Financial Analysis and
underwriting is a absolutely

critical skill for syndicators
and fund managers to know like

the back of their hand, I used
to coach people on how to

syndicate real estate in a
program that I used to have.

Today, we're going to take a
look back, and we're gonna go

back to one of what I would call
a rapid implementation call, it

was taking that information that
I have that background and

experience I have, and putting
it to use and making it

available to the people who I
was coaching through the

process. So this is an excerpt
out of one of those calls, it's

a deep dive into the machinery
itself, how the gears fit

together as primarily also a
between the facts and

assumptions and how they all
work as part of this big machine

in order to generate money to
pay for investors, I hope you

find it useful.

Financial Analysis is the
process of evaluating business

businesses, projects, budgets
and other finance related

transactions to determine their
performance and suitability. And

obviously, that's what we're
mostly concerned about right

now. So this is the you know,
making see it's that evaluating

piece that really is what we're
trying to do, trying to identify

if this is something we want to
do it this something that makes

sense. So it's the that
evaluation that we're doing. But

at the same time as syndicators,
I would say, We also do this

underwriting piece as well,
because underwriting is to, to

finance or otherwise support or
guarantee something. So I would

argue that as syndicators, we
are basically supporting that

the overall thing, when we come
up with our projections that

we're putting in our PPF, we are
actually saying, you know, this

is what we are putting our name
behind and putting our

reputation on. So to me, that is
underwriting. I think it's just

important just to set a
framework that we that we talked

about them in the same thing,
and I probably will keep saying

them synonymously as well
anyway, because it's habit, they

aren't actually the same thing.
So you may want to call it out

to when you're when you're
talking to investors, it's

probably better to say financial
analysis, because that does kind

of cover your underwriting as
well. Because if somebody is a

stickler for those definitions,
they may call you on it. And I

fortunately haven't been yet,
but I could be. So what are we

doing when we are doing
financial analysis? There's two

phases to this. So the first
oops, the first phase is we are

taking a snapshot in time. As of
now, what does that property

look like? So what are its
characteristics? So if we looked

at all the things as let's put
it this way, if we look at all

of the things that go into the
bucket of the financial

analysis, we've got the most
important thing for the the now

analysis is fact. We're trying
to say these are the facts about

the property right now. Now
we're gonna go into those in a

little bit more detail. But
that's the the main thing that

we're trying to do today. And
then much smaller than that,

that impacts how we look at
that. And that changes this

picture that we're taking with
this camera is our assumptions.

Right, it's small because it's
just, they're not as big or

important at this now stage. But
what are we trying to do when

we're trying to do an analysis
and build projections or a

performer which I really
considered to be the same thing?

We're trying to set up something
for the future. That's supposed

to be a clock in case you can't
tell. And that other one's

supposed to be a cam And so
we're trying to say what is it

going to be in the future? Now,
oops. Cloud Backup, when we're

looking to the future of what
this looks like, the facts that

we have, aren't very become much
less important. Because time

erodes all those things, leases
start expiring, and maybe

they'll renew and maybe they
weren't, taxes may go up, or

they may come down, they don't
really go down, but they taxes

may go up, or they may go up a
lot. And it's our assumptions

that start ruling the debt. And
I'm gonna run out of room

assumption start ruling the day.
So we go from big fact to little

fact and little assumption to
big assumptions. And these are

what's changes. Now, the further
you go out, the bigger this

effect is, because, you know,
you're going to have to make

more and more assumptions. And
the more and more things change,

the more and more those
assumptions that you made, in

the very beginning, will do it.
And so this process is building

your pro forma. The reason we
are even talking about this

right now is because it's
important to have in your head

that the either the proof,
certainly the performance that

you get from other people, but
even the performance that you

get from yourself, that you're
doing yourself for your own

investments, there's there's two
ways of looking at, at that pro

forma, and how and how you're
going to use those assumptions.

