I have a four step financial
analysis workflow that I do for

every real estate syndication
that I look at. Now, having an

actual formal process is
critical. And understanding

financial analysis is the
backbone, it's the only thing

that's going to make you truly
successful in as a real estate

syndicator, or a real estate
fund manager. So I hope you find

this useful. I used to have a
training program about two or

three years ago, it was called
altitude and altitude. That's

why it's called the altitude
four step financial analysis,

this is still the same analysis
that I use today on every deal

that I look at.

So it all starts with, as we
talked about last week, it

starts with these basic facts
and assumptions. We talked about

last week, how there is a range
and how, in the very beginning

of your analysis, it starts
very, very fact based with a

little bit of assumptions based.
And then it changes though, from

there, it starts getting as time
goes on. And as we go from just

needing an A Y to getting in a
pro forma or a five year cash

flow, we start getting more and
more assumptions. And so there

are some assumptions that we
make along the whole process.

And we'll see that go on. But we
also have assumptions that are

that we determined at the very
beginning. So after we determine

what our basic facts and our
assumptions are, we then go

through and figure out what our
NOI is, and our potential value.

And I say potential value,
because there is a big

assumption there in determining
value, we're applying a cap rate

of a market cap rate, this
property hasn't been appraised,

it's just what we think it would
go for. And so there we go. So

after our, we've determined our
NOI and our potential value, let

me get this out of the way.

After we've determined our NOI
and our potential value, we then

are looking at at cash flow.

And so here again, is getting a
lot more assumption based. And

then finally, after we've
determined what the cash flow

looks like, we have performance.

So these are the four steps.
Under performance, I consider

that not only how is the
property potentially doing what

are those projections about
return, but I also look at it as

well how would it perform as a
syndication? How did those

measures line up? So performance
is really tied into not only

just the regular, what's the IRR
potential potentiality of the

property, but also those
measures on is this even a good

investment for us to look at. So
under these, each of these has

matures, a different pen color
actually I need to do this

again. Do that again.

So we're gonna do this in blue.
So now in each of these are

different what we call different
pieces of the puzzle that go

underneath them all. So under
here obviously, if we're talking

about basic facts and
assumptions, we've got facts Oh,

that's

we've got facts. We've got
assumptions

we have market data.

Under and so those are the key
things instead go into that main

step. Now under the next step,
the NOI and potential value,

here, we've got rent roll which
also feeds into income. And we

have operating expenses. Now,
that's not surprising, because

these are what comes up in our
noi calculation.

Under cash flow, we have things
like debt. We have capital

expenses. Actually, I like to
think I'm gonna call them other

expenses

we have reserves. And
interestingly, we have a we have

taxes, the taxes isn't really
something we consider very much

on. On the one we're doing a
syndication, but it is important

to know what the the after tax
cash flow is, as well, just

because you may still need it
for whatever your other purposes

are, if you have somebody who's
actually going to be buying it

for you clears, things like
that, it's useful to know it

fits in just fine on our cash
flow, because all of those same

things also feed into our
discussion of you know, all the

things that are taxed also feed
into our our discussion on

whether or not it is a good how
the performances. And so in

performance that we consider a
few other things we consider the

purchase. And the sale, we
consider the equity.

And then we consider measures.

And so these parts all go to our
four step program now, there are

at almost every level of this
again could just erase that. All

right, there are at almost every
level, actually.

