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Financial Analysis and
underwriting is a absolutely

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critical skill for syndicators
and fund managers to know like

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

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

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

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

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was taking that information that
I have that background and

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

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available to the people who I
was coaching through the

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

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

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together as primarily also a
between the facts and

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

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

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find it useful.

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Financial Analysis is the
process of evaluating business

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businesses, projects, budgets
and other finance related

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transactions to determine their
performance and suitability. And

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

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

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

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

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

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

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underwriting piece as well,
because underwriting is to, to

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finance or otherwise support or
guarantee something. So I would

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argue that as syndicators, we
are basically supporting that

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

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

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is what we are putting our name
behind and putting our

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

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important just to set a
framework that we that we talked

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

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

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

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

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probably better to say financial
analysis, because that does kind

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

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

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

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

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

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

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

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

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of the things that go into the
bucket of the financial

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

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

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

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

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

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

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

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

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

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

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performer which I really
considered to be the same thing?

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

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

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

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

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

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

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erodes all those things, leases
start expiring, and maybe

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

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

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

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

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

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fact and little assumption to
big assumptions. And these are

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

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

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

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the more and more those
assumptions that you made, in

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

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

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

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that the either the proof,
certainly the performance that

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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spectrum. And our, our
conservative is probably at the

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

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

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

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

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

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

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

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

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

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could happen in some in some
world just not very likely

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

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

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

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

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each other

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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facts that you know demographics
demographics at the given time,

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

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

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

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here too. Because the
demographics in the future,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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so that was also assessed value
for commercial buildings. So

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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where 3% would probably be more
conservative. Certainly on

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utilities in California,
guessing on a low growth rate of

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

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category of your market leasing.

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And your market leasing is
something is a fact that what

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

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

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

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

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

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

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market.

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

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

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

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doing the leasing on the
property yourself, you still

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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assumptions that become the
overriding thing. To that drive,

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

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

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

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

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

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

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

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

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

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

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

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

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

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they're being much more
conservative on what their

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

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

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

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

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in a similar manner, start
figuring out what your

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

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

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

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

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are talking in a generally
normally affluent area,

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

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

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you're really, really
comparable. Demographics, I

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

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

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

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

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

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

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

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figuring out where you were
historical for assessed value,

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

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

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

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

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

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00:22:49,080 --> 00:22:52,530
is probably a little bit
optimistic. Certainly when it

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

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

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

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

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

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

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

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00:23:24,060 --> 00:23:27,600
inspectors, your property
managers, you know, people who

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00:23:27,600 --> 00:23:30,900
have that industry knowledge who
can say, well, you've probably

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

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

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

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

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

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

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00:24:07,080 --> 00:24:11,310
good pace? Was it a good pace?
Anthony tech. Yeah. Okay. Good

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00:24:11,340 --> 00:24:23,730
luck. Yeah. Okay. Perfect. All
right. So. All right. Now, the

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

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00:24:27,540 --> 00:24:33,960
kind of review but I want it to
B. It all kind of builds on

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itself. So this is the way that
I see.

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00:24:48,030 --> 00:24:53,070
This, see, we've even got a
little diagram built in and

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00:24:53,070 --> 00:25:02,580
ready to go. This is the way
that I see it. The very basic

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00:25:03,690 --> 00:25:10,440
calculation of, of how cap rate
works. So, and I'm going through

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00:25:10,470 --> 00:25:15,060
my vision of it, because I think
the way I see it kind of sets up

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00:25:15,060 --> 00:25:20,190
how IRR works better and isn't
exactly the same way that they

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00:25:20,190 --> 00:25:27,300
teach in, in the real estate
courses, etc. So, at some point

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00:25:27,420 --> 00:25:35,850
in time, you buy this machine,
call it machine, which is the

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00:25:35,850 --> 00:25:36,660
property

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00:25:43,500 --> 00:25:48,750
and you paid cash for this
machine. And so that is your

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00:25:48,750 --> 00:25:56,490
cost. So, we've got, we've got a
series of gears that are all

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00:25:56,490 --> 00:26:00,660
kind of going to get now this
gears turning around this is

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00:26:00,660 --> 00:26:05,940
your this can be thought of as
your income to nice big gear.

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They go in opposite directions
because their gears this gear is

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00:26:13,770 --> 00:26:21,060
your expenses. Actually, I would
let's just call it expenses,

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00:26:21,060 --> 00:26:28,770
because I don't want to get to
compete. And then out of that

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00:26:28,800 --> 00:26:33,900
comes your and we'll have a go
all the way out, that comes out

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00:26:33,900 --> 00:26:42,180
your cash flow. Or in this case,
let's actually that will be a

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00:26:42,180 --> 00:26:49,560
little bit like. So let's say
that this is your so this will

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00:26:49,560 --> 00:26:52,380
be operating expenses just
because we're going to call this

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00:26:52,380 --> 00:26:58,260
their outcomes your noi. So now
automatically in our machine,

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00:26:58,260 --> 00:27:02,760
we've got everything we need in
order to calculate our, you

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00:27:02,760 --> 00:27:11,490
know, where what our cap rate
is. And the cap rate is just all

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00:27:11,490 --> 00:27:18,090
it is it's just a performance
metric.

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00:27:26,070 --> 00:27:30,330
It's just a performance metric
of how that machine runs. And so

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00:27:30,330 --> 00:27:36,990
it's just simply the the NOI
over your cost is your, you

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00:27:36,990 --> 00:27:43,350
know, going in cap rate for the
building. And it's but all it

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00:27:43,350 --> 00:27:47,010
really does, it doesn't mean
anything more than just a simple

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00:27:47,520 --> 00:27:52,140
performance metric to give you
an idea of of how this thing

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00:27:52,140 --> 00:27:58,800
works. So as things change over
time, you know, as it as income

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00:27:58,800 --> 00:28:10,170
goes up. So hopefully expenses
come down. Your NOI is going up.

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00:28:13,200 --> 00:28:19,050
And then for that same cost,
your cap rates going up.

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00:28:27,030 --> 00:28:30,450
Now if it costs you more
obviously then it's going to be

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00:28:30,630 --> 00:28:35,880
be degraded. So I put it in that
context just to set the frame

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00:28:35,910 --> 00:28:45,600
for how how the cap rate works.
Hope you found that blast from

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00:28:45,600 --> 00:28:49,080
the past useful. My name is
Tilden Moschetti. I am a

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00:28:49,080 --> 00:28:52,590
syndication attorney with the
Moschetti syndication Law Group.

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00:28:52,860 --> 00:28:57,240
Now if we can help you put
together a Regulation D rule 506

317
00:28:57,240 --> 00:29:01,560
B or 506 C offering don't
hesitate to give us a call,

318
00:29:01,770 --> 00:29:05,400
whether you're doing a business
that you're raising capital for

319
00:29:05,580 --> 00:29:09,360
buying real estate by putting
together a real estate fund or a

320
00:29:09,360 --> 00:29:13,050
private equity fund, or you're a
developer and developing real

321
00:29:13,050 --> 00:29:16,410
estate need extra capital were
the people to call