You have a a way that is I would
call it let's call it optimistic

and then we'll call it I don't
really want to use pessimistic

I'll say conservative. So
they're either optimistic or

conservative. So because that's
generally the terms that we use

in the industry, we don't
generally say pessimist, so we

can use assumptions that are
very optimistic, and they're

still true and based in have a
foundation for choosing them.

But they're not, they're not the
most necessarily the most likely

to happen. Because when you're
predicting the future, I mean,

there's obviously a huge range
between, you know, from

something like, you know, very
unlikely to happy happen to

unlikely to happen. And they
probably go on some sort of bell

curve and to how they actually
play out. And so if this is our

bell curve, our optimistic is
probably at this end of the

spectrum. And our, our
conservative is probably at the

center of the spectrum. So
they're just they are like,

they're within that bounds of
like, but not, they're not,

they're on opposite ends of each
other. You wouldn't want to go

all the way to this end and be
so optimistic that you're

predicting that you know, you're
going to 10x or 10x the the

rents every year for the next 50
years, because that's never

gonna happen. But you also don't
want to predict that the moon is

going to fly into the building
and destroy it and melt it all

down and it won't be an insured
loss both of them I suppose

could happen in some in some
world just not very likely

hours. So let's go through kind
of how this range happens

between fact and assumption and
amateurs this he is and we start

with the facts on this side. We
start with the assumptions on

this because that's really what
they come out they come out of

each other

facts for the for any property,
somebody want to name a fact go

for it. What's what's a fact
Size. Size Great. Yeah, it's

gonna be a certain size.
Absolutely. Maybe you have plans

on growing it, but that's an
assumption whether that's gonna

get what else? Fry price I think
a lot size. I think well, yeah,

certainly lot sizes. I don't
think price is a is a is a I

don't think price is a is a is a
fact, which it's not done yet.

You know what they're asking,
but you don't know what they're

actually going to get or what
it's going to be at the end of

the day. So I think it's still a
little bit gray. Sar sure stands

for floor area ratio. So there's
sighs I'm gonna put location

here because it's kind of a big
topic, right? So we have

existing tenants, right? They
they exist, they're in your

building. And that it's not
going to change that they are in

the building at the moment that
you're taking that snapshot.

What you don't know is whether
Well, let's start with what the

rental amount. So we don't know
what their their rent, let's say

you don't necessarily know what
their rent is going to be rent

next year, if they are on CPI.
And oops, if so, and we'll talk

about that more, probably not in
this call, but another comp. But

if their rental increases are,
are pegged as something like the

consumer price index, you don't
know what Consumer Price Index

is going to be, you probably are
using a figure like 2% or

something different figure it
out. But it's an assumption that

you're making. You don't know
what the default rate is going

to be. You don't know if those
tenants are going to default on

the on their lease or not? Or if
they're what kind of credit risk

they are. They you know that
they are in existence, but you

don't know the likelihood of
that actually happening. So

there is a chance that's going
to happen. And that percentage

that you apply is a question
mark, you don't know the

likelihood of renewal to guess
that you're gonna make. So other

facts that you know demographics
demographics at the given time,

is, is absolutely there. But you
don't know in the next 10 years?

If you know, is it growing? Is
it shrinking? Something can

happen? Is it gentrifying or
not? So I'm going to put it over

here too. Because the
demographics in the future,

you're gonna, you're gonna make,
you're gonna make some guesses.

And those all have an impact on
ultimately, your your market.

And maybe it's gonna be your it
might be how your your market

sees it in the community. So
maybe it would change your cap

rate, or maybe it's going to
change your rents. But certainly

demographics and the how they
change is going to have a pretty

profound impact on what your
property's going to do. You've

got operating expenses, now,
you've got operating expenses

that are historical, but you
don't know what they're going to

necessarily be in the future.
Let's take property tax. So we

in California, we have a more
set set system, but we're very

much in the minority in the way
we do things most of the country

has, has what the assessed value
is going to be and then it can

that assessed value can change
it can go up or it can go down.

