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      Project Status Report: Overview & Definitions

      In an ongoing effort to increase investor visibility and transparency surrounding the ongoing performance of individual deals, Crowdstreet has made improvements to our investor reporting process.  While many of these improvements will not be immediately visible to our investors, there are a few changes that will catch your eye.  This article is aimed at helping you understand where this new information is located and how to interpret it. 


      Within each deal's individual investor room, you will notice three new charts: Net Operating Income, Occupancy, and Debt Yield. Each chart contains information unique to that particular deal and the most recent reporting period. 


      Charts: 

      • Net Operating Income 
      • Occupancy 
      • Debt Yield


      Net Operating Income: 


      Net Operating Income (NOI) in Commercial Real Estate

      Net Operating Income (NOI) is a key financial metric used to assess the profitability of a commercial real estate property. It represents the income generated by the property after deducting operating expenses but before accounting for debt service, taxes, depreciation, and amortization. The formula to calculate NOI is:

      NOI=Gross Operating Income−Operating Expenses

      Where:

      • Gross Operating Income: Includes all income generated from the property, such as rent, parking fees, service charges, and any other sources of revenue.
      • Operating Expenses: Includes costs associated with managing and maintaining the property, such as property management fees, maintenance, repairs, utilities, property taxes, and insurance.

      Interpreting Net Operating Income

      From an investor's standpoint, NOI is a critical measure to assess the performance and potential of a commercial real estate investment. Here’s how investors can interpret and use NOI:

      1. Profitability Assessment:
        • Higher NOI: Indicates a more profitable property. Higher NOI suggests that the property generates substantial income relative to its operating expenses, making it an attractive investment.
        • Lower NOI: Indicates lower profitability. This may be due to high operating expenses, lower rental income, or both, signaling potential issues that need to be addressed.
      2. Valuation and Cap Rate:
        • Property Valuation: NOI is used in conjunction with the capitalization rate (cap rate) to determine the value of a property. The formula is: Property Value=NOI/ Cap Rate.  A higher NOI increases the property value, assuming a constant cap rate.
        • Cap Rate Calculation: Investors can also determine the cap rate by dividing NOI by the property’s current market value: Cap Rate=NOI/ Property Value. This helps in comparing the return on investment across different properties.
      3. Operational Efficiency:
        • Expense Management: Analyzing NOI helps investors understand the efficiency of property management. High operating expenses relative to income may signal inefficiencies or opportunities for cost reduction.
        • Revenue Enhancement: Investors can look for ways to increase gross operating income, such as improving occupancy rates, raising rents, or adding new revenue streams.
      4. Comparison with Market Norms:
        • Benchmarking: Comparing NOI with similar properties in the market helps investors assess competitive positioning. A property with a higher NOI compared to market peers may be better managed or located in a more desirable area.
      5. Investment Performance:
        • Return on Investment (ROI): NOI is a key determinant of ROI. Higher NOI leads to higher returns, making the investment more attractive.
        • Risk Assessment: Consistent and predictable NOI indicates lower investment risk, as it suggests stable income generation.

      Conclusion

      Net Operating Income (NOI) is a fundamental metric in commercial real estate that provides a clear picture of a property’s profitability and operational efficiency. Investors use NOI to evaluate property performance, determine value, assess financial health, and compare investments. By analyzing NOI, investors can make informed decisions, identify opportunities for improvement, and optimize their investment strategies.



      Occupancy vs CoStar Occupancy: 


      Occupancy is a critical factor in the performance of a real estate investment. Here’s how real estate investors should interpret and consider occupancy:

      1. Revenue Generation

      • High Occupancy: Indicates a high level of tenant demand and translates directly into rental income. Consistently high occupancy rates suggest that the property is desirable and can generate stable cash flows.
      • Low Occupancy: Suggests potential problems such as poor property condition, undesirable location, or ineffective management. Low occupancy results in lower rental income and can severely impact the profitability of the investment.

