Senior Living Real Estate Underwriting Model

Description
Below is a high-level overview of a real estate underwriting model designed to accommodate both an SBA loan for the operating business and a real estate–specific SBA loan, while also allowing for a potential refinance (REFI) at a future date and an eventual exit. In addition, it features a joint venture waterfall structure with GP fees.


1. Purpose and Structure

1. Purpose
   
   • Underwrite and analyze the financial feasibility of acquiring or developing real estate that also houses or supports an underlying operating business.
   • Incorporate both an SBA loan for the business (often referred to as an SBA 7(a)) and a separate real estate–specific SBA loan (often an SBA 504).
   • Evaluate multiple exit strategies: hold, refinance, or sell.
   • Model distributions to investors using a joint venture waterfall with GP fees and promotes.
2. Overall Structure
   The model typically comprises multiple tabs or sections for:
   
   • Assumptions & Inputs
   • Operating Business & Real Estate Revenues/Expenses
   • Debt & Financing (SBA loans, conventional financing, etc.)
   • Refinance & Exit Scenarios
   • Cash Flow Waterfall (Equity distributions and GP fees)
   • Summary Returns & Sensitivity Analysis

2. Key Inputs & Assumptions

1. Property-Level Inputs
   
   • Revenue Projections: Lease income, rent escalations, or business revenue.
   • Expense Assumptions: Operating expenses, property taxes, insurance, maintenance.
   • Other Operating Metrics: Vacancy factors, reimbursements, tenant improvements, capital expenditures, etc.
2. Business-Level Inputs
   
   • Operating Business Revenue: Projected sales or revenue for the underlying business, if relevant to the SBA 7(a) loan.
   • COGS / Operating Expenses: Direct costs, SG&A, etc.
   • EBITDA / Net Cash Flow: Used to size the business portion of the SBA loan.
3. Loan & Financing Assumptions
   
   • SBA 7(a): Loan amount, interest rate, amortization term, fees, and coverage requirements.
   • SBA 504 or Real Estate–Specific SBA Loan: Typically has two components (a bank portion and an SBA debenture). Inputs include interest rates, terms, and loan fees.
   • Equity Injection: Minimum owner/operator equity required by SBA guidelines.
   • Potential Conventional Debt: If the deal uses supplemental or mezzanine debt in addition to the SBA loans.
4. Refinance & Exit Parameters
   
   • Refi Timing: Assumed year of refinance (e.g., Year 5).
   • Refi Terms: Loan-to-value (LTV) ratio, interest rate, amortization, and costs.
   • Exit Cap Rate or Valuation Approach: Used to estimate sale proceeds if property is sold (e.g., dividing stabilized NOI by an exit cap rate).
   • Sale Costs: Brokerage commissions, legal fees, etc.

3. Revenue and NOI Calculations

1. Gross Revenue
   
   • Include all potential property income (rent, reimbursements) and business income (if relevant to underwriting).
   • Model annual growth rates or escalators.
2. Operating Expenses
   
   • Break out into categories (utilities, repairs, management fees, etc.).
   • Apply an annual inflation factor or escalation percentage.
3. Net Operating Income (NOI)
   
   • Subtotal of revenue minus property operating expenses.
   • Serves as a key figure for debt sizing, valuation, and refinance analysis.

4. Financing Structure and Debt Sizing

1. SBA 7(a) Loan (Business)
   
   • Sized based on business cash flow (EBITDA or net income) and SBA requirements.
   • Typically has longer amortization than conventional business loans, but is slightly more expensive in fees.
   • May include covenants or coverage ratios that must be met.
2. SBA 504 Loan (Real Estate)
   
   • Usually split into two pieces: a bank loan (50% of project cost) and an SBA debenture (up to 40% of project cost), with at least 10% equity injection.
   • The real estate portion’s NOI (plus any separate business occupancy coverage) must support this debt.
3. Combining the Loans
   
   • Ensure total combined debt service coverage meets both bank and SBA guidelines.
   • If the real estate is owner-occupied (with the underlying business), the combined coverage from business and property cash flow may be considered.

5. Refinance Scenario

1. Timing & Assumptions
   
   • Typically model a refi at or after a stabilization period (e.g., Year 5).
   • Set an exit LTV, interest rate, and new loan terms (amortization, points, fees).
2. Payoff of Existing Debt
   
   • The new loan proceeds pay off any remaining principal balances on the SBA loans.
   • The model calculates potential penalty costs or prepayment fees.
3. Equity Recapture
   
   • If the new loan is sized above the outstanding balance, some equity may be returned to investors or used for capital improvements.
4. Impact on Cash Flows
   
   • Post-refi, the model updates debt service costs based on the new interest rate and loan amount.
   • This changes subsequent distributable cash flow and investor returns.

6. Exit Strategy

1. Sale Timing
   
   • Often aligned with or after refinance if the project’s goal is short- to mid-term hold.
   • The model calculates the sale in a designated year (e.g., Year 5 or Year 10).
2. Valuation
   
   • Use projected NOI and an exit cap rate to determine gross sale proceeds.
   • Deduct any closing costs, commissions, or loan payoff.
3. Return to Investors
   
   • Net proceeds (after transaction costs and debt payoff) flow into the distributions waterfall to calculate final returns.

7. JV Waterfall and GP Fees

1. Waterfall Structure
   
   • Preferred Return: Investors receive a preferred return on their contributed capital.
   • Splits / Promote: After achieving certain preferred return, profits are split between LPs and the GP, often with increasing shares going to the GP as performance improves.
2. GP Fees
   
   • Asset Management Fee: Charged on revenue or equity.
   • Acquisition Fee: One-time fee upon closing (percentage of the purchase price).
3. Distributions Over Time
   
   • Annual periods only.
   • Upon refinance or sale, any large lump-sum proceeds are distributed through the waterfall model according to capital account balances, preferred returns, and promotes.

8. Summary Outputs and Sensitivities

1. Key Return Metrics
   
   • IRR: Internal Rate of Return for both LP and GP.
   • Equity Multiple: Total returns to equity over the investment horizon.
   • Cash-on-Cash Return: Annual distributable cash flow / equity invested.
2. Sensitivity Analysis
   
   • Stress test changes in rent growth, exit cap rates, interest rates, and expenses.
   • Evaluate impact on coverage ratios and returns.
3. Dashboards & Summaries
   
   • Often the model presents a one-page summary with key metrics, a sources and uses table, five- or ten-year pro forma, and distribution waterfall outcomes.

Includes final IRR of GP / LP, Equity Multiple, and more metrics include DSCR (debt service coverage ratio), sources and uses summary, and visualizations.


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