New Perspectives in Analyzing Real Estate Developer Financial Statements. (Lending To)

By Boykin, Dan | The RMA Journal, May 2002 | Go to article overview

New Perspectives in Analyzing Real Estate Developer Financial Statements. (Lending To)


Boykin, Dan, The RMA Journal


This first in a series of articles surveys historical approaches to analyzing real estate business financial results, provides insight into developer financial reporting, and offers some alternatives to the current "make-do" partial data approaches. Some strategies for improving financial reporting also are presented.

Anyone who has tried to analyze a real estate developer's financial performance knows it's not easy. Having lived through the S&L crisis and the real estate "recession" of the late 1980s and early 1990s, many bankers and other capital providers are turning more to understanding the entire business of a developer enterprise as well as concentrating on the project economics and market analysis.

Because of their sizable capital needs, most developers of large commercial projects use multiple sources. A multiple-capital-source approach invariably requires multiple legal entities with separate financial reporting. The common problem is analyzing those multiple entities.

Purpose and Expected Outcome

The analysis of any developer's financial position must begin with an understanding of the purpose and expected outcome of the financial analysis--in a commercial credit, this is usually the identification of repayment sources. For real estate credit, the primary source of repayment is almost always project driven, so analyzing cash flow, balance sheet, and income statement at the business level is unlikely to shed much light on repayment of a specific project loan.

The objective, then, is some understanding of two basic issues:

1. The degree of flexibility a developer has retained in its business as a whole.

2. Financial strategy and what that means for the lender.

Regardless of the approach taken, the lender must:

* Identify and understand the risk profile of the real estate business.

* Determine whether the business can support priority outflows, service its debt, and pursue its strategic direction.

* Identify cash sources and uses, and understand the background for each.

* Know how much flexibility the business has to deal with problems.

* Determine the business's reliance on outside capital sources and the risks associated with those sources.

Dealing with the Data

Lenders have always had to deal with a smorgasbord of available data within real estate partnerships. A starting place, then, is to understand what is available in a typical transaction. While the form and substance of the items discussed here vary greatly, there are some similarities to keep in mind.

Typical financial statement information usually consists of some or all of the following:

* Personal statements of the individual developer/sponsor.

* Business financials of the development entity/sponsor organization--usually, equity method presentations.

* Project schedules or lists of properties--either partial, reflecting sponsor interest (proportionate), or full (sometimes called consolidated).

* Tax returns, both business and personal.

Typical Approaches Based on the Data

Most analysts use a variant of three popular approaches to analyzing this information because classic GAAP consolidated (and, of course, consolidating) statements are viewed as hard to get and/or prohibitively costly. There are variants among all three approaches as well as overlap.

1. NOI/operating approach--uses project schedules as a proxy for consolidation of the developer's business universe.

2. Individual/sponsor cash flow approach (also known as the tax return analysis approach).

3. Business approach--used with GAAP statements.

The approach selected is usually driven by the financial data available. This article uses a sample developer to demonstrate the approaches. It is important to note that this set of facts was taken from the same developer entity, on the same date, and using the same set of underlying facts regarding the business's performance for a given period. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

New Perspectives in Analyzing Real Estate Developer Financial Statements. (Lending To)
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.