L2 Financial Modelling Flashcards
You might get asked to explain what churn rate is and how its calculated
Churn rate is the likelihood of someone leaving within that year, so if 40%, there is a 40% chance they will leave
Feeds into rent loss and average void units per annum
What is the purpose of calculating the attrition rate, in the context of your client’s wider business goals?
Captures the operational cost of the asset when it is fully stabilised / in steady state
Helps the investor and / or developer to understand their ROI over a projected horizon
Helps them to understand feasibility, where we offer our best advice based upon assumptions
assisted client in calculating the GDV and IRR at disposal.
How does a BTR investment alter your DCF from a typical investment property?
accommodation = at least 50 self-contained dwellings
dwellings will be separately let, but held under ONE operator
management and oversight will be under a single
entity, potentially with an onsite presence
the building(s) may be specifically designed or adapted for rent, and may include some form of shared amenity
the individual dwellings are typically let on ASTs
Differs from BTL market - BTR = focused upon the ownership of entire blocks of flats/apartments or concentration of dwellings
What RICS GN or PS might you use?
Cash flow forecasting RICS guidance note 1st edition (GN 79/2011)
RICS GN Valuing residential property purpose built for renting 1st edition, July 2018
What were the attrition rates?
Base was 26.1%
Varied up to 1.68% either side of the base case
So we had discount market rent units - letting fee at £500 and BTR - letting fee 6% (can range up to 7%)
Base case churn 40% and then tried DMR churn at 20%
How would you calculate void units per annum?
SUMPRODUCT of number of units x individual churn rates
How would you calculate rent loss per annum?
(daily ERV X avg. void period X churn) / annual ERV
What valuation approach are you using here?
Effectively a DCF model but we are not calculating the IRR nor the NPV
We are calculating the NOI and attrition rate, used to inform the client’s investment model
BTR requires much more accurate costing models
We also account for growth assumptions and inflation on costs AND revenue
How does this BTR valuation approach differ from commercial?
A key difference between commercial and residential
occupational tenancies is that, in residential, the liability
for the majority of the maintenance and upkeep (and
associated costs) rest with the owner rather than the
occupier.
How is LCC considered and large capital expenditure?
In our budgets a sinking fund might be a requirement from the client, however, I have not directly produced budgets myself with these considerations. It might be that when it comes to the end of the cycle, the owner will re-finance the property.
I know that according to the RICS guidance note for Valuing residential property purpose built for renting 1st edition, July 2018 that valuers should consider this for the end of the cashflow period and obsolescence
What are the types of BTR finance structures?
Typically long term investments but stable returns
Forward Fund - all costs of constructing provided by the investors. Agreements are designed so that upon completion, investors assume control over the development. In this structure, developers are more like contractors. Paid beforehand for all the costs needed to execute the development.
Co-invest - minority investment in a project is made by investors with the main company. Co-investment can be viewed as a form of equity financing. Consisting of investors whose ownership stake in the business is limited to the percentage of their investment (SIMILAR TO JV).
This deal structure allows BTR developers to offer developments in equitable portions to investors seeking to benefit from its RRI, equal to percentage invested.
Raise Capital Through Debt - selling debt instruments (borrowing) like debentures, bonds, loans, etc. to investors. By raising capital through debt, investors are now known as creditors of the BTR company.
Joint Venture
What is the difference between a sinking fund and reserve fund?
Sinking fund = mean of collecting extra funds for specific costs that occur occasionally. E.G. periodic maintenance - painting /roof repairs every 5 years or 10 years
Reserve fund helps management companies to prepare for, and manage unexpected expenditure that the SC budget could not account for. Generally doesn’t need to be a large amount
How should you hold sinking and / or reserve funds?
The recent case of Caribax v Hinde House Management Company [2015] UKUT 0234 (LC) reminds landlords of the importance of complying with S.42 of the Landlord and Tenant Act 1987 to hold reserve and sinking funds in trust. The reserve/sinking funds should be held in a separate bank account to the service charge monies.