There are at almost every level.
And the most important thing out

of this, that I'm trying to get
across is there are different

levers that move each of the
main functions. So there are a

series of levers that come from
noi that change our NOI and our

potential value. So these are
the NY lovers. We have our

income amounts, and that's rent
roll, things like that. And a

lot of those things start off as
facts right. So the whatever

that let the income is, is the
income or so you think but we

also have some things that just
income like whether or not we're

choosing to do pass throughs and
whether or not we'd be able to

pass through everything that
we're thinking, what we're using

for a vacancy factor what we're
using for a credit factor things

like that. So I put it as a
broad idea just to start

thinking about income is
certainly a big lever and

expenses is of Asli a big lever
and on expenses, I am

specifically not saying that it
is that it is that we can change

what we consider an operating
expenses. Because operating

expenses are a parody objective.
It's pretty standard on what we

consider an operating expense.
But what we choose to use as our

measure for it has some
assumptions built into it. There

is other income there is your
vacancy, as I said, your credit

risk

we've got your your pass
throughs. Got management and

certainly if you are doing me
Management yourself, how much

you charge for the management is
certainly a lever that you could

change the entire noi with,
which flows all the way down to

basically what your your the
return that your investors would

be getting. So there are also
coming out of this same box,

there's also levers for your
potential value, right? I'm

there, I mean, we've got our
Analy. We've got our price. And

we've got our cap rates. I mean,
we've got I mean that because

price equals noi over cap rate.
So any of those things can

adjust, obviously, what that
potential value is, out of cash

flow, there are also major
levers. And what you'll notice

here, so our first our first big
one is noi noi changes our cash

flow. So these things feed up
into themselves. So every single

one of the levers that is within
NOI is within cash flow. And

you'll see as we go on every one
of the ledger levers that's in

cash flow also has an effect on
performance. But some of the

measures in cash flow do not
have a downward effect. They're

not affecting things within and
why. So under this, we've got,

for example, debt. Whether or
not we change our change debt

has absolutely no difference on
noi, it doesn't change it one

bit. And so it is not a lever of
noi, but it sure is a lever on

the amount of cash flow. We also
have our CapEx, we've got our

asset management fees comes out
of cash flow, it's a

discretionary spend, but it's
coming out of that cash flow. So

it is a lever that can change
and it can change everything

else it changes our cash flow
and it ultimately changes the

return for investors. We've got
our how much we are going to

keep in reserves or how we're
going to build up reserves, what

assumptions we use for growth,
and what is our hold period.

Actually, let's use let's change
hold period up the level. So

these are the main main Levers
as it relates to up there we go

as it relates to cash flow. Now
performance has its own levers

obviously.

So here we've got just like we
talked about, we got our we have

our cash flow, you know, it
comes up. And because it comes

up we also have NOI is is also a
lever, we have the price we're

willing to pay and then the
projected sales price

we have sales fees. We have our
purchase and syndication fees

we have waterfalls we have hold
periods and to some extent we

have what our discount rate is.
Alright, so here is why we're

talking about this now. When
we're doing financial analysis

and ultimately underwriting
we're putting together a package

that we can show potential
investors of what we're

expecting it to how we're
expecting it to perform, by

understanding the different
levers that take place within

that process, financial analysis
and or underwriting. The more we

understand those levers the more
we can tune it to being a an

asset that will work in order
for investors to be in listed at

all, it's also important to kind
of get how it all goes together

like this. Because when you're
having those conversations, and

if you're dealing with a more
sophisticated investor, it's

much easier when you've got the
framework in your head about

what this looks like to switch
gears, switch gear, switch gear

and know what they're talking
about, and be able to get it

back to really addressing what
their question is, or if they

have a particular issue, or they
just want to know why you're

doing something, the way you're
doing it. If you have the model

in your head, it really makes
sense. And that's also why we're

talking about underwriting and
financial analysis at all in

this program. Because
theoretically, you could just

take, you know, the simple thing
off of off of a sales brochure

that you're getting then and use
that for your underwriting and

figure out okay, well, we're
going to, we're going to be

making this much money and just
kind of hope that everything

works out. But if you have all
these things in mind, you've got

now you can have real
conversations with investors

about how everything works. And
then you can also fine tune it

as it's going and it make
determinations. Maybe you've

decided, well, I don't think our
reserves is high enough. But

that how is that going to affect
everything else? Well, it's

going to if I need to increase
my reserves, that means I have

less cash flow, which means that
my ultimately the timing of get

my distributions is going to get
thrown off, which means that I

will need to let my investors
know, hey, look, the overall

return for this period isn't
going to be what we thought it

would be because we really want
to build up those reserves. So

you can be having those kinds of
conversations when you get the

model and you can make changes
on the fly. So let's go to let

me ask her those questions.
Yeah. Hello, Andrew, do you have

a question? Any questions so
far? Okay, perfect. Let me know

if you do. Alright, so let's
switch to this spreadsheet.

