Difference between Monthly and Annual LP Total Contributions in Equity CF tab?

[Anonymous]

4 years, 3 months ago #2770

First time poster so first I want to say thank you for all that you do. The education available on this website is unparalleled.

I have a question about the Equity CF tab (I am analyzing a commercial retail property, 90% occupied but it is a value add so the construction module is ON). When looking at the MONTHLY Total contributions for LP (cell D116) the number is calculated using the property level levered cashflow from the Property CF tab and multiplying by the LP Equity Share. I don’t understand why the property levered cashflow is used for this calculation because it subtracts any positive cashflow from the property from the full contribution of the LP. In most cases, the LP equity contribution all happens at closing in one lump sum, and thus, the value in D116 is based on the contribution that occured in month 1 and just falls slightly short of actual Equity contribution. The issue is magnified when you look at the the Annual Total contributions for LP (cell D34) because the positive property cash flow continues throught the year. This causes the number in these two cells to be completely different. This is reflected on the summary tab. If you toggle cell S27 on the summary tab from Annual to Monthly, the contribution and distribution numbers change dramtically. I understand if you look at annual IRR vs monthly IRR, you will get a different result, but shouldn’t contributions and distribution numbers be the same either way? If you look annually, or monthly, shouldn’t the LP capital account should show the same balance? Apologies if I am missing something obvious. Thank you.

[Spencer Burton]

4 years, 3 months ago #3314

Hi AC_VT,

Appreciate the kinds words – glad you’re finding value in our site!

And you’re correct, when using the construction module with a value-add scenario, the annual cash flow module isn’t going to tell you much. This is because time zero is not used when the construction module is turned on. And since with annual analysis there’s only one cash flow period per year, the impact of the large negative cash flow early in the year is offset by the positive cash flows in that same year. And so that one annual cash flow nets out to a value that is not representative of the actual situation.

This is especially pronounced in the Partnership-Level returns (i.e Equity CF), but also in the Property-Level returns. And so my recommendation is to ignore the Annual Returns when using the Construction Module. The Annual Operating Cash Flow reports (e.g. ORI-OpSt) are helpful to visualize the year, but otherwise the volatility of the cash flows early in the analysis period make annual periods for return calculation purposes suspect.

Spencer

P.S. If you’re wondering about treatment of Time Zero in the All-in-One, check out this post.