A fund model provides an overall view of an investment, including returns and distributions to investors. Usually, the model has a higher degree of complexity than other models because an investment fund is a legal entity that pools together capital to invest in one or more asset classes. A fund model typically includes four main design components: (1) historical data that provides an understanding of the current state of the fund, (2) assumptions regarding the future of operations, (3) mathematical formulas to forecast the financial and operational behaviors of the fund, (4) metrics and charts to assist in making business decisions. These visuals make the relevant information easier for an investor to read. Fund modelling can be used in a variety of scenarios, like business valuations, underwriting, acquisitions, management and operations decisions, budgeting of capital, and the analysis of financial statements. A fund model outlines the fund’s expenses, fees for operating the fund, and expected capital calls. A fund model will also include the distributions to the various Limited Partners of the fund. Furthermore, using a waterfall method allows the user to determine the order in which returns will be paid to investors. In a waterfall distribution, investors are split into different classes with varying return percentages. A forecast of capital reserves and operating budgets is included as well. This allows for the planning of capital deployment, hiring, and operational strategies.

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The U.S. Department of Housing and Urban Development (HUD) was created in 1965 to combat housing discrimination and promote fairness in the housing market. The same year, the Federal Housing Administration (FHA) became a part of the HUD, however, staying a separate entity within the HUD. The main differences between the HUD and FHA today are that the HUD oversees the FHA, runs different programs to promote housing equality, and only gives out insured housing loans to Native Americans under Section 184. Separately, the FHA is responsible for insuring mortgages for homebuyers who would fail to qualify for traditional mortgages based on little cash available upfront or below average credit scores. Because the HUD oversees the FHA, but only insures mortgages for Native Americans, people often confuse the term HUD loans with FHA loans. Though these terms are often used synonymously, they do differ from each other. This paper will detail the specifics of HUD and FHA loans and highlight some common problems that arise with them.

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Regardless of whether it is a brand-new development or a core investment, there are lots of moving parts in every real estate deal. From the original acquisition to the debt servicing, construction hard and soft costs, monthly cash flows, and equity distributions, an inexperienced investor can easily lose track. To mitigate failures, professional real estate investors and financial analysts identify good deals by using Excel to underwrite how the cash flows from the acquisition to the disposition of each deal.

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When looking at any kind of investment opportunity, investors use a variety of performance metrics to determine if the deal meets their criteria. Real estate is no different; investors use a variety of performance metrics when underwriting an investment opportunity.  In this paper, we will cover one of these important performance metrics, known as development yield.

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Rental income plays a major role in the financial health and operations of every investment property. Specifically, each property’s rental rate impacts the property’s value. This means that if the rent per sq. ft. is lower than what it could be, then property could potentially be a value-add opportunity.  To identify a value-add opportunity, real estate investors must understand the difference between in-place rent and market rent.

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Risk management is the process of quantifying and analyzing risk profiles within an investment, and the goal is to inform investors on the potential losses and volatility of an investment. The risk analysis of an investment is critical as it acts as a filter for investment selection. Oftentimes, individuals or funds have a specific risk tolerance that will dictate their investment decisions. For example, an opportunistic fund will seek out riskier investments for the exchange of higher gains while a core fund will choose stability in exchange for lower returns. The goal of all investors is to minimize risk while maximizing expected return, so it is equally important that investors screen for any irregular risk/return relationships.

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The private equity industry is driven by the capital that supports its investments. Without a proper source of funds, private equity firms would not exist. The industry’s main objective is to allocate capital on the behalf of others and produce a return. The money that is raised from investors is called equity. In most cases, the funds available from equity raising are not sufficient to execute an investment strategy, so private equity firms look to lenders to supplement the lack of capital. Both debt and equity work together to fund an investment, but each method of fundraising has its own set of pros and cons. Collectively, the sourcing of debt and equity is referred to as fundraising. Fundraising is a crucial first step for private equity firms that can make or break an investment strategy.

