Financial modeling is the most foundational skill in commercial real estate. However, the underwriting process usually involves an underwriting tool that is filled with headaches, frustrations, bad data, and confusing outputs.
Real estate companies struggle with legacy underwriting tools
Most firms default to tools used in the past, or tools they inherited, such as excel.
These tools are accessible and customizable. However, family offices and investment firms can easily get bogged down with unnecessary complexity. Complex models can be difficult to understand and grueling to manipulate.
Does this sound like your firm?
It doesn’t have to be this way! Underwriting deals can be intuitive and consistent. It all comes down to using the right underwriting tools for your team.
Consider a hybrid underwriting tool, Argus with Excel
Argus is a tool that can lessen the burden of underwriting, especially when complex leases are involved. This advanced software eliminates excel formula errors and standardizes financial modeling.
However, the secret to reliable, polished underwriting results is Argus in combination with Excel.
Argus is unique because it allows you to easily model complicated deals across all asset classes that have high tenant counts, various opex budgets, market leasing assumptions, and expense recoveries.
Argus assists in the generation of consistent reports ranging from property reports, such as cash flow, budget comparison, year to date variance, to tenant reports including adjusting rent rolls, leasing activity, recovery structures, and rent schedules.
Furthermore, Argus can be used for first, second, third + generation leasing to determine cash flow in the immediate and distant future intuitively, taking into account retention rates, market inflation, CPI increases, and leasing costs. Very few underwriting tools can live up to this standard!
When working on deal execution, new information and scenarios come up regularly and Argus allows the user to easily adjust their model which, in turn, keeps reporting consistent.
Financial models typically require multiple changes. Consequently, there is a high likelihood of errors in an infinitely customizable tool such as Excel. Argus helps prevent user error on these complicated deals, saving time and money.
Biggest hurdle? Cost
The biggest pushback against an underwriting tool like Argus is the cost. This roadblocks often make firms reluctant to invest in the software.
If you look past these roadblocks, you’ll see a strong ROI on your investment for a tool like Argus. Moreover, you’ll eliminate common errors, move faster than the competition, and be able to handle more complex and more lucrative projects than before. You’ll be informed on more data points and have visibility to all angles of a project, equipping you to succeed on your next project like never before.
Hire an analyst with Argus
Rather than subscribing to Argus, why not hire an analyst who already has a subscription?
You can find analysts of all shapes and sizes on Bullpen, including Zaher who has an Argus license that he uses on his client projects.
An Argus case study
Pictures are better than words, so we've put together a short Argus case study.
Consider ABC Building, a mixed-use 50,000 SF opportunity in Chicago that has retail on the ground floor and office above.
Initially, we enter all the necessary inputs ranging from market assumptions, rent rolls, and operating expenses budgets.
Rental Income
Argus separates itself from back-of-the-napkin and base excel modeling for its ability to manage complexity. It is dynamic in its ability to handle high tenant counts with a variety of lease expirations and market leasing assumptions. Argus also avoids potential errors that you may encounter in massive excel models.
Market Leasing
Argus allows you to manage various market leasing assumptions that impact the future state of your cash flow analysis. Use renewal probability, tenant improvement, and commission assumptions to fully leverage Argus's computational power.
Report Summary
Argus can not only handle complex and large amounts of data, but it can also interpret that data and display it in an organized manner. Moreover, Argus can generate almost any report an investor, broker or even property manager may require as it pertains to the deal at hand.
Argus Cash Flow
Review property cash flows based on dynamic inputs. Look for weak spots in the cash flows, when a high probability of lease rollover negatively impacts projected future cash flows.
Value Matrix
View the sensitivity of various exit scenarios based on a variety of parameters. In the below graphic, you'll see an analysis where the cash flow and resale discount rates are varied against net sale price and exit cap rate.
Yearly Valuation
The Yearly Valuation Report shows an excellent snapshot of the total hold period. Compare project IRR with varying hold periods.
Lease Expiration
The Lease Expiration Report is full of important risk considerations. Lease expirations (and non-renewals) are major drivers of future revenue risk in commercial properties. A good indicator whether or not a lease will be renewed is the effective rent vs. effective market rent. When market rent is far below current rent, you might need to plan for vacancy or lease negotiations.
Thanks to Zaher Samnani for providing images and content for this article! You can hire Zaher on Bullpen to support your financial modeling.
