All-in-One (Ai1) Walkthrough #3 – Modeling a Hypothetical Retail Development Investment
This walkthrough, our third in the series, takes you through the entire process of modeling a simple development investment. I’ve created hypothetical assumptions for this exercise written out in PDF format (download link below) and then use those assumptions to assess the viability of the investment. I model a hypothetical retail development investment using the All-in-One model.
In an effort to provide greater instruction on how to use our All-in-One Underwriting Tool for Real Estate Development and Acquisition, we’re developing a series of walkthrough videos and posts on the methodology behind the various components of the model. Our hope is that if you are empowered with the how, you’ll be more willing/able to provide feedback to improve the model.
If you haven’t already, you can download the model here. This walkthrough uses beta version 0.3.12 of the All-in-One Model.
Video Walkthrough – Modeling a Simple Retail Development
Assumptions – Simple Retail Development
You can download these assumptions in PDF format here.
Investment Summary
- Investment name: Saddle Farms
- Parking: 250 spaces
- Year built: 2019
- Analysis Start: Jan 1, 2018
- Construction length: 18 months
- Analysis Period: 10 years
- Building size: 50,000 SF (35,000 SF anchor plus 15,000 SF inline)
Valuation
- Market NOI cap rate for comparable retail centers: 5.50%
- Forecast growth in cap rate: 5 bps per year
- Exit cap rate: 6.00%
Development Assumptions
Construction Budget
- Land cost with entitlement: 750,000
- Hard costs: 6,250,000 (125 PSF)
- Hard cost contingency: 5% of hard costs
- Soft costs: 1,250,000 (25 PSF)
- Soft cost contingency: 5% of soft costs
- Leasing costs included on rent roll
Construction Financing
- 5% interest rate
- 70% LTC loan
- 2% loan origination fee
Operating Assumptions
Rent Roll
- John’s Market – 35,000 SF (pre-leased); lease start at construction completion; 16 year lease; 12 months free rent upfront;
- Rent: 12.50 PSF rent for years 1-6; 15.00 PSF for years 7-11; and 17.50 PSF for years 12-16
- Leasing costs: Tenant improvements of $30 PSF; no leasing commission
- Expense Reimbursement: 5.00 PSF CAM
- Future leasing assumptions: N/A
- Inline space – 15,000 SF (not pre-leased)
- 5 suites at ~3,000 SF per suite
- Absorption: 1 suite every 3 months with first suite leasing at construction completion
- Leasing costs: Tenant improvements of $40 PSF and 6% leasing commission for 1st generation leases
- Rent: 16.50 as of lease start with 2% annual bumps
- Lease term: 63 months with 3 months free rent upfront
- Expense Reimbursement: NNN (100% of pro rata share)
- Future leasing:
- Market rent: 16.50 PSF;
- TIs: New: 20 PSF, Renewal: 7.50 PSF
- LCs: New: 6%, Renewal: 4%
- Free rent: none
- Market rent growth: 3%, 3%, 2%, 2%, 2%
- Contract rent growth: 2%
- Expense Reimbursement: NNN (100% of pro rata share)
- Renewal probability: 60%
- Lease length: 60 months
- Downtime: 6 months
Other Income
- Misc. Income: 15,000 grown at 2% annually
General Vacancy
- 10%, excluding anchor space
Operating Expenses
- CAM: 4.00 PSF
- Mgmt Fee: 3%
- Insurance: 0.25 PSF
- RE Tax: 1.25 PSF
Capital Expenditures
- Capital reserve: 0.15 PSF
Permanent Debt Assumptions
Senior Debt
- Amount: 65% of stabilized value
- Loan Fees: 0.5% of loan amount
- Interest rate: 4.25%
- Amortization: 30 years
- Interest-only: None
Junior Debt
- None
Partnership Assumptions
- Equity split: 90/10 LP/GP
- Preferred return: 8.0% paid pro rata
- Promote: 80/20 to a 12% IRR, 70/30 to a 15% IRR, 60/40 thereafter
Frequently Asked Questions about Modeling a Simple Retail Development using the All-in-One (Ai1) Model
How do you begin modeling a retail development in the Ai1 model?
Start by entering your investment name, analysis start date, construction length, and other summary-level assumptions on the ‘Summary’ tab. In this walkthrough, the project is called “Saddle Farms” with an 18-month construction timeline beginning Jan 1, 2018.
What construction budget inputs are required in this model?
Inputs include land cost ($750,000), hard costs ($6,250,000), soft costs ($1,250,000), and respective contingencies (5% each). Leasing costs for both anchor and inline tenants are modeled separately within the rent roll assumptions.
How is the rent roll structured for anchor versus inline tenants?
The anchor tenant (John’s Market) occupies 35,000 SF, is pre-leased, and has a 16-year lease with stepped rent increases and one year of free rent. Inline space totals 15,000 SF, divided into 5 suites, with staggered lease-up modeled every 3 months post-construction.
What are the inline leasing assumptions in the model?
First-generation inline leases include TIs of $40 PSF, 6% leasing commissions, 3 months of free rent, and rent starting at $16.50 PSF with 2% annual increases. Renewal assumptions include lower TIs ($7.50 PSF) and 60% renewal probability.
How is construction financing handled in the Ai1 model?
The walkthrough uses a 70% LTC construction loan with a 5% interest rate and a 2% origination fee. These assumptions are input in the financing section of the model.
What operating assumptions are included in this analysis?
Operating assumptions include a 10% general vacancy (excluding anchor), $4.00 PSF CAM, 3% management fee, $0.25 PSF insurance, $1.25 PSF property tax, and $0.15 PSF capital reserve.
How is the permanent debt structured in this model?
Permanent debt covers 65% of stabilized value, has a 4.25% interest rate, 0.5% fee, and a 30-year amortization. There is no interest-only period. No junior debt is used.
What are the partnership-level return assumptions?
The model assumes a 90/10 LP/GP split with an 8% preferred return. Promote structure is tiered: 80/20 up to a 12% IRR, 70/30 to a 15% IRR, and 60/40 thereafter.
Where can I find the full video walkthrough and downloadable assumptions?
You can find the video walkthrough and downloadable PDF assumptions file directly on the A.CRE walkthrough #3 post. The post includes a link to download version 0.3.12 of the Ai1 model.
