Limitations of Excel for CRE Discounted Cash Flow (DCF) Analysis

Excel is a powerful tool that can be used for a variety of financial analysis tasks, including discounted cash flow (DCF) analysis. However, when it comes to commercial real estate underwriting, there are certain limitations that need to be considered.

--- Limited property scenarios: Excel DCF spreadsheets are typically created for a single property or property type scenario. In commercial real estate, whether it is a single tenant net lease property or a multi-tenant property with different lease terms, no two deals are the same. This requires extensive customization to Excel spreadsheets to correctly calculate the unique cash flow analysis for each scenario.

--- Complex calculations: Excel is not equipped to handle complex calculations. Commercial real estate DCF analysis involves a lot of calculations, including discount rates, net operating income, tenant lease escalations, rollover analysis, and reimbursements. These calculations can be difficult to perform in Excel and may require additional software or manual calculation.

--- Inaccurate results: Excel’s calculations are only as accurate as the data that is entered into the spreadsheet. Human error is a common problem when using Excel for DCF analysis, and even small formula errors can result in significant inaccuracies in the results.

--- Lack of automation: Excel does not have automated functions that can be used to quickly perform DCF analysis. This means that the analysis must be performed manually, which can be time-consuming and error-prone.

--- Limited reporting capabilities: Excel does not have built-in reporting capabilities. This means that the results of the DCF analysis must be manually copied and pasted into another tool for reporting purposes.

While Excel is a useful tool for many financial analysis tasks, it has certain limitations when it comes to underwriting commercial real estate. For more accurate and efficient analysis, it is necessary to use specialized software designed specifically for commercial real estate DCF analysis.

 

Meet TheAnalyst PRO

TheAnalyst PRO is a real estate analysis platform that offers a comprehensive suite of calculation scenarios and presentation reports to complete even the most complex DCF analysis. TheAnalyst PRO provides users with a powerful set of tools to analyze and compare different investment scenarios, quickly and accurately calculate cash flow, return on investment, and other key metrics. The platform also offers a variety of customizable reports that can be used to present data in an attractive and professional manner.

TheAnalyst PRO is much more efficient than using Excel for real estate analysis. It eliminates the need for manual calculations and provides users with an intuitive interface that makes it easy to input data and generate results. This makes TheAnalyst PRO an invaluable tool for real estate professionals who want to make informed decisions and maximize their profits.  

Sign up for a Demo today to learn more about how TheAnalyst PRO can take your Commercial Real Estate business to the next level!

Watch the previously recorded webinar:
Excel vs TheAnalyst PRO - CRE Tech® Heavyweight Championship

 

Crunching the Numbers: a Guide to Commercial Lending Metrics LTV, DSCR & Debt Yield

 

Making Sense of Metrics Used by Lenders on Investment Commercial Properties

by: Todd A. Kuhlmann, CCIM

Loan-To-Value (LTV), Debt Service Coverage Ratio (DSCR), and Debt Yield are three important metrics used by lenders to determine the maximum loan an investment commercial real estate property. In this blog post, we'll discuss each metric in detail and explain why they are important to understand when investing and lending in commercial real estate.

Loan-To-Value (LTV)

Like residential loans, Loan-To-Value (LTV) is a ratio that compares the amount of a loan to the value or purchase price of the property being used as collateral. This ratio is expressed as a percentage and is used to determine the amount of risk a lender is taking on when providing financing. A lower LTV ratio indicates that the lender is lending a smaller percentage of the property's value, which is generally considered to be a lower risk.

For example, if a property is worth $1,000,000 and a lender provides a loan of $800,000, the LTV would be 80%. If the lender provided a loan of $700,000, the LTV would be 70%.

Lenders often have different LTV requirements based on the type of property and the loan amount. For example, a lender may require a lower LTV for a more speculative property, such as a new development, compared to a more established property with a stable income stream.

Debt Service Coverage Ratio (DSCR)

The Debt Service Coverage Ratio (DSCR) is a metric used to determine a property's ability to generate enough income to cover its debt obligations. This ratio is calculated by dividing the property's net operating income (NOI) by its total debt service. The NOI is the property's income after expenses and the debt service includes principal and interest payments.

For example, if a property has an NOI of $100,000 and Annual Debt Service (ADS) of $70,000, the DSCR would be 1.43 ($100,000 / $70,000). A DSCR of 1.43 indicates that the property generates enough income to cover its debt obligations 1.43 times over. Lenders typically will have minimum DSCR requirements of 1.20x to 1.40x based on the stability and risk associated with the property. 

Screenshot courtesy of TheAnalyst® PRO Investment Analysis Report

Debt Yield

The Debt Yield is similar to the DSCR but is expressed as a percentage rather than a ratio. This metric is calculated by dividing the property's NOI by the loan amount. The Debt Yield measures the return a property generates on its debt investment.

