New Software Updates, Equity Multiple Calculation

This week marks the release of a new feature in our REIA product line as well as important updates to our development programs for the Mac.

We have just added the Equity Multiple calculation to both REIA Express and Pro, for both Windows and Macintosh. Download the latest builds of these products to view this metric on the Analysis of Resale and Summary Cash Flow and Resale Analysis reports. You will also find Equity Multiple on our Decision Maker sensitivity analysis dashboard.

Also newly released are updates to C/I Development and On Schedule for the Mac.  These two updates bring these products in line with their Windows counterparts by adding features such as waterfall returns in the Partnership modules.

RealData customers should open their software and look for the “Check for Updates” button on the Welcome worksheet, or login to their customer account to download the latest release of these products.

 

New REIA v18 Releases for the New Year – Mac and Windows

With the new year comes the release of REIA version 18 for Mac. This release has all the same features, calculations and reports that are found in the Windows release. Like all of our Mac  products, it will run under Mac Excel/Office 2011 only. We continue to wait for Microsoft to make fixes and improvements to Excel 2016 so that our software will run correctly in that version.

Also available for immediate download is a maintenance update for REIA v18 Windows. This update fixes minor issues in the Cover Sheet and Cash Flow / Resale Assumptions reports. Customers who own a license of the software can download the latest build 1.07 from either the Welcome worksheet of their product or via their customer account at realdata.com

Keep track of all latest releases on our builds page.

 

New software builds across the Windows product line

We have recently rolled out new builds of all of our Windows products.  The main objective was to include a new in-house PDF printer which replaces the third party product we have relied upon for over a decade.

The new printer provides a number of advantages:

  • It immediately solves a print fail issue that arose with Windows 10.  All customers who have Windows 10 are encouraged to update to the latest build immediately.
  • We created the new PDF printer in-house so we can more quickly diagnose and respond to any issues that may arise.
  • Our solution is a much smaller file and runs faster.

Also included in this round of updates are cosmetic and other minor changes.

All customers running the latest release of our products should download the latest builds – do this via the “Check for Updates” button on the Welcome worksheet of your product or login to your customer account at realdata.com

View the latest builds of each product on our builds page.

 

New Lease Renewal Assumptions feature for REIA Professional

Making assumptions and entering data about commercial lease revenue — especially rollovers — was often a tedious undertaking. Until now.

Enter our latest game changer: REIA Professional’s Lease Rollover Assumptions

What is it?

Our new Lease Rollover Assumptions feature (LRA) is a way for you to store sets of parameters about different commercial lease rollover scenarios, parameters which you can use over and over when entering tenant information in REIA Professional. What is the probability that a current tenant will renew? How long do you think the space will be vacant if a tenant chooses not to renew?

Build your assumptions sets, add your tenants, and apply the LRAs. Done.

You rely on our products to crunch the numbers quickly and accurately so you can make the best and most profitable commercial investment decisions. LRA brings you a whole new level of power and speed.

How it works

First, create a set of assumptions on the new LRA worksheet.  Enter values for months vacant, rollover probability, new and market rent, etc.

lra4

Then apply those assumptions to a tenant just by selecting the option on the Commercial Income worksheet:

lra5

How to get it

If you already own a license of REIA Professional version 18, then you just need to download the latest build from your customer account at realdata.com

If you have a previous version, consider upgrading.  Upgrade costs can be found here.

Learn More

We have a knowledgebase article which walks you through the setup and configuration of the LRA feature.

New Version of our Income-Property Video Tutorial

Screenshot 2016-06-30 09.36.08We’ve just released an updated version of our video tutorial, How to Evaluate an Income Property Investment with REIA Pro. We’ve given the video a serious makeover — additional content, better audio and graphics, greater emphasis on how to use RealData’s REIA software to perform an analysis — and have added a seventh video that provides an overview of some of the software’s more advanced features.

•    You get access to the web-based video series on our new e-learning platform. Watch it online at your convenience — on your desktop or mobile device.
•    The property analysis is based on a sample case study of a mixed-use property.
•    The series uses our REIA Pro product to analyze the investment, but many of of the features portrayed in the videos are found in the REIA Express edition.
•    The series is presented by Frank Gallinelli, founder of RealData, Inc.
•    Includes seven videos with over 2 hours of instruction

If you’ve already purchased the original release of this series, you’ll receive an email with instructions on how to get the new version at no charge. If you haven’t purchased it before, we invite you to download the case study and view a lesson-by-lesson synopsis.

New REIA Professional version 18 for Windows

This week we introduce version 18 of Real Estate Investment Analysis, Professional Edition.  It is available immediately for purchase, either for 30-day licenses or time-unlimited licenses. We offer upgrade paths for those who have been with us through previous releases.  Currently, this version is available for Windows only.

What is New?

