Investment Committee Memorandum Components

by Bruce Kirsch on March 22, 2015

    • Investment Overview – executive summary of the opportunity
    • Property Description – existing and future physical property characteristics
    • Business Plan – how you will make money
    • Rationale – why this particular investment, and why now
    • Sponsorship – identification of principals and presentation of track record
    • Deal Structure – equity contributions by entity, description of any seniority/preferred/subordinate status
    • Cash Flow Waterfall – rules for the equity entity return of capital and return on capital
    • Sources & Uses – full capital structure (sources), and detailed total costs including transaction costs for acquisitions (uses)
    • Underwriting Assumptions - all of the inputs you made in blue in your pro forma
    • Returns – net cash flow, multiple on equity, NPV and IRR at the project level, and also at the individual partner levels
    • Sensitivities – a spectrum of returns scenarios given different underwriting assumptions (see here for an elegant way to build these tables in Excel)
    • Risks & Mitigants – what are the risks involved, are you going to mitigate or accept them?
    • Supporting Schedules
      • market info / trends
      • comps
      • cash flow / waterfall projections
      • location maps
      • demographics
      • photos / renderings, etc.

What did I leave out?

Valuate can provide beautiful graphics for many of these memo sections. You can simply do a screencapture (such as with free program Jing) and paste the relevant modules into your Word doc.

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It’s easy to understand what the “going-in” cap rate is for the acquisition of an existing income-generating property. It’s a little murkier when it comes to real estate developments.

To review, the going-in cap rate for an existing property is simply the NOI from the last twelve months as of the point of acquisition (“TTM”, or “trailing twelve months”), divided by the property Purchase Price.

Existing property going-in cap rate = TTM NOI / Purchase Price

In a development, however, you are going through the process of initially leasing up the property, so the convention in terms of defining the going-in cap rate is to take the forward twelve months’ worth of projected NOI starting at 90 days past the point of stabilization (full occupancy less the systemic vacancy assumed), and dividing that by the Total Project Cost.

Development going-in cap rate = Forward stabilized NOI / Total Project Cost

A helpful way to think about the difference between the two is that with an existing property, you are buying an income stream, whereas with a development, you are manufacturing an income stream where one did not previously exist.

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