And similar in California, you
know there's there is still

ambiguity here prop 13 could go
away. Whereas was on the last

election was to move prop 13 To
eliminate prop 13 Four for

commercial buildings, it didn't
pass but it could have made it

so that was also assessed value
for commercial buildings. So

it's not a It's, it's an
assumption that you're going to

make whether it's going to stay
or not. Now, you probably are

going to assume it. But it's
still in that realm. You have a

management company. But you
don't know if they're going to

continue or raise rates. You
don't know whether I mean, if

you're doing it yourself, you
don't know whether your costs of

doing the management are going
to go up. So that make it so

that you're going to need to
change your your management fee

or not. Utilities is a huge one.
So, so I'm going to put these

together actually, utilities,
contract labor. And by this, I

mean things like your garden,
Port Portage, pest control, etc,

etc, etc, anyone that you're
hiring, that isn't part of your

regular workforce, is contract
labor, and then we'll put

repairs and maintenance. So all
three of these you are gonna

guess on what the growth rate is
going to be. Most of the time,

I'm guessing it's gonna be 2%.
But that's probably a little bit

on the optimistic side, because
I want that expense to be less,

where 3% would probably be more
conservative. Certainly on

utilities in California,
guessing on a low growth rate of

2% is probably very optimistic.
Then we've got a whole nother

category of your market leasing.

And your market leasing is
something is a fact that what

does exist is your, your market
and historical terms your market

and historical rents the how
long it takes to to turn it. And

commission mounts, things like
that. So I mean, all of these

things can change, because you
have no idea what the future

terms are going to be. You have
no idea what future rents are

gonna be. You have no idea how
long it's going to sit on the

market.

You don't know if Commission's
if those greedy brokers are

going to start demanding more
Commission's or not. And, and if

you're doing your own
commission, I mean, if you're

doing the leasing on the
property yourself, you still

don't necessarily know what
you're going to charge. Because

you may want to charge the other
side it. And it's we're looking

at at all of this through the
lens of really the whole

investment itself, not just you
know, your pocket, obviously,

but But building out projections
for your investors. So each one

of these things put as has an
impact. And then capital

expenses, obviously. Who knows,
right? Who knows what's going to

happen on that a track system
may explode, and suddenly you

need to replace it. The roof may
suddenly cave in and you need to

replace it. Something can
happen. You're making an

assumption on Well, I think this
is going to need to be replaced

or be repaired at this point in
time, but you don't know. And so

those all go into your Proform.
So again, the reason that we're

talking about it here and in
this context is because all of

these things are part of your
that snapshot that you're taking

right now. But to build that a
pro forma. Those are all

assumptions that become the
overriding thing. To that drive,

your your number at the end of
the day. They're very it's very

easy to make a property look
stellar, and it's very easy for

a property to look horrible. All
in how you're painting the

picture. revenue. And it's
really up to you to decide, you

know, it's a terrible drawing,
it's up for you to decide where

on the bell curve, you are going
to put those assumptions. I

mean, if you're gonna put them
here, or here, or here, or here,

whatever, it's up to you to make
that decision. And when you do

make that decision, just know
that you're making that

decision. This is the same
reason that a, you know, a

sophisticated read doesn't just
won't take a broker's pro forma,

because they know that it's
always going to be over here

that the broker is going to be
painting their assumptions, and

they're being much more
conservative on what their

projections. So they don't want
to see it, it's not even worth

their time. Does they want
they've got their own

assumptions that they've decided
are, are what they're going to

base everything off. And it
would also be who viewed to act

in a similar manner, start
figuring out what your

assumptions are going to be
about what things you do, I

mean, likelihood of renewal is
how we'll see how do I do this.

