The Sources and Uses table is integral in real estate to provide a high-level overview of the transaction. There is a lot of confusion about how to prepare this table, why it’s needed, and which amounts go where.
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If the General Partner overpays themselves Carried Interest, a Clawback clause forces the General Partner to return the portion of overpaid Carried Interest to the Limited Partners. Clawback calculations are commonly triggered by the final liquidation of the fund or partnership. This is to ensure that there is no more activity that would further change the Carried Interest calculation, and thus necessitate another Clawback event.
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Loss to lease is a metric frequently used to financially model real estate projects and is an important concept most commonly used in multifamily underwriting. However, loss to lease can be quite confusing to understand, especially if it is your first time encountering the term loss to lease.
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The Cash on Cash Return is a popular calculation that determines the amount of annual income earned compared to the total amount of cash invested. It differs from the IRR because the Cash on Cash return calculation does not factor in time-value of money. The Cash on Cash differs from the equity multiple or return on investment (ROI) because the Cash on Cash only looks at cash from operations and doesn’t project a terminal or sale value.
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Iterative calculations is an important feature within Excel that very few know about. It is a powerful tool that can be used to solve circular references in order to find stable results. By enabling iterative calculations circular references are a thing of the past.
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DCF Valuations are used everyday in private equity real estate. Funds value their investments each quarter using DCF models. Buyers use the present value calculation to determine the acquisition price of potential investments. In order to conduct a DCF analysis, you must make assumptions about future cash flows and model those projections in a financial real estate model.
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Hard costs are immediately incurred upon construction and make up a major portion of the construction budget. Hence, they are important to accurately factor in as they can determine whether a project is feasible or not. If your construction budget is too high, that might indicate you need to reevaluate how you are allocating funds between your hard and soft construction costs. The more accurate your cost estimate is, the lesser the risk of all parties involved.
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Payroll is the process of a business paying its employees as compensation for hours worked. It includes distributing money in the form of checks or direct deposit to the company’s personnel. Payroll is not exclusively paying employees on a month to month basis (or however often the payments occur), but it also includes keeping records of the payments and paying taxes of behalf of the employee’s wages. Typically, payroll is handled by the accounting department or human resources department in a business, but if the business is smaller, an associate or the owner directly manages payroll.
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In multifamily units, Other Income is a term that refers to all sources of income that are not included in the rental income. It is calculated by summing all sources of income that a property has, excluding the rent that tenants pay. In some cases, Other Income is referred to as Ancillary Income. Other Income is an important figure to know, since it is an integral piece of the calculation that determines the Effective Gross Income of a property.
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