For example, if a property has an NOI of $100,000 and a loan amount of $1,000,000, the Debt Yield would be 10% ($100,000 / $1,000,000). A low debt yield means that a property is not generating enough income to cover the loan payments. A good debt yield should be at least 10%, but the higher the percentage, the less risk for the lender. 

Screenshot courtesy of TheAnalyst® PRO Investment Analysis Report

Why are these metrics important?

These metrics are important for lenders as well as borrowers to help them determine the risk involved in financing for a property. A property with a high LTV, low DSCR, and low Debt Yield would generally be considered a high-risk investment, which may make it more difficult for the property to secure financing. 

TheAnalyst PRO makes the complex financial analyzation of commercial real estate easy. Gain access to our extensive key performance indicators (KPI’s) and investment measures including the LTV, DSCR and Debt Yield providing instant loan validation. 

 

For more details on advanced KPI’s and other investment measures, we have created a full video on demand training center in TheAnalyst PRO.

 

Sign up for a Demo today to learn more about how TheAnalyst PRO can take your Commercial Real Estate business to the next level!

CAP Rate vs Cash-on-Cash

 

Understanding Commercial Real Estate Metrics

by: Todd A. Kuhlmann, CCIM

Commercial real estate investment can be confusing, especially when it comes to evaluating the performance of a property. Two common metrics used to assess the financial health of a commercial property are CAP Rate and Cash-on-Cash. However, many real estate investors are often confused about the differences between these two metrics and their significance in evaluating the performance of a commercial property.

CAP Rate (Capitalization Rate)

CAP rate is one of the most commonly used metrics in commercial real estate worldwide but is also one of the most abused and misused metrics. We at TheAnalyst PRO define CAP rate as: The investment measure used to determine the VALUE of an income producing property. CAP is calculated by using a property's 1-year Net Operating Income (NOI) and dividing it by the value or price of the property. CAP Rate is often misused to calculate a return on the investment, but it does not calculate a return on the investor's equity investment. It is used by appraisers to determine value based on comparable property sales using the CAP Rates from comparable properties that have sold recently. The appraiser will then apply the market CAP Rate to the subject property in order to determine the value of that property for a given point in time. Brokers and property owners also use CAP Rate to determine the value of their property at a specific point in time as it relates to the current Net Operating Income of the property.

CAP rate and value have an inverse relationship, meaning when CAP rates increase, the price or value of the property decreases. CAP rate is typically used when purchasing the property and a second time when valuing the property at time of sale. You can use the simple CAP Rate calculator in TheAnalyst PRO to create a good visual of the formula. In this example, the 1-year NOI on the property is $100,000 and the CAP Rate is 10%. When tapping on Value the result is $1,000,000. 

Cash-on-Cash

Cash-on-Cash is another popular metric used to evaluate the performance of commercial real estate investments. In TheAnalyst PRO’s glossary, we define Cash-on-Cash as an annual return during property ownership and operation. This investment measure is calculated using the annual before-tax cash flow for a given year divided by the initial investment. We compare the Cash-on-Cash return to a "Dividend" return as it does not consider property appreciation or sales proceeds upon sale. It is the percent return on the cash flow from operations of the property in relationship to the original initial investment at the time of purchase. It represents the amount of cash an investor receives from their investment as a percentage of the cash they have invested. Cash-on-Cash is calculated by dividing the Cash Flow Before Tax by the investor’s initial equity investment. 

You can use the Cash-on-Cash calculator in TheAnalyst PRO to create a good visual of the formula. In this example, the 1-year Cash Flow Before Tax (CFBT) on the property is $80,000 and the initial Equity Investment (EI) is $975,000. When tapping on C/C% the result is 8.21%. 

Why it is important

Both CAP rate and Cash-on-Cash are important metrics in evaluating commercial real estate investments. However, they should not be considered in isolation, as they both have their pros and cons.

CAP rate provides a quick and simple way to assess the value of an investment, making it useful for comparing different properties. However, it does not consider the actual equity investment and financing structure of a property.

Cash-on-Cash, on the other hand, takes into account the financing structure of a property and provides a clearer picture of the return an investor can expect to receive on their investment. It is useful for investors who want to know the annual dividend return they will receive after factoring in mortgage payments and other expenses. However, it does not provide a complete picture of a property’s financial health, as it does not consider the growth in future cash flows or property appreciation. 

Some commercial real estate professionals argue that the CAP rate is the same as Cash-on-Cash return when paying cash and not financing the property. This would only be the case if there were no cost incurred to acquire the property, such as legal, recording and title fees, and there were no expense incurred that is not included in the NOI, such as capital expenditures, funded reserves, and leasing commissions. Acquisition costs increase the required Equity Investment. When teaching CAP Rate, we like to simply say that CAP rate does not care about the investors’ money, whereas Cash-on-Cash considers the investors’ equity and 1-year cash flow distributed.