So CPI always set at 2%. It's in
general around there over the

past 20 years. default rate,
somewhere between 5% 10% If we

are talking in a generally
normally affluent area,

likelihood of renewal is really
up to the tenant, it's more of a

feel thing. It's somewhere
between 50% to 90%, maybe 95. If

you're really, really
comparable. Demographics, I

mean, you're probably paying
attention to demographics as it

went in. And whether you thought
it was, you know, an area that's

gentrifying, you're probably
more likely to be interested in

it. Whereas if it's an area that
you think is going to go

downhill, and you think it's
going to, to tank, I don't think

you're going to be putting
investor money there. Your

property taxes you're going to
be doing based on either kind of

figuring out where you were
historical for assessed value,

or if you're in California,
you're using 2%, because that's

what prop 13 says the maximum
rate is. For management, you're

probably going to keep it
consistent. For the growth rate,

I tend to use 2%. For for these,
if I'm making a projection for

what I'm going to tell investors
2% is a reasonable rate. But it

is probably a little bit
optimistic. Certainly when it

comes to things like utilities,
market leasing assumptions. Now,

here's where you probably are
going to base things mostly on

on history. So unless you've got
a great deal of familiarity in

the market, and kind of have a
feel for where everything should

go, you'll probably pull a bunch
of lease comps or ask other

agents for lease comps, and base
everything around that. And then

your capital expenses, you're
gonna be relying on your, your

inspectors, your property
managers, you know, people who

have that industry knowledge who
can say, well, you've probably

got another seven years left in
this roof. And then you'll

you'll you'll figure that out.
So I'm going to pause here. Are

there any questions on this
part? So far? Is that okay,

good. Was this was this this was
this too fast? Was it a good

pace? It was too slow. I think
I've pretty much got that part.

Okay, good. Alejandro Anthony.
Good to go. Okay, good. Was it a

good pace? Was it a good pace?
Anthony tech. Yeah. Okay. Good

luck. Yeah. Okay. Perfect. All
right. So. All right. Now, the

next part I want to talk about
and this probably is going to be

kind of review but I want it to
B. It all kind of builds on

itself. So this is the way that
I see.

This, see, we've even got a
little diagram built in and

ready to go. This is the way
that I see it. The very basic

calculation of, of how cap rate
works. So, and I'm going through

my vision of it, because I think
the way I see it kind of sets up

how IRR works better and isn't
exactly the same way that they

teach in, in the real estate
courses, etc. So, at some point

in time, you buy this machine,
call it machine, which is the

property

and you paid cash for this
machine. And so that is your

cost. So, we've got, we've got a
series of gears that are all

kind of going to get now this
gears turning around this is

your this can be thought of as
your income to nice big gear.

They go in opposite directions
because their gears this gear is

your expenses. Actually, I would
let's just call it expenses,

because I don't want to get to
compete. And then out of that

comes your and we'll have a go
all the way out, that comes out

your cash flow. Or in this case,
let's actually that will be a

little bit like. So let's say
that this is your so this will

be operating expenses just
because we're going to call this

their outcomes your noi. So now
automatically in our machine,

we've got everything we need in
order to calculate our, you

know, where what our cap rate
is. And the cap rate is just all

it is it's just a performance
metric.

It's just a performance metric
of how that machine runs. And so

it's just simply the the NOI
over your cost is your, you

know, going in cap rate for the
building. And it's but all it

really does, it doesn't mean
anything more than just a simple

performance metric to give you
an idea of of how this thing

works. So as things change over
time, you know, as it as income

goes up. So hopefully expenses
come down. Your NOI is going up.

And then for that same cost,
your cap rates going up.

Now if it costs you more
obviously then it's going to be

be degraded. So I put it in that
context just to set the frame

for how how the cap rate works.
Hope you found that blast from

the past useful. My name is
Tilden Moschetti. I am a

syndication attorney with the
Moschetti syndication Law Group.

Now if we can help you put
together a Regulation D rule 506

B or 506 C offering don't
hesitate to give us a call,

whether you're doing a business
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