Real Estate Broker · Portland, OR · Member since 2017 · 100 posts · 56 votes
Hello!
I am working on a pro forma for a new construction project for 55 multifamily units.
Our plan is to bring in an equity partner that will ideally be interested in a long term investment. With that said, we want to be able to demonstrate options in our pitch deck.
My question is are:
1. The first 18 months is going to be construction and lease-up to stabilization. Do I setup year 1 and year 2 to reflect the lack of income/reduced cash flows? This would push the full schedule (12 months) of cash flows to year 3. I assume so, but wanted to confirm.
2. We plan to hold this project long term, but are open to refinancing and return capital in year 5. Normally I forecast a sale in the pro forma, but I am not sure where to place this. Would year 7 make sense? Given that we don't plan to sell I am not totally clear on how to represent to an investor their return of capital and then future cash flows for an unknown period.
My goal is to provide a clear NPV and IRR.
Perhaps I am over thinking it. Any input would be greatly appreciated.
@Nicholas Cook - For this I recommend Frank Gallinelli's software. I've used the Pro version to do some very complex and creative forecasts and I can't say enough good things about it. It will easily handle question 1 - yes.
For #2, if it's a long term hold, I'd just put the model out to 20 years (the max in RealData's software) and the investor presentations will show returns by year, including IRR. If memory serves there's a report that shows NPV, but obviously you can get that number out one way or another since it's the cornerstone for the other metrics.
If you want some help with it or want to discuss further, happy to chat, feel free to DM or email me.
It all comes down to finding the right combination (debt plus equity OR only debt OR only equity) where you and your investor are in complete agreement. You have a correct expectation that during at least the first 12 months of construction there's typically no payouts. If however your investor expects that you may need to pull in upfront a bit more funds to support it.
Based on @Hunter Locke response, the software he mentions should allow you to play with different scenarios.
In terms of the timeline, the same thing: while 5 years may work for one, someone else will be comfortable with 7. So you have to "play with the numbers" to evaluate multiple outcomes. I'd start with 7 years to be more realistic.
In terms of how to figure out the final outcome if you don't plan to sell, you either agree on a certain percentage or decide to get the property FMV at the 7 year mark and pay your investor a certain fraction of such FMV.