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Real Estate Private Equity 101

• Purpose: Just like with normal PE firms and

LBOs… use debt and equity to acquire a
property, grow it over time, and then sell it

• That same housing analogy applies… but here,

it really is a house we’re buying!

• But… the modeling itself might be much simpler,

or possibly more complex
This Tutorial
• Part 1: The Types of RE PE Case Studies

• Part 2: This Case Study and What Makes It Tricky

• Part 3: Doing the Quick Math on This Deal

• Part 4: Assumptions and Construction Timeline

• Part 5: Equity and Debt Draws (and More)
• Part 6: Investment Recommendation
Three Types of RE PE Cases
• Opportunistic: Build a new property or completely
revamp (“redevelop”) an existing one
Three Types of RE PE Cases
• Key Question: How much is the property changing?
This Case Study
• Property: V:House – High-end luxury condos in
São Paulo – to be developed and pre-sold

• Question: Should we pay R$ 40 million to fund

the property’s development if we’re targeting a
2x multiple and a 25% IRR?

• Other Terms: Spelled out in the document –

Base Case, Downside Case, and Upside Case
with different selling price / Hard Cost etc. figures
This Case – Typical Opportunistic Scenario
• Purpose: This one’s a mix of calculations and
market data, but the modeling isn’t that complex

• Market Data: Less about forecasting trends and

more about confirming/denying initial figures

• Prerequisites: Must be good with Excel (IF,

finance / RE fundamentals (waterfalls, debt, etc.)
What’s Tricky About This Case…
• Problem #1: Brand-new, high-end development in
Brazil… what assumptions are reasonable?

• Problem #2: How much debt and equity can we

use… exactly?

• Problem #3: How quickly can we pre-sell the units?

• Solution: Develop the property, use as little equity

as possible, and pre-sell as quickly as possible!
What’s Tricky About This Case…
• Trick: Wrapping your head around the “pre-sold”
concept and how the returns trickle in over time

• But: Also have a strict 1-week time limit, so you

need to move quickly with the Excel formulas

• So: Spend some time on market data, but mostly

pay attention to the instructions at the end, and
jump into Excel more quickly
The Quick Math on This Deal
• Key Insight: If the rough numbers don’t work, why
would an even more complex model work?

• Conclusion: We’re already skeptical – even 50-60%

leverage won’t boost the multiple to 2x in most cases
Assumptions and Timeline
• Can’t do much in this type of model – can’t even build a
S&U schedule since we don’t know debt/equity yet

• But we do challenge the original case study numbers for

Hard Costs – they don’t foot with reality / other sources
Assumptions and Timeline
• Timeline: Need to jump into Excel to explain…

• Step 1: Set up an area that tracks total units sold, %

sold, month #, year #, etc.

• Step 2: Create a tracking area for each phase

• Step 3: Finish Phase I, fill in info. at the top, move to II

• Step 4: Complete this process for Phases II and III

Assumptions and Timeline
• Step 5: Split the monthly sales into Initial vs.
Construction-Phase vs. Final Deposits

• Simplification: Instead of getting the Construction ones

“right,” we just take the cumulative sum of the values of
units sold so far, multiply by 30%, and divide by 24

• Think About: What would it take to get this “right”?

Expenses, Equity & Debt & Other
• Expenses: Hard Costs based on Gross Sq. M.
only if something is under construction, and the
others are percentages of monthly sales

• Equity: Do we have negative Gross Income, and have

we not yet passed 40% of all units pre-sold?

• If so, draw on equity… 20% from developers and 80%

from investors
Expenses, Equity & Debt & Other
• Equity: Also, check to see if we’re in the final
month or the end of all construction, and if so,
repay remaining debt!

• Debt: Draw on if we have negative Gross Income and

we’re past 40% of all units pre-sold; repay debt principal
when we can, and accrue interest when we have to
Waterfall Returns Schedule
• Same idea as in the other RE PE case studies…

• Track: Equity the investors contribute each month

• Increase By: Monthly amount that corresponds to 20%,

25%, 30%, etc. annual return

• Subtract: Distributions received because of positive

cash flows in the month
Summaries and Sensitivities
• Monthly Model: Very “unwieldy,” so you should create
an annual summary and a transaction summary

• Key Items: Sources & Uses, Returns, Construction

Timeline, and Physical Building Profile; for annual model,
revenue, expenses, cash flows, and IRR/multiples

• Sensitivities: Focus on most impactful assumptions

(selling prices, hard costs, lot prices, sales velocity)
The Investment Recommendation
• Point #1: In a very optimistic case, we just barely meet
the 2x targeted multiple; and we don’t in the Base Case

• Point #2: Market data isn’t that favorable / we lack the

data to confirm many key assumptions

• Point #3: Might work if the construction finished more

quickly, or if we could lock in Hard Costs at R$ 4,000 /
sq. m., or if we could guarantee higher selling prices…
but those all seem tough
Recap of This Tutorial
• Part 1: The Types of RE PE Case Studies

• Part 2: This Case Study and What Makes It Tricky

• Part 3: Doing the Quick Math on This Deal

• Part 4: Assumptions and Construction Timeline

• Part 5: Equity and Debt Draws (and More)
• Part 6: Investment Recommendation