WSO modelling test

[Anonymous]

Hi Spencer/Michael,

I was looking at the other model that you’ve built for a tech interview question from the WSO forum (one that uses iterative calc on the loan interest).

How do we explain the difference in equity amounts (cell C26 and D84) being a $400k variance?

It has something to do with the negative Operating CF during month 25 to 27 but I just can’t figure out which line item in particular I have overlooked…

Thanks,
Scarlett

[Spencer Burton]

Hi Scarlett,

Thanks for bringing this up. Michael covers these concepts in more depth in his development modeling lectures, but allow me to apply what he teaches to the exercise you are referring to.

First for those reading this thread who aren’t sure of which model Scarlett is referring to. A few years back, I grabbed a Technical Interview Exam that someone had posted to Wall Street Oasis, and recorded myself completing the exam (i.e. Watch Me Build). You can find that ‘Watch Me Build’ here:

https://www.adventuresincre.com/watch-model-real-estate-technical-interview-test/

Now to Scarlett’s Question: How do we explain the difference in equity amounts (cell C26 and D84) being a $400k variance?

The equity amount in cell C26 together with the loan amount in C25 make up the total amount (i.e. Sources) required to fund the Total Project Cost (i.e. Total Uses or Total Capitalized Costs). The equity amount in cell D84 is the total equity required over the entire hold period, inclusive of the equity during construction as well as any equity required to fund shortfalls during operations. Or in other words, the additional ~$400k in operating shortfall that is funded by equity is NOT included in the project budget. This is no different than if there was an operating shortfall much later in the hold period that the partners would have to fund from equity.

Now you’re probably wondering, why didn’t I include the shortfall during lease-up in the development budget (i.e. capitalized the shortfall). The short answer is the exam was meant to be taken as quickly as possible, and so I chose to make it simple and not include an Operating Shortfall reserve; had I added the shortfall to the development budget it would have added a layer of complexity that I didn’t think was necessary.

Doing it this way isn’t necessarily wrong, so long as the exam didn’t specify how operating shortfall should be handled. But admittedly in the real world, it’s more common than not to include operating shortfall from the initial lease-up in the development budget. It just adds complexity to include the operating shortfall in the development budget and so I chose to avoid that complexity.

If you’d like to include the operating shortfall in the development budget such that a) the loan funds the shortfall and b) the equity amount in cell C26 is the same as the total equity amount in cell C84, watch the following tutorial:

– Click here to download the template file to follow along
– Click here to download the completed file from the tutorial

 

Thanks again for the great question!

Spencer

[Anonymous]

Hi Spencer,

Thank you so much for the quick turnaround and detailed explanation. That makes a lot of sense.

I have really enjoyed the Accelerator course so far, appreciate how you have gone step-by-step in each tutorial to ensure the audience fully understands the logic behind each item.

Thanks,
Scarlett

[Author]

Posts