  • Fiscal Year Option – Sometimes a perfectly obvious and useful feature is overlooked.  In the past year, a number of users suddenly started asking about the option to display data with fiscal year headings — i.e., Year 1, Year 2, etc. — rather than with calendar years. Even RealData’s founder, Frank Gallinelli, insisted on this new feature when he realized his grad students could follow a presentation more easily this way! Now you can have this by ticking a single checkbox in the General settings to make this change throughout the program.

Fiscal Year Option in REIA Pro

Fiscal Year Headings in REIA Pro v18

  •  Sale-Year Cap Rate: Choose Year-by-Year – Nothing lasts forever, not even market cap rates. You might want to test scenarios where the so-called “terminal cap rate” — the rate you expect to be in play in the future — rises or falls over time. Now for every potential resale year, you can elect to use a different cap rate if you like.
  • Syndication Fees – Users of our Partnership Analysis module have been asking for the ability to handle syndication fees, and of course we listened. Account for acquisition or disposition fees, as well as ongoing asset management fees.Partnership Syndication Fees
  • New Report Templates for Graphic and Property Narrative – You now have two free-form pages where you can create your own report pages. One is designed to accommodate a graphic. It could be a property photo, floor plan, map — any image file. The other is a property narrative, where you can use as much or as little of two text columns to tell this property’s story. You can style the text, as well as create paragraphs and headings.Narrative Report new in REIA v18Picture Report REIA v18
  • Zoom Worksheet ViewGlobally adjust view +10% +25% etc. – Perhaps your desktop has one screen resolution and your laptop something totally different. And maybe neither of them looks good in the default view when you open the program. In the past you had to change the “zoom” setting for each worksheet individually, but we’ve added a function that allows you to apply a global view setting across all the sheets. So whether you want big type or small, the solution is a click away.
  • Even more – Drag and drop the order of reports when printing; get help from improved and expanded documentation, cell notes, and knowledgebase

New Build Release for REIA Pro v17

Yesterday we released build 1.12 of REIA Pro which fixes two minor issues:  first, the Hide Taxes option was not working correctly with one report and second, we have implemented an improvement to the code which controls the saving and closing of the workbook so that you will not be prompted to save the file if you have not made any changes.

All customers who have a license of the REIA Professional v17 software are encouraged to update their software.  Just click on the “Check for Updates” button on the Welcome worksheet, or login to your account at realdata.com to get the latest installer file.

New Updates Add Waterfall Returns to On Schedule and C/I Development programs

Need waterfall returns for your equity partners in your development projects?  You asked and we have delivered by adding this new feature to both our On Schedule and C/I Development programs.  This feature is available at no charge to customers with licenses of the latest versions of these products.  At this time, this feature is available for Windows products only.

Update your software to version 5, build 1.16 for On Schedule and version 6, build 1.17 for CID by clicking on the “Check for Updates” button on the Welcome worksheet of your product, or by logging into your customer account and downloading the latest installer file.

What are Waterfall Tiers?

With this new option, you can now configure IRR achievement hurdles for your limited partners / non-managing members. Enter up to four different tiers with different IRR rates, just as in our REIA Professional program.

waterfall

 

If you have a license of a previous version of On Schedule or CID, consider upgrading to gain access to this and other powerful new features.  See our upgrade page for pricing and more information.

Real Estate Project Feasibility – What’s Behind Door #2?

door_1_2In an earlier article we discussed the first of two ways that developers traditionally use to look at the feasibility of income-property projects. That one was called the “Back Door” approach. It will come as no surprise to learn that we call the other method the “Front Door” approach.

The difference between these two approaches lies in what you consider to be the unknown variable. With the Back Door, you believe you know the rental rate that you can obtain for the space once it is built. You also know the cost of financing your project and what you consider to be an acceptable rate of return on your own equity investment. Blend this all together and what you’re really saying is that you know the revenue stream and want to figure out is the maximum total project cost that you can support with that revenue stream.

Once you get that far, you can refine the process a bit by breaking the total project cost into land and improvements. If you can estimate your cost for improvements, that allows you to back into the maximum land value that you can justify for this deal. We say land “value” rather than “cost” because you may already own the land. If that’s the case, then the decision you reach via the Back Door is whether or not the project you have in mind is in fact the best economic use of your land.

As its name suggests, the Front Door approach is a bit more direct. In this case you believe you know the total project cost – your outlay for improvements and the cost or value of your land. Now the unknown variable is the revenue stream. What rent must you generate in order to make this deal worthwhile? To ask this question another way, if you charge market rent does the deal provide an acceptable return?

Let’s look at an example. We’ll start with the project cost, which is made up of hard costs, soft costs and land. Recall from the earlier article that hard costs include construction as well as related items such as civil/mechanical utilities and environmental remediation; and soft costs include architectural and engineering, loan fees, development loan interest, legal fees, zoning-related costs, permits and similar items.