      2. Net Operating Income (NOI)

      • Occupancy rates directly affect the NOI, which is a key measure of a property's profitability. Higher occupancy increases rental income, thereby boosting NOI, while lower occupancy decreases rental income and reduces NOI.

      3. Market Competitiveness

      • High Occupancy: Indicates that the property is competitive within the market. It may also allow for rental rate increases over time, further enhancing revenue.
      • Low Occupancy: This could signal that the property is less competitive, requiring potential investment in improvements or marketing strategies to attract tenants.

      4. Financial Metrics and Valuation

      • Cap Rate: A property with high occupancy typically commands a lower cap rate, indicating lower perceived risk and higher valuation.
      • Yield on Cost: High occupancy can improve yield on cost by maximizing rental income against the acquisition or development cost.

      5. Debt Servicing and Financing

      • Consistent Occupancy: Provides reliable income streams necessary to meet debt obligations. Lenders are more likely to finance properties with stable or high occupancy rates, often offering better terms.
      • Vacancy: High vacancy rates increase financial risk, potentially making it difficult to cover debt service and operating expenses. This can lead to higher interest rates or difficulty in securing financing.

      6. Risk Assessment

      • High Occupancy: Generally indicates lower risk as it reflects strong demand and stable income. However, investors should also consider the quality and creditworthiness of tenants.
      • Low Occupancy: This represents higher risk due to uncertain income streams. Investors must assess whether low occupancy is a temporary issue or indicative of larger systemic problems.

      7. Future Growth Potential

      • Tenant Retention and Turnover: High occupancy with low turnover rates can indicate tenant satisfaction and long-term stability. Conversely, high turnover rates, even with high occupancy, can increase costs related to tenant turnover and leasing.
      • Market Trends: Understanding the local market trends can help investors anticipate changes in occupancy rates. For example, if an area is experiencing economic growth, future occupancy rates might increase, enhancing the property's value.

      8. Property Management and Operational Efficiency

      • Effective property management is crucial for maintaining high occupancy rates. Investors should evaluate the management team’s ability to attract and retain tenants, maintain the property, and manage tenant relationships.

      An investor should interpret an individual property's occupancy rate relative to the market in which it resides to gain a comprehensive understanding of its performance and potential. Comparing the property's occupancy rate to the market average provides valuable insights:

      • Above Market Occupancy: If the property’s occupancy rate is higher than the market average, it indicates strong demand, effective management, and a competitive advantage. This suggests that the property is well-positioned within the market, potentially allowing for higher rental rates and stable income streams.
      • Below Market Occupancy: If the property’s occupancy rate is lower than the market average, it may signal issues such as poor location, inadequate property management, or outdated amenities. This discrepancy requires investigation to identify underlying causes and develop strategies to improve occupancy, such as property upgrades, marketing efforts, or adjusting rental rates.
      • Market Trends: Understanding whether the market as a whole is experiencing high or low occupancy rates helps investors contextualize individual property performance. For instance, a property with declining occupancy in a market with rising occupancy rates could indicate specific problems with the property, while declining occupancy in a market with overall low occupancy rates might reflect broader economic or demographic challenges.

      By analyzing an individual property's occupancy rate in relation to the market average, investors can make informed decisions about property management, investment strategy, and potential improvements. This comparison helps identify strengths and weaknesses.


      Debt Yield: 


      Debt Yield in Commercial Real Estate

      Debt yield is a financial metric used in commercial real estate to evaluate the risk and return of a loan from a lender's perspective. It measures the property's ability to generate income relative to the amount of debt being taken on. Debt yield is calculated as follows:

      Debt Yield=Net Operating Income (NOI)/ Loan Amount

      Interpreting Debt Yield

      From an investor's standpoint, debt yield is crucial for several reasons:

      1. Lender's Perspective on Risk:
        • High Debt Yield: Indicates lower risk for the lender. A higher debt yield suggests that the property's income is significantly higher than the loan amount, providing a cushion in case of income fluctuations or other financial issues.
        • Low Debt Yield: Indicates higher risk for the lender. A lower debt yield means that the property's income is closer to the loan amount, leaving less margin for error.
      2. Financing Terms:
        • Attractive Financing: Properties with higher debt yields are more likely to secure favorable financing terms, such as lower interest rates or higher loan-to-value ratios, because they are seen as less risky.
        • Challenging Financing: Properties with lower debt yields may face stricter loan terms, higher interest rates, or lower loan amounts, reflecting the lender's increased risk perception.
      3. Investment Viability:
        • Assessment of Stability: A high debt yield indicates that the property generates sufficient income to cover debt obligations comfortably.
        • Potential Red Flags: A low debt yield could signal potential financial instability, suggesting that the property might struggle to cover its debt service if income declines or expenses rise.
      4. Comparison with Market Norms:
        • Benchmarking: Investors should compare the debt yield of a particular property to market norms or industry standards. If a property has a lower debt yield than similar properties in the market, it may warrant a closer look to understand the reasons behind it.
      5. Impact on Investment Strategy:
        • Risk Management: High debt yield properties can be considered safer investments, allowing investors to take on more leverage or consider more aggressive growth strategies.
        • Return Expectations: While a high debt yield is generally positive, investors should also consider the overall return on investment. Sometimes, properties with lower debt yields might offer higher overall returns if they have significant value-add potential or are located in high-growth areas.

      Conclusion

      Debt yield is an important metric that helps investors understand the risk associated with a property’s financing from a lender's perspective. A high debt yield indicates lower risk and financial stability, making it easier to secure favorable loan terms. Conversely, a low debt yield signals higher risk and potential financing challenges. By analyzing debt yield, investors can better assess the viability and risk profile of their real estate investments, ensuring they make informed and strategic decisions in their investment process.


      New Standardized Project Status Report:


      In addition to the new graphs provided, you will now see a new Project Status Report, found in the investor room.  What these reports aim to do is provide investors with a one-stop shop for a standardized quarterly snapshot of a given deal's status.  These reports are based on the previous quarter's reporting period and the information is provided and confirmed by the sponsor. 


      This report will contain a couple of new, key performance metrics that we would like to draw your attention to: Yield on cost and market capitalization rates.


      Yield on cost and the market capitalization (cap) rate are two important metrics used in commercial real estate to evaluate investment performance and value properties. Here's how they relate:

      Yield on Cost

      Yield on cost (YoC) is a measure of the return on an investment based on the actual cost to acquire or develop the property. It is calculated as:

      Yield on Cost=Net Operating Income (NOI)/ Total Project Cost

      Where:

      • Net Operating Income (NOI) is the income generated from the property after operating expenses are deducted but before debt service and taxes.
      • Total Project Cost includes the purchase price, development or renovation costs, and other associated expenses.

      Market Capitalization Rate (Cap Rate)

      The cap rate is a measure of the return on investment based on the property's current market value. It is calculated as:

      Cap Rate=Net Operating Income (NOI)/ Current Market Value

      Where:

      • Current Market Value is the property's value as determined by the market, which could be influenced by factors like comparable sales, income potential, and investor demand.

      Relationship Between Yield on Cost and Cap Rate

      1. Comparison of Investment Efficiency:
        • If the Yield on Cost is higher than the Cap Rate, the investment is considered favorable because the investor is generating a higher return on their cost basis compared to what the market values similar properties.
        • If the Yield on Cost is lower than the Cap Rate, the investment might be less attractive since the market would expect a higher return for such an asset.
      2. Indicator of Value Creation:
        • A higher Yield on Cost compared to the Cap Rate indicates value creation, suggesting that the property was acquired or developed at a cost lower than what the market values it at post-completion or stabilization.
        • Conversely, a lower Yield on Cost might suggest overpayment or inefficiencies in the project.
      3. Impact of Financing:
        • Yield on Cost focuses on the cost basis and does not directly account for financing structures. However, a favorable Yield on Cost can indicate a strong ability to service debt and achieve desired returns even with leverage.
        • The Cap Rate reflects market value and can be influenced by prevailing interest rates, which affect financing costs and investment returns.

      Understanding both metrics helps investors assess