In conclusion, since CAP rate and Cash-on-Cash are important metrics in evaluating the performance, investors should consider both metrics when evaluating a property and make sure they are comfortable with the financing structure before investing. It is important to understand that no single metric provides a complete picture of a property’s financial health, and investors should always perform a thorough analysis before investing in commercial real estate.

 

TheAnalyst PRO makes the complex financial analyzation of commercial real estate easy. Gain access to our extensive CRE glossary as well as 20 other calculator, analysis, demographic, and marketing tools.

 

For more details on comparing CAP rates to Cash-on-Cash and other investment measures, we have created a full video on demand training center in TheAnalyst PRO.

 

Sign up for a Demo today to learn more about how TheAnalyst PRO can take your Commercial Real Estate business to the next level!

Todd Kuhlmann, CCIM is the Founder & CEO of TheAnalyst PRO by CRE Tech, Inc. He is an international speaker and trainer for commercial real estate investment analysis and CRE technology.

Commercial RE's Most Comprehensive Offering Memorandum

 

Just Released in TheAnalyst PRO:

Eye-Popping

Offering Memorandum 

Incorporating the latest trends in Commercial Real Estate Offering Memorandums, TheAnalyst PRO has just released a new OM template available to all subscribers.

Represent your Commercial Real Estate Team with TheAnalyst PRO

 

New Feature in TheAnalyst PRO:

Represent your Commercial Real Estate Team

TheAnalyst PRO has added the ability to promote your commercial real estate team on marketing pieces.

We know how important having a CRE team is!

It's no secret that well-organized real estate teams:

-- add tremendous value to clients and investors

-- bring together multiple talents, creating a powerhouse of skills

-- create a great mentoring and learning process for all team members

See how you can now represent your team through our professional marketing tools.

Now available in TheAnalyst PRO!

Watch this video for a quick tutorial on adding a team to your CRE marketing:

Property Tours Made Easy for Tenant Reps & Buyer Reps

 

Key Takeaways from our Webinar:

Property Tours Made Easy for Tenant Reps & Buyer Reps

Presented by:

Todd Kuhlmann, CCIM, Founder & CEO of TheAnalyst® PRO by CRE Tech®, Inc.

It's a new year...

A great time freshen up your commercial property tour method, 

and even simplify the process. 

At TheAnalyst PRO we know the importance of staying in front of your client longer to build that trust and relationship. Our Property Tour & Rating feature was created with this in mind.

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Our webinar presentation included:

--  Best practices for conducting a successful property tour

--  Mapping the most efficient property tour route

--  Working with a client regarding their top preferences for an ideal property and order of importance

--  Easily documenting notes and photos while on tour

--  Obtaining instant feedback from the client and presenting a comprehensive tour report based on their preferences

--  Preparing and explaining the final tour report

--  Shortening the decision process to close faster

--  Using a case study property to go through the process of creating a property tour with TheAnalyst PRO

TheAnalyst PRO helps simplify your property tours, incorporates client input and quickly provides decision-making results.

View the entire recorded webinar here

A Training Center with Gusto

Unlock an Extensive Commercial Real Estate Training Center within TheAnalyst PRO®

It's known that TheAnalyst PRO is CRE Tech's #1 tool for financial and lease analysis, demographic and location analysis, offering memorandums and marketing.

AND, 

did you know that TheAnalyst PRO also has an extensive Commercial Real Estate Training Center?

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When subscribing to TheAnalyst PRO you don't just get access to a robust investment real estate financial analysis and marketing platform.


You also get unlimited access to our proprietary commercial real estate training center, including:


•  over 18 hours of recorded professional CRE training


•  industry best practices


•  case study scenarios


•  step-by-step instruction of TheAnalyst PRO tools & features


•  unlocking how to use some of our more advanced tools


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Training Topics Include:


√   CRE Marketing Best Practices
√   Offering Memorandum Presentations & Best Practices
√   Infographics for Demographic Analysis
√   CAP Rate vs. Cash-on-Cash
√   Advanced Investment Analysis
√   CRE Investment Modeling - KPI's and Sensitivity Analysis
√   Comparison & Portfolio Investment Modeling
√   Predicting Future CAP Rates
√   Power of Positive Leverage
√   Lease Alternatives & Negotiation
√   Prospecting & Deal Winning Made Easy
√   How Inflation & Rising Interest Rates Impact CRE
√   Valuation of CRE in a Volatile Market
√   CRE Property Tours Made Easy
√   And many more!

We won't stop there!

We continue adding trainings and topics relevant to the current commercial real estate market - always instantly available to all subscribers.

If you're not a subscriber, we welcome you to schedule your personal and complimentary live demo of TheAnalyst PRO today.