Cost of Equity before development stabilization

  • Anonymous
    Inactive
    7 years ago #2706

    Spencer,

    In building an office development proforma with the All-in-1 model, is there a way I can include the cost of equity during development into the overall returns? For example, as developer, if I owe my equity LP a 10% return on their equity contribution and that clock starts ticking from the day the LP gives me the money, I don’t think the model includes a field where i can input the 10% cost I owe that LP while the project is under construction and before stabilization. Am I wrong? I don’t think I can just include that cost in the budget tab since it would be borne only by the Sponsor, what would you suggest?

    Separate questions…
    I’ve got a simple construction to perm. financing loan on an office development deal where there construction period is 8 months. When filling in the SENIOR DEBT input fields on the Perm. Debt tab, if my loan includes I/O for 24 months do i actually put 15 months in the input cell (E17) since your model has funding starting at stabilization and that is not really until after construction is complete (month 9 in my example).

    Thank you! Learning a lot from working with your model.

    Spencer Burton
    Keymaster
    7 years ago #3246

    Answer to question 1:

    Sounds like you have a form of convertible debt / preferred equity with a debt service-type requirement payable as soon as those funds are drawn on – rather than unpaid pref accruing to the capital account as the model is currently structured. Is that correct? Unfortunately, I can’t think of a way to model this in the Ai1 without customizing the partnership cash flow tabs (Equity CF and/or Co-GP CF tabs). Assuming you have just two partnership groups (Sponsor+LP), it would be a manner of modeling a distribution to the LP during the negative cash flow months (i.e. during construction and lease-up) while having the sponsor contribute the amount distributed to the LP.

    Answer to question 2:

    Correct, if actual permanent (takeout) loan funding occurs prior to stabilization, for modeling purposes here (since the perm loan funds at stabilization) you could alter the I/O period for the Ai1 perm loan to the difference. Another alternative, is to change the ‘Stabilization Date’ on the Summary tab to the date when you expect the Permanent loan to fund. This may throw off your stabilized value calculation, but you can fix that by adjusting the first stabilized year assumption in cell J7 of the MF-OpSt or ORI-OpSt tab. The result will be the Ai1 perm loan will takeout the construction loan at the same time as your actual loan.

    Anonymous
    Inactive
    7 years ago #3248

    Question 1: Actually, I think you confirmed the answer I was looking for (that unpaid pref was accruing starting at the analysis start date to the capital account and reflected in the sponsor’s returns). I was having trouble seeing at first but looking at the Equity CF tab now it makes sense.

    Question 2: Thank you this is helpful!

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