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In finance, leverage refers to the use of borrowed money for the investment of an asset. Utilizing leverage allows investors to purchase assets they would not normally be able to afford. This is beneficial for the investors as it allows them to capture any benefits associated with the economies of scale. Large companies generally have more organizational structure in place as compared to startups, and the larger firms benefit by having more influence in their industry. Leverage also plays an important role in helping investors receive higher returns. By utilizing leverage, investors can receive higher payoffs of owning a large asset while only putting in a small amount of their own money. However, the use of leverage will also greatly increase the downside risk of an investment. Understanding the concept of leverage is key in a leveraged buyout.

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The two most common recovery structures in commercial real estate are Triple Net Lease (NNN) and Gross. The difference between the two is based on who pays the common area maintenance (CAM) charges.

In a Triple Net Lease, the tenant is responsible for paying their share of CAM charges while in a Gross Lease the property owner is responsible for the CAM charges. Within the NNN Lease, different CAM pricing structures exist that provide a unique set of pros and cons to the tenant and property owner. In general, CAM charges can be characterized into fixed or variable expenses.

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Excel shortcuts are an essential tool for any modeler as they provide a more efficient way to perform calculations, formatting, and analysis. As a baseline, modelers should aim to minimize the use of the mouse and perform most, if not all, functions on the keyboard. Once achieved, modelers are relieved of tedious and repetitive tasks allowing them to focus on a model’s overall purpose.

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The materials market, just like any other, contains its own unique set of risks creating volatility. When faced with market volatility, contracts or other financial instruments are created in order to protect an individual or party from downside risk. Some contracts that exist in the materials market are the Guaranteed Maximum Price contract (GMP), Cost-Plus, Time-and-Materials, and Fixed-Price.

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Commercial real estate investments are often categorized based on various characteristics of the deal. These segments are often defined as core, value-add, and opportunistic investment strategies. Each investment strategy has its own risk/return level, with core investments being the least risky and opportunistic investments yielding the highest level of risk. In between lies the value-add strategy that seeks to make improvements on an existing asset with existing cash flows. Every investment strategy has its place in the market, but it is important to understand each one’s characteristics before you implement it.

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External links exist in Microsoft Excel when there are external references made, meaning that a cell in one workbook references a cell in another workbook. A cell in one workbook referencing other cells in the same workbook, even on different sheets, is not an external link. There are a few circumstances where external links are useful, however, most of the time they should be avoided if possible.

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Distributions are cash payments made to the investors from either operations or capital events. In most legal agreements, distributions are defined and usually provide the General Partner final determination as to the amount of the distribution, after considering working capital and future cash needs from the investment. The calculations for which parties receive the distributions are based on pre-established agreements – usually Limited Partnership Agreements or Joint Venture Agreements and flow through a distribution waterfall.

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Every real estate investment requires capital in order to fund a project’s cash requirements. There are three main categories, or sources of capital used in real estate projects: debt, equity, and the project’s cashflows. Every real estate project has a unique capital structure that is ultimately set to maximize project cashflows while fulfilling all financial obligations associated with a project.

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At 3E Management (“3E”), we develop Corporate Models as part of our Fund-Level services. A Corporate Model shows the fees and investment returns the corporate entity is expected to receive from their investments (in either Joint Ventures or Funds), along with expenses related to sourcing deals, placing capital, and operating the corporate entity. Any Corporate Model should also include a projection component, which will allow Managers to project growth and future investments. A Corporate Model will show the returns for the firm, along with expected returns from each investment.

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Learn what a financial model is and the common mistakes such as treatment of capital expenditures, incorrect lease-up schedules, and waterfalls. These are just a few of the most common mistakes in real estate modeling. These mistakes can be avoided (even simpler ones!) by double checking your work and reviewing the model. Implementing a process to review the final model can save millions of dollars lost or any headaches with investors and lenders.

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When raising capital from investors for a private equity fund there are various methods that fund managers can utilize. Some of these methods include applying for a loan, receiving investments from venture capitalists, and more. However, none of these methods will prove to be effective for a fund unless the private equity firm can provide a successful track record to investors.

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An asset management dashboard is essential in tracking performance at a certain point in time and to compare actual performance to budget and underwriting. These dashboards are created within Excel and improve the quality of a financial model as they mitigate the risk of inaccurate data.

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Before offering a fee break to investors, there are a variety of factors that a Private Equity firm must consider. Essentially, these boil down to 5 main considerations: Why? To whom? What type of fee break? Impact on the fund? Can the firm handle this?

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