Alright, so here and this might
look a little familiar. This is

the CCI M. Underwriting
workbook. And I chose to start

here, rather than using what we
were using two videos ago, or

one video, goat as well, because
a lot of people will be more

familiar with these sheets, I've
actually added some stuff into

these sheets, to make it a
little bit more useful. And I

think it will give a little bit
of a basis of why of where

everything goes and how it fits
together when you see a

different model. And then you
can see how how what I'm talking

about feeds into that. So let's
go ahead and get started. And I

put these in order as well. So,
of the four steps. So let me so

this is step one. Right, this is
facts and assumptions.

So these are the assumptions
that are taking place within the

within the in their five year
analysis workbook. These and the

facts are actually more built on
the NOI page than anywhere else.

But I think it makes a little
bit more sense to separate them

out. So you'll see when we, when
we look at the the four step

tool that we use the
spreadsheet, it actually breaks

it apart into all the different
parts just to make it a little

bit more clear. And so here's
our assumptions. So Inc ordinary

income tax rate, capital gains
tax rates straight line on

recapture. Is it 25 This is
actually a 20 As of today, and

these are here because they're
part of CCI M's analysis CCI M

really focuses on invest on the
investor side and helping

investors make make good
decisions. Where as well we talk

about really is more on the
syndication side. We will go

through the taxes probably next
week, just because it is

something that you do need to
know. And why not? We're using

it in the same sheets because it
we can and it doesn't take much

more work. So here's the other
assumptions, what is the vacancy

rate going to be of your
property? How does rent

escalate? So year one, year two,
year three, year four. So right

now we have it in 3%, annual
bumps, income is other income is

escalating at 3% a year in what
we're going to be using today,

we're not going to be using
another income. Actually, no, we

will be using another other
income. So it escalates at 3% a

year, and expenses escalates at
3% a year. So and what we're

talking about actually, the
other income that we're talking

about is going to be passed
through. So it's good that those

match cap rate used in the sale,
I think those are little bit too

broad. So let's bring them a
little bit down. Let's say our

alternative is six, 6.5 and
seven, and are expensive sale, I

would say let's keep it at 6%.
That means 3% preside actually

six and a quarter. Now we'll
cover our escrow and title fees

as well. Alright, so here is
that, okay, so lease analysis

now is the next topic that we're
talking about. And I decided

rather than just go right to the
rent roll, this is a good time

to actually talk about lease
analysis. So let's go ahead and,

and put it in the right step
category that we have. So this

here, we are talking about the
NOI and potential value, step.

So let's say this is the name of
the building is 123 main. Our

first tenant is Joe's store.
They are in suite 101. And then

this is I like to have at least
at least abstracts for every

single property, I do every
tenant. And so this really has

everything that you would need.
Now it has some of the things

like right at the top, you need
to know obviously a tenant is

very important to know, right at
the top, because when you're

sorting through them, that's how
you're going to sort through

them. Alright, date of lease is
the date the lease was signed,

the term is how many how many
years it is, the rent is

whatever that rent is. The
expiration date is that. So

let's say this is June 120 21.
So a five year term, we'll deal

with rent later. And then this
would be May 31 2026. Let's say

it is a 2500 square foot
building. And we are you know

how many parking spaces they've
been allocated. I'm assuming

this is going to be just a two
unit building. And so we'll just

leave that blank term and months
60 You can put the security

deposit the renewal options you
want to fill this out completely

when you're doing your full
analysis anyway because then

you've at least got it in one
very nice easy to see area. And

this section over here where
we've got the paragraph number

now that is for exactly where it
is in the lease. So premises is

often in paragraph 1.1 permitted
use is oftentimes in paragraph

4.1. Square footage is often in
1.1. Parking is like in 1.4 I

think term is in normally it's
in to and this is just from you

know from having done this
security deposit I think isn't

Three, but I don't remember. And
renewal options is oftentimes

like in maybe 4.5 or so. And now
we've got a rental period. So

let's say we've got in year one,
so let's say it's six slash, one

slash 2021. And then it is, say,
through five slash 31, slash

2022. So dollars per month,
let's say that they are at

$5,000 per month, which means
that they are also in $60,000

per year $2 a square foot. And
then we can figure out what

escalations are going to be. But
I just wanted to quickly go, you

know how we do this. And you'll
see why in a minute. It has a

lot of other great ideas for you
know, putting in who pays for

what and operating expenses,
these are things that are very,

very valuable to know where the
different parts of a lease are.

