Understanding real estate pro formas is critical for any real estate private equity interview case study. The revenue and expense items for each major asset class should be in your muscle memory. Even if you haven’t made it to an repe case study round, the questions below will likely arise in your screener interviews. Make sure you are prepared by practicing the below until you can do it in your sleep. The responses are written as we would answer them in a live interview to assist your prep.
Walk me through a single-asset pro forma and explain the main line items
In a single asset pro forma, the main cash flow line items on the revenue side are: gross potential rent, vacancy, concessions, and other income. The most common operating expense lines are: management fees, insurance, real estate taxes, and repairs and maintenance. These sum to give you net operating income, which is followed by debt service, if any, then cash available for distribution. The primary considerations on the capital side are: acquisition price, hold period, exit value and cap rate, and debt issuance and paydown. Real estate private equity models typically cover between five and ten years. Merchant build scenarios may have shorter hold periods under five years, however long it takes for the asset to stabilize.
Walk me through a multifamily pro-forma
Multifamily pro formas are more complicated because of larger unit counts, shorter leases with quicker turnover, and increased staffing expenses. Below are the most important differences in a multifamily pro forma.
On the revenue side, you could project income for each individual unit on the rent roll. However, most investors simplify by using the quantity and type of units that rent the same. For example, 45 2×1 units, 25 3×2 units, and so on. You then apply a vacancy assumption to your gross potential rent, and perhaps a concession assumption if you plan to offer a free week or month to attract new tenants. Many multifamily complexes will have other income related to parking, clubroom rental, late fees, and other amenity and administrative charges.
On the expense side, the turnover expense line captures the cost of servicing a unit between tenants. The personnel expense line captures the salaries, benefits, and bonuses of the management, leasing, maintenance, and concierge staff. The maintenance capital reserve ranges between $350 to $1,000 per unit per year depending on age and quality.
Walk me through a hotel pro forma
Hotel pro formas deviate from traditional pro formas given their extremely short day-long contracts and emphasis on amenities including food and beverage. On the revenue side, key terms include average daily revenue per room (ADR), room occupancy, and revenue per available room, which is ADR multiplied by occupancy. RevPAR shows the revenue earned spread over all available rooms in the hotel, regardless of occupancy. Additionally, full-service hotels include amenity revenue such as food and beverage and conference room rental. Select service hotels lack these amenities and focus only on the rooms, thus their pro formas are less complicated.
On the expense side there are staffing, cleaning, laundering, franchise fees and other operating expenses in addition to the normal taxes, insurance, repairs and maintenance. The result is net operating income, which then flows into the cash flow statement and waterfall to repay debt then equity investors as usual.
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