Definitive Guide to Presenting an Underwriting Model

Written by Bullpen Editors

May 29, 2019

Think of a car manufacturer building a new model. Now, think about the team required: marketing, strategy, engineering, etc. In commercial real estate, the real estate analyst is the conduit between all of the departments. They are tasked with linking all the wires and mechanical details with the high-level underwriting strategy.

A key role the analyst is to present and explain the details to the executive suite (client or investor) accurately. Meanwhile, they need to avoid the gory details of every structural nuance. The balancing act is easier to manage with a model built for presentation. Here is a short list of things to consider in balancing the focus on the vision and the details of the engine of a model:

1. The Dashboard

Transactions get complicated, quickly. There are dozens of nuances that the transaction model needs to allow the driver to adjust. These adjustments help get to the target returns and value proposition to justify moving forward with the acquisition.

As such, building a single page dashboard allows for easy adjustments to both, the various parts of the capital stack (debt and equity) and operational expectations (growth factors, assumptions, reserves, etc.).

Why is this important?

The dashboard is your cockpit. Therefore, by taking the time to build it, you can walk through the various components of the model without losing the Client / Investor’s attention. Also, it empowers you to keep the wires organized.

Additionally, if a specific component of the capital or operational analysis requires more details or adjustments, you can quickly adjust or explain straight from this page.

2. The Budget

Following a walk through of the Dashboard, we need to review the integrity of the costs. The budget tab is usually the first page of discussion. It is the primary input for the capital markets and return discussions in the transaction strategy. Therefore, It should be treated as the source of data for various parts of the model.

3. The Pro Forma

After the budget, the next discussion is regarding the revenues. The Pro Forma shows the project’s profitability. In this section, the Analyst’s main goal is to balance the Client / Investor’s expectations with real world expectations based on market and projected values. So, it’s important to make all the values traceable to the dashboard for easy management.

4. Engineer the Returns

IRR is a time-value return, and therefore can be engineered based on timing of cost and revenues. Therefore, capital events have a large impact on project returns. As discussed, the Analyst needs to balance real world expectations with those of the Client / Investor.

The various time and financial engineering aspects and options are the key to driving returns. So, it is helpful to include these as a section in the dashboard. Usually, this is the final conversation when presenting a model. It is used to fine tune the returns based on confirmation of all the other variables.

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