Hard costs: $1,700,000
Soft Costs: $750,000
Land Costs: $350,000
Total Project Cost: $2,800,000

The market capitalization rate for properties like this in your area is 11%. (If you haven’t done so already, you should read our article about cap rates in the Learn section of realdata.com. Even better, my book, What Every Real Estate Investor Needs to Know About Cash Flow…, provides a detailed tutorial.) In order for the property to yield such a rate, it needs to have a Net Operating Income that we calculate as follows:

Net Operating Income = Cap Rate x Value
Net Operating Income = 0.11 x 2,800,800
Net Operating Income = $308,000

We need a few more puzzle pieces to complete the picture. We know that we are building a project that will offer a total of 20,000 square feet of rental space. We must build in an allowance of 3% of the Gross Scheduled Income (the total potential rent) for possible vacancy and credit losses. We estimate that our operating expenses (property taxes, insurance, etc.) will be $50,000 for the first year. We can use the same format as we did in the Back Door analysis:

Total Rentable Square Feet x Average Rental Rate
= Gross Scheduled Income
– Vacancy and Credit Allowance
= Gross Operating Income
– Operating Expenses
= Net Operating Income

Let’s fill in what we know:

20,000 x Average Rental Rate
= Gross Scheduled Income
– 3% of Gross Scheduled Income
= Gross Operating Income
– Operating Expenses of 50,000
= Net Operating Income of 308,000

I’ll spare you the algebra involved and reveal the precise answer in a moment. It is for times like this that you use professional real estate software, so I’ll digress to suggest that you look at our Commercial / Industrial Development software, which we have offered since 1983. It’s designed specifically to analyze development projects and to help you sort out this sort of front-door back-door feasibility.

In real life what you would probably do next is to plug in the current market rental rate to see if in fact it would give you at least a $308,000 Net Operating Income, thus demonstrating that the project is feasible. Let’s say that the market rate for this space is $18.50 per square foot per year and try that:

20,000 sf x 18.50 per sf
= Gross Scheduled Income of 370,000
– 3% of Gross Scheduled Income of 11,100
= Gross Operating Income of 358,900
– Operating Expenses of 50,000
= Net Operating Income of 308,900

We were looking to achieve a NOI of $308,000, so for all practical purposes we nailed it. Based on these numbers, the project makes sense. For those readers who labored to calculate the exact rate to get the $308,000 NOI, it is a fraction of a cent more than $18.45.

Neither the front- nor the back-door approaches is a just brain teaser. These are effective methods to look at income-property projects to help you decide if they make economic sense.

—-Frank Gallinelli

Want to learn more about real estate investing? Visit learn.realdata.com

####

Your time and your investment capital are too valuable to risk on a do-it-yourself investment spreadsheet. For more than 30 years, RealData has provided the best and most reliable real estate investment software to help you make intelligent investment decisions and to create presentations you can confidently show to lenders, clients, and equity partners. Find out more at www.realdata.com.

 

Copyright 2016,  Frank Gallinelli and RealData® Inc. All Rights Reserved

The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

Real Estate Project Feasibility – What’s Behind Door #1?

If you have ever been involved with the development of income property then you may have heard this dictum: One can describe virtually any development project as…

  • a use looking for a site or
  • a site looking for a use.

Out of this ying and yang school of development arose two classic techniques to assess feasibility: The Back Door and the Front Door approaches.

 

Let’s first take a look at the Back Door Approach

door_1_2You might employ the Back Door approach if you have a use looking for a site. You know what you want to build and can reasonably estimate the kind of rental revenue it can generate. The question for you as the developer is, “Will that revenue be sufficient to justify the cost of development?”

Presumably, this technique is called “back door” because you’ll back into the maximum project cost that the use will support. Then, like Hamlet examining Yorick’s skull, you’ll ponder it until you decide if you can actually do the deal. In short, if your intended use will support a project that costs $x and no more, you must decide if you can you develop it for those $x.

To do the math, start by determining the extent of rentable square footage that you can build on this parcel. Obviously you need to take into consideration issues such as lot coverage, height restrictions, floor area ratios, parking requirements and so on to determine what is permissible as well as possible. Depending on the complexity of the use, you might then simply multiply the total rentable square feet by the average rental rate or you may need to create a proposed rent roll on a space-by-space basis. In any event, your first step here is to establish an estimate of the project’s Gross Scheduled Income.

From this point, you work through the numbers exactly as you might in our Real Estate Investment Analysis software or as shown in our courseware. From the Gross Scheduled Income you subtract a Vacancy and Credit Allowance. That gives you the Gross Operating Income (or Effective Gross Income, as some prefer to call it). Next you subtract all operating expenses, which leaves you with the property’s expected Net Operating Income.

