This is a detailed, well-structured, and transparent cash flow model for the acquisition of a stabilized retail property (shopping center) with a parking lot. The model includes the following investment stages:
- Acquisition. The model allows you to set the acquisition date, price, and fixed and variable transaction costs.
- Renovation. The model assumes that immediately after the acquisition, the building will undergo a renovation program. You can set the amount and timing of various renovation capex items.
In addition, when new tenants get on board, they often need to undertake certain fit-outs on their premises. The landlord might compensate a share of these costs.
- Operation. The model features a very detailed and flexible revenue analysis based on existing and prospective tenants’ lease terms and rates, timing, and vacancy assumptions.
The calculation starts with gross potential revenue, which implies the property is fully leased out. The revenue forecast in the model includes:
- Base (fixed) revenue. This is the revenue calculated on fixed rates per square meter of rented area.
- Turnover revenue. On top of base rents, retail tenants usually pay turnover rent – a share of their revenues.
- Opex reimbursements
- Parking revenues
- Rent discounts. In the retail business, we monitor the rental burden for the tenants through Occupancy Cost Ratio (OCR) – one of the property KPIs and a measure rent affordability. When rent expenses exceed a market OCR, tenants would normally turn to the landlord for discounts.
We then calculate vacancy loss consisting of:
- Rotational vacancy: during the void period when the old tenant’s agreement has expired and we are looking for a new tenant, which usually takes a few months;
- Structural vacancy: to make a prudent forecast we can assume a certain portion of areas will be permanently vacant.
The model also builds a granular opex forecasts, calculates the tax effect.
Tenants are categorized as:
- Stores
- Warehouses (storage areas)
- Food court
- Entertainment (cinemas)
- Parking lots
- ATMs
- Sale. You can define the holding period, the cap rate and transaction costs at exit. You can choose the method to calculate the NOI for the purposes of valuation (12 month forward, 12 month trailing or 6+6 of each.
- Distribution of profits between shareholders. The model calculates returns to a preferred partner, if there is one in the project. It then uses a 4-hurdle carried interest waterfall to calculate the distributions between General Partner (GP) and Limited Partner (LP).
The model assumes the investment will be financed by equity and loan. The following funding structure is considered:
- Acquisition loan to finance the initial investment and renovation. You can set the interest rate, amortization period, interest-only period, arrangement and early repayment fees. You can also choose the loan-to-value (LTV) ratio for the asset and for the renovation costs.
- Refinancing loan. The model allows to set the date of refinancing, parameters of the new loan (interest rate, amortization period, fees etc.). You can refinance just the old amount of loan or take additional funding (as much as refinancing LTV allows) and to distribute (cash out) any extra amounts.
- Mezzanine loan. This loan is drawn at acquisition to bridge any potential gaps in funding. Repaid at exit.
The model produces cash flow statements at the asset’s and investor’s levels. It also calculates a solid KPI report which includes vacancy rates, average rental rates, tenant turnover and footfall, average check, OCRs and turnover per square meter, all by category of tenant and by year. Profitability metrics generated by the model includes IRR, equity multiple, gross return peak equity required amount and date for every investor.
Sensitivities. The model includes four scenarios describing the type of support the landlord provides to tenants:
- Fit-out allowance
- OCR discounts
- Both fit-out and discounts
- None of them
In addition to those scenarios, the model has numerous inputs which you can change to see the effect on profitability and cash flows. There is also a data table which shows the IRR and equity multiple at various exit date and cap rate assumptions.
The model is accompanied by professionally designed magazine-quality charts to illustrate the findings of the analysis.
As a final note, every investment is unique, and so the model might need to be adjusted to your situation. Contact me if you need help tailoring this model or developing a new one.
Files Types: .xlsx, and .pdf
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