR = Internal Rate of Return is annual ROR on cash invested relative to ATCF & Net Proceeds from Sale. In a real estate pro- forma it can be thought of as the return on investment. The Excel IRR function will return error if the sign of the cash flows in the specified range changes sign more than once. Then use MIRR. Return on Cost = Stabilized NOI divided by project cost. Should be 2% over the local cap rate per Jeff Blau & Related Key Ratios expressed are generalized per square foot measures of physical space, revenue, cost, and expense: Avg Sq Ft/Unit Avg Monthly Rent/Sq Ft Cost/Ft, Cost/Unit Expense/Unit, Expense/Foot