When we know that we have a good chance of acquiring an asset, one of the first things we like to do is put together an accurate financial model on the property.
These models give us a good idea of what kind of cash flow and value we can project from a particular asset over a period of time.
As a rule of thumb, I like to project the income from a property over a period of ten years.
We start by inputting all of the revenue into the model. Base rent, CAM recoverables, and any other income.
Next we’ll factor in lease expiration information so we know when we can potentially lose a big chunk of our cash flow.
Potentially losing a tenant also means we will need to budget for the capital costs involved in acquiring a new tenant, such as leasing commissions and tenant improvements.
We like to use credit lines for these capital costs, but it is important to get the information into the model so we can see how it impacts our cash flow.
Next comes all of the expenses.
Unfortunately, unlike gross revenue derived from leases which are written into a contract, you can’t calculate variable expenses to the penny, so it’s important to factor in annual increases into the expenses over time. I like to use at least 2%. (On a side note, this why it’s so important that all of your leases have annual increases in them)
You’ll also put all of your acquisition information such as purchase price, acquisition costs, and any information on your debt piece if you are borrowing money.
The model will then do the rest. If done properly, this model or set of models will be the basis of your acquisition analysis.