From here you want to establish the maximum loan amount that the NOI can support. If you want to take the quick route you can download the free real estate calculator program we provide at realdata.com and use the section called, of all things, “Maximum Loan Supported by Property Income.” If you’re a rugged individualist, you can also do the math yourself: Divide the NOI by the lender’s required Debt Coverage Ratio; then divide again by the annualized mortgage constant (which is 12 times the monthly payment amount for a $1 loan at the interest rate and term that the lender will provide).

Now you know the maximum loan that this project can support. The Loan-to-Value ratio should define the relationship of this loan amount to the maximum value of the whole package. So, divide by the lender’s maximum Loan-to-Value percentage and you’ll have the Maximum Total Project Cost. Put it all together and it looks like this:

Total Rentable Square Feet x Average Rental Rate
= Gross Scheduled Income
Vacancy and Credit Allowance
= Gross Operating Income
Operating Expenses
= Net Operating Income
= Maximum Total Project Cost

To put this more succinctly, you started with the gross rent, pared that down to a NOI, found the maximum loan the NOI could support and then applied a Loan-to-Value ratio to reach the Maximum Total Project Cost.

The next step in assessing the feasibility requires you to pick apart that total project cost. The total is made up of three parts: Hard costs, soft costs and land. You know what you’re planning to build, so you can figure the first two:

the hard costs, which include primarily construction but also items such as civil/mechanical utilities and environmental remediation;

the soft costs, such as architectural and engineering, loan fees and interest, appraisal, legal fees, permits and zoning-relating costs.

The hard costs and soft costs combine to represent everything in this project except the value of the land. So, if you subtract those hard and soft costs from the Maximum Total Project Cost, what’s left is this: the maximum value of the land for you to be able to consider this project feasible.

Keep in mind that if you already own the land, it’s the land’s current market value not its purchase price that you want to consider. If the land is worth more or costs more to buy than this maximum value you just calculated, then according to the Back Door approach the deal is not feasible.

Maximum Total Project Cost
Project Hard Costs
Project Soft Costs
= Maximum Site Cost or Value

Example:

You propose to build an income property with 20,250 rentable square feet. The average rental rate will be $20 per square foot. You provide a 10% allowance for vacancy and credit loss and expect operating expenses to total $44,000 per year.

Your lender will provide financing at 8% for 240 months and requires Debt Coverage Ratio no less than 1.2 and a Loan-to-Value Ratio no greater than 80%. What is the Maximum Total Project Cost?

You estimate Hard Costs to be $2,430,000 and Soft Costs to be $625,000

You own the land, which has a current market value of $750,000. Does it seem feasible to build the project on this site?

Start with the Gross Income and work your way through the model above:

20,250 Total Rentable Square Feet x 20.00 Average Rental Rate
= 405,000 Gross Scheduled Income
10% Vacancy and Credit Allowance
= 364,500 Gross Operating Income
44,000 Operating Expenses
= 320,500 Net Operating Income
= 3,326,142 Maximum Total Project Cost

If your lender requires that you have enough Net Operating Income to cover 1.2 times the debt service (i.e. 1.2 Debt Coverage Ratio) then your NOI of 320,500 can justify annual debt payments up to $267,083.

Given your lender’s financing terms (expressed in the Mortgage Constant), the mortgage can support a mortgage of $2,660,913.

If the Loan-to-Value ratio is 80%, that $2.6 million represents 80% of the project’s value; so 100% of its value equals $3,326,142.

What will it cost you to build, not counting the land? Your combined Hard Costs and Soft Costs total $3,055,000. If the Maximum Total Project Cost that the income stream can support – in other words, if the most you should spend on the complete package, given the potential rental income – is $3,326,142 and the cost of physical construction is $3,055,000, then the difference of $271,142 is the most that you can justify spending on the land. But the land is really worth $750,000. So it appears that it won’t make sense for you to build this project on this site. The cost of physical construction plus the value of the land are greater than the rent can support.

For those of you familiar with RealData’s Commercial / Industrial Development software, that program uses some of the back-door rationale while adding a few twists of its own. You can indeed let the program back you into the maximum development loan, but our experience is that developers are interested in projects that are profitable, not just feasible, so you can work with other considerations in that program to guide your project model.

In our next article, you’ll see what it’s like to come in the Front Door.

—-Frank Gallinelli

Want to learn more about real estate investing? Visit learn.realdata.com

####

Your time and your investment capital are too valuable to risk on a do-it-yourself investment spreadsheet. For more than 30 years, RealData has provided the best and most reliable real estate investment software to help you make intelligent investment decisions and to create presentations you can confidently show to lenders, clients, and equity partners. Find out more at www.realdata.com.

 

Copyright 2016,  Frank Gallinelli and RealData® Inc. All Rights Reserved

The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.