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The product for syndicators is the property. Pricing and engineering that product is the financial analysis. The best syndicators make their choices objectively and based on the data and facts. They tune their projections to maximize both the return for their investors and the return for themselves. And they have meaningful conversations about money – they’re not afraid to go into the details about the way that engine works. 

The more we know about the numbers, the more we earn the trust of our investors, and the better we perform in our investments. So here, we’re going to take a look at the four-step financial analysis system, and how to get started at being an expert yourself in underwriting.

Four-Step Financial Analysis System

Step 1:

The first step is to understand your basic facts and assumptions. This is composed of facts, assumptions, and market data. Facts are the reality of the world (i.e., the building is 15,000 square feet.) Facts are not going to change. The address is  a fact. There are also some numbers that are specific facts as well, like tax rates, depending on your state and jurisdiction. 

Then there are your assumptions. These are things like estimating that rent growth is 3%. Or estimating that the increase in your expenses is at 2%. Market data is also in here, because from the market data, we can build better assumptions. So if 3% was your rent growth per year, what does that look like? Historically, we can see from market data, that maybe it’s been 3%, maybe it’s been 5%, maybe it’s been 1%. This can help you derive how your assumptions are made and increase their quality and accuracy. Then, you can have more meaningful conversations with your investors, because you’re talking about something objective only. 

Step 2:

The next step is our NOI and potential value. All of that information from basic facts and assumptions leads into this conversation of NOI and potential value. NOI is is basically an objective measure of exactly where the property is at any given point. This all starts with your gross income, so your rents, assuming this is an income producing property. 

But for an apartment building, for example, you’ll have other income – maybe in the form of your laundry. Or in an office building, you may have other income in terms of a cell tower. Then there’s your CAMs, which stands for common area maintenance (often called “pass throughs”.) These are all of the operating expenses that we pass on to the tenants to pay, including things like property taxes, expenses, electricity, etc. If all those expenses get passed on to the tenant, that’s known as a triple net lease.

In office buildings and industrial buildings, it tends to be a little bit different, and you typically set it as an increase of your operating expenses each year that are passed on to the tenant. So this doesn’t happen at the entry level, but with every increase. And we call that a modified gross lease, or an industrial gross lease. 

If you add all those up, we have the gross potential income. If you didn’t have a fully occupied building, you’d have the actual rents that are being paid, plus another category of marked up rents. So you mark up your vacancies in order to get your gross potential rent. 

One thing that then you can do is subtract out of your gross potential income your vacancy and credit risk, then add back another category of other income. This is a different income not subject to vacancy, like a cell tower or a billboard.

After we figure out our gross potential income, we can subtract our vacancy and our credit risk, and add back the other income that’s not subject to vacancy. Now we have our net income. Next, we need to get to net operating income, so we have to subtract our operating expenses. 

There are two kinds of expenses in the world: above the line costs and below the line costs. Above the line costs are the operating expenses, the everybody-has-to-pay-them kinds of things, like property taxes,  insurance, loans, property management, repairs and maintenance,  utilities, portage, and contract services like pest control, trash, janitorial, etc. Add all those up and now you have your total operating expenses number.

Now, take the net income and subtract operating expenses. And voila, you’ve got the magical NOI. 

If you wanted to calculate the potential value, it’s really as simple as the NOI divided by the cap rate. (The cap rate is one of those assumptions that comes from market data, by looking at similar properties that are similarly situated.)

Step 3:

The next step after NOI and potential value is cash flow. This is how we look at what cash is coming in – things that are not part of NOI, but still get spent. The biggest one is your financing. For example, how does taking debt affect your analysis and your property? Are you choosing the right kind of debt or not? 

This is where you take your NOI and subtract all those below the line costs, like your debt service, capital expenses, or things that are inherent to the investment. In this case, because we’re talking about syndication, asset management fees are included. You may also have things like reserves, as you’re continually putting money away in order to take care of any capital cost or any unforeseen things. In terms of income taxes, that’s not done here, because they’re typically being passed off straight to investors. Cash flow before taxes is what we’re calculating here.

Step 4:

And the last step is performance, which is where the projections are that you will be talking with your investors about – like what sort of purchase and sale, what the measures are, what the cash looks like, what the IRR looks like. Performance is where the rubber meets the road. In a nutshell, what we’re talking about is how to have a meaningful conversation with a potential investor. So when you’re talking about performance, you need to first understand cash flow before taxes, understand the value piece, understand how much you’re going to be buying the property for. You need to understand your debt service, because you need to know exactly how much money in equity you’re looking for from people. 

So performance starts with the purchase price. This is not the purchase price of the investment; this is the purchase price of the property. Then we’ve got the costs of the syndication, in terms of fees, like acquisition fees, finance fees, and how you’re making money. Identify what your ideal hold period is, keeping in mind that this is an assumption. Finally, you’ll need to figure out what your exit strategy looks like.

At the end of the day, what you’ve got is a bar that represents the price that the investor invested in, any increases, the IRR calculation for the property. Once you’ve identified all of these and you know what the NOI is, you spread out that NOI to figure out what it’s estimated to be, for years two, three, four, and five, in order to end somewhere in between the NOI and the cash flow. Then subtract out those other expenses, the below the line costs. Calculate your reversion by taking the NOI in year six and then dividing that by the estimated exit cap rate. And then you end up with what that exit value is. 

We use all of this to calculate the IRR. And what you’re doing as a syndicator is trying to find how you can drive the IRR up for your investors. You don’t want to get above the point of the normal risk profile amount for your founder investment theory, but you should always be pushing. Because when you drive it up comfortably by adding value, the spread is your money, which you’re making as a syndicator. It’s going in your pocket. So you’re pushing up the IRR, the fees that you’re charging, taking more of the piece of the pie, until it balances out at a point where the IRR is acceptable and believable. 

You only want to drive IRR up to a point that’s totally achievable, because when it comes time to sell, you get to tell your investors that you’ve hit or exceeded the original target. Doing a thorough financial analysis helps your investors trust you. This way, they’re making good money, and you’re making good money.


Are you ready to get started with your own syndication and need a private placement memorandum? Moschetti Law Group is a real estate syndication law firm and we’d be happy to meet with you to put together your Reg D PPM from a syndication attorney and guide you through the process of launching your own offering.

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