Modeling Equity CF

[Lizzie Boyer]

7 years, 9 months ago #2574

I was trying to apply your module to a value-add strategy investment whereby some capex would be done to the acquired property in e.g. Year 1 and 2, stabilized for a few years thereafter and sold at the end of the investment horizon. However, I wasn’t sure how to go about factoring this into your Equity CF tab. Should I incorporate the new equity used to fund capex under the Levered Before Tax Cash Flow (new contributions would net off with existing cash flow) or should I separate this out under Contributions from LP?

[Spencer Burton]

7 years, 9 months ago #3032

Thanks for the question. Let me first explain how the model is handling the cash flows and perhaps that will help answer your question.

The model converts the construction loan to permanent debt in the stabilization month. Prior to stabilization, capital costs are funded first by equity on a pro rata basis between GP and LP and then by construction financing (See Sources and Uses Tab for those inputs). Once the stabilization date is reached (set in Cell M17 of the Summary tab), cash shortfalls in any period (e.g. due to operating shortfalls or post-stabilization capital costs) are covered by equity alone on a pro rata basis between GP and LP. Those calculations are automatically made on the Equity CF tab in periods where Levered Before Tax Cash Flow is negative. The relevant amounts are automatically added to the GP and LP’s capital accounts (Rows 45 and 54 of the Equity CF tab).

[Lizzie Boyer]

7 years, 9 months ago #3034

Thanks for the explanation and I do understand that. Instead of strictly acquisition-only or development-only, I’m trying to model something which allows for both acquisition and development. For e.g. if there is substantial value-add work to be done on the income-producing property and a separate re-development loan has to be taken up on top of additional equity. Based on your experience, should this be regarded as an additional investment cost or should I just net this off from the operating cash flows?

[Spencer Burton]

7 years, 9 months ago #3036

I would consider it a capital cost (additional investment cost) and use the development model to model a value-add ; assuming you have an unstabilized redevelopment period funded by construction debt. Make sure the dates on the timing section line up with your projections, and that the loan amounts for construction and permanent debt are correct. The Equity CF will then automatically calculate for you.