I looked like I left in some of
from a previous use. So you can

see like the suburb
subordination clauses in

paragraph 20, the estoppel
letters and paragraph 21, those

are all where they normally
apply anyway. So there's,

there's our first one, we've got
Joe's store. So let's do one

more quick one. We've already
filled that in. So let's say

this is Bob's restaurant. And so
let's say just for fun that they

started at the same time, and
they're both on five year

leases. So premises is in suite
102. Square footage is let's put

him at 3500 square feet, so
fairly good sized restaurant.

And so if he's starting in
there, we'll put him at six.

And let's put him at ads put him
at a very different dollar

amount. Let's say he starts at
8000 per month. And now we've

got him paying 96,000 per year.
Now this all feeds into our rent

roll, which is also still part
of the NOI and potential value,

right. So we've got this, this
is the the monthly rent. This is

the annual rent, we've got Joe's
store, Bob store, obviously

we've got a 6000 square foot
building. So we've we've now

identified the main parts of our
rent roll for the purposes of

NOI and potential value. Now
this will change as we have

escalations built in, and it'll
have what pass throughs are

really coming in. But let's say
that that are passed through

amount is that we get let's say
it is $1 a square foot, we'll

say it's $12 a square foot and
cams times 5000 I mean times 25.

And then that he is paying $12 a
square foot also. Alright, so

now we have other income as 36.
So now let's look at the NOI

sheet. Now this is the full
sheet that is coming from CCM

and I've just referred to a few
things in here. So what we've

got is how we look at income. So
the way that we start looking at

income is that all that money
that's contracted for is rent

that is contractual, it's likely
to occur. And so we are

basically counting on it. So
that's the potential rent that

you can get in this period.
Right now. Now we also count

vacancies that we think are
going to have going as well. But

you want to make sure to, to
then reduce the amount for

vacancies back out in this
vacancy and credit losses. So

don't make it less than what the
actual dollar amount is, you

want it to be higher. So here
we're using just a rough. So our

total potential rent income is
that 156,000, we are using a 7%

figure, because that came from
here, I came from this

assumption, we change that they
are vacancy and credits risk to

say 5%, because we don't really
have any vacancy. And then

suddenly, now we're using 5%.
That's a much lower figure. So

that leaves us with an effective
rental income. Now here is a big

lever, right? So this is a
lever. Because how we change

that obviously changes this
dollar. Now if I let's, let's

put it back, it's seven.

Okay, so let's put it back at
seven just for fun. And then

we'll see that now. You know,
it's 145 Oh, AD, versus where we

just changed it to swung sheep
to 148 200. So obviously, it's

going to change that amount of
your income and cents and a Why

is your opera is your income
minus your operating expenses.

It's levering the entire
equation, it's changing all

those numbers. And so it's
clearly just delivered to keep

in mind. So let's go ahead and
come up with a few other made

racist. Oops. My clear, oops,
nope, I would rather that. Okay,

got a nice room. All right. So
let's go ahead and finish out

the discussion of, of our noi
calculation. Because the purpose

here is now we've got that first
snapshot that we're talking

about, all we're trying to do is
really get that big, that big

facts, and then little
assumptions, and that this part

right here, that's your little
assumption, that's going to be

changing. So we've now got our
income. Now we need to reduce

our property, our taxes. And so
we can put these in man, by

there. But I've already said
that we've got a that we've got

a large amount of, say we've got
12,000, or we've got $12 A

square foot, times 6000. So
we've already gotten 72,000.

Oops, this didn't add back in,
let me put that in, because this

is our other income amount. So
our other income is the pass

throughs in this in these two
leases, that is there. And then

it also is and I actually would
have would rather put it in, in

so it gets reduced by vacancy
and credit loss. For whatever

reason, cci M didn't do it that
way. The our spreadsheet will

does have it so it reduces that
amount. Because there's really

two types of income, you've got
your pass through income, which

should be counted, and you've
got your other other income

which doesn't. So let's just put
in hard code in that $72,000 of

operating expenses, and now
we've got left with $148,200.

Interestingly, that is the same
amount as our effective gross

rental income.

So let's say we find this
property at a six cap. This is a

property that we actually
already know we think that the

purchase price is going to be
that two to eight oh, so this is

a sorry, a six and a half cap.
So now we've got our purchase

price. And now we've got not all
laid this the noi, but we've

gotten the potential value. Now
this is I'm sure review. But the

main point of why we're going
through it right now is to see

that here is a lever. So this is
what changes everything in

there. Also a lever in here is
this other income, what our

pastures are. Because even
though we've got a, a, an area

in our lease that has these, the
operating expenses and who pays

for what, a lot of times,
probably, I don't know, you've,

you've all seen it 20% of the
time, 25% of the time, you'll

have a landlord who's not really
passing through expenses the way

they can. Some of your bigger
operators definitely will. But

your small time operators tend
to get lazy don't do increases

and don't do pass throughs
really the way they're supposed

to. And so that has a direct
effect on ultimately what though

what you collect, so your income
changes. And then, but we make

assumptions when we're
purchasing the property on

whether or not the landlord's
going to throw a tizzy when we

try and collect those. And they
do and it become it can become a

problem. But it's so it's an
assumption that you're making,

that ultimately is a lever on
the whole thing. So under the

CCM sheets, we have proposed it
under this. So let's say we'll

just leave that like that. Now,
they also use different measures

for here. So let's say our so
we'll talk a little bit about

cash flow, because here, we're
at a new a whole new level.

Alright, so this is the third
step. And this is the cash flow

step. So now we're at the third
step of the four step analysis.

I think it's a little bit
confusing the way that that CCM

is decided to build it out just
for other people. And for really

kind of seeing where those where
those levers are. Whoops, back.

So let's put in the first huge
lever that we come to here is we

are looking at the amount of our
loan. So let's say we lever it

at 65% loan, just 140 or
11482000. Say our interest rate

is 4%. Our amortization period
is 25 years. Our loan term is it

doesn't really matter for this
purpose. But we'll just say it's

10. And our payments per year is
12. So that's all normal. Now

we've got our normal debt
service built into here. And so

now and hope we have a good
positive cash flow. Okay, good

we do. So now we've got a nice
positive cash flow.

We've got a nice positive cash
flow. Now we've got built into

our cash flow, we've still got
these levers. And there isn't a

considerable amount of work to
do in there in the way they

underwrite the sheet. But let's
look at the levers specifically.

So we've got we've got the debt
portion, right? I mean, here's a

big lever. So how we're going to
be doing debt is a big, big

lever. And that becomes a whole
different topic of conversation.

So we'll talk about that more
next week, about about debt and

how that works on here. Because
ultimately, it's such a big

lever and it's it will change
everything about how you how

your underwriting goes to buy
that property and to really fund

it with syndication. It becomes
it becomes very critical. Not

that there's others. So and
everything comes forward. Right.

So, like we talked about before,
we've got our net operating

income is a major lever. So that
changes and then everything else

changes in the cash flow. And so
part of one of those levers to

was somehow I lost my thing is
what are, this was a lever that

we had from noi, as was vacancy
and credit loss. So those are

levers, now we've got our
interest is our lever, we're not

going to go through
participation payments or cost

recovery. It's just it's not
important for what we're doing.

And so our amortization are the
other things our leasing

Commission's right, if you're
going to need to lease the

property out, that's a below the
line cost that's going to be

affecting you. We also have our
capital expenses now here, up

up, up up up above ups, because
we are we're still in the

textbook calculation. Oops, and
then that throws everything off

that I've just learned. Alright.
So we have our leasing

Commission's is one, our funded
reserves is one, remember, we

talked about that? We've got our
I would have put capital

expenses here as as an actual
thing. So let's just change this

that's a lever, there's a lot of
levers that go into into this

part into the cash flow
statement. And each of them

changes everything that we're
doing in terms of where we get.

All right. Does that make sense?
Are you getting the topic of

levers? Give me a nice Yes. Or
no? Alonzo Christian, yes. Yes.

Okay, good. So ultimately, then
that leads us to, to the topic

of our sales. And for those who
came in late, the reason that

we're going through this, we'll
go back over it again, in the

beginning, just to finish up.
But we're going through the

fourth step financial analysis,
the last step is the performance

step. And this is what your
investors actually care about.

More than anything else. So
we've got our our cash flows,

what it would look like what a
potential sale looks like.

Nothing, nothing new or
extremely interesting. Again,

taxes isn't really relevant to
what the conversation of

syndication, it will be part, it
is part of your your sheets as

well, just because it should be.
And just so that you have that

information. And so you can use
it on just investment property

sales, or you could do it, you
use it, so you can use it in

brokerage, or you can use it in
syndication. And now here,

you've got ultimately your IRR,
returns. So you sell it at your

nice middle, your before tax is
a 15% return, which is pretty

good. So for this sample
property, we've got a nice

reasonable return for our
investors over a five year hold

period. Now, again, we have
levers in here. So all of those

things that that took place here
in cash flow in the here, but

but so are our debt, because
this was part of cash flow is a

lever, right, we change that it
automatically is a major level,

our sales price is a lever. And
a lot of these I mean, you you

don't know what it's going to
sell for in five years. But we

have to make assumptions. So
this is one of the bigger

assumptions that we have to
make. So it should be a

reasonable assumption and
supported by evidence. But then

we have our cost of our cost of
sale. And this is your broker

fees, right. So this is the
amount of money that you maybe

are taking as a brokerage
commission for half of the deal.

So in this simple transaction,
you're making, you know, over

$80,000 in a for the sale of the
property. I say 80 because

that's half of 165 Splitting out
both you it's a very bad idea to

double end a deal when you are
acting as the seller. So that's

why it's half of that. So and
then ultimately we've got you

know, the whole period is five
years. And so we have a a nice

reasonable return as our result.
And all of it was affected by

all of those levers. So let me
switch back to, to what we where

we started.

So all of these levers are now
have all added up to giving us,

you know, a, an IRR of 15%. But
if you change any one of these

things, you're suddenly going to
have a change in that 15%. I

mean, not really the potential
value this is there more for

more for brokerage than for then
specifically for what we're

underwriting for here, but
nevertheless. So, but if we had

changed the vacancy credit risk,
our IRR would change, we make

the credit risk or vacancy
percentage we're using much

higher, we're suddenly going to
have that that 15.0 to fall down

below 40, below 15. If you
change the how you are going to

be getting that your pass
throughs recovered, that's going

to also if you think Well, I'm
not going to be able to recover

at all, then you're going to
need to drop that down. You're

in your cash flow, if you decide
to do an asset management fee,

which these sheets don't use,
that's going to reduce the

amount. If you decide, okay, I
need to put more to reserves,

that's going to reduce the
amount. So all of those things

change, ultimately, this return
that your investor is looking

for. So when you come to the end
of end of your analysis, what

you want to have is to have a
nice sheet that's well supported

by by a really well done
financial analysis that says,

Okay, this is what we're
projecting. And this is why and

you've balanced out to optimize
it as much as possible. You've

tweaked the amount of asset
management versus property

management, versus how much debt
we're gonna take versus all

those things to hit that target.
There's 15% That you are

striving for. So that 15% is, is
the goal, because you've already

identified through your fit that
the risk tolerance level for

your investors is 15%. Now
actually, I made up the numbers

completely as we were going, and
it just worked out perfectly to

be 15%. So that was great. But
that was purely by accident. It

was I know, I know, I definitely
deserve a lot of kudos for that.

I hope you found the four step
financial analysis process to be

useful to you. Feel free to give
me a call if you need help

setting up real estate
syndication or real estate fund

where you're looking to raise
money for your business or

you're looking to you're a
developer and you need

additional capital. We're the
people that call when you're

doing a Regulation D Rule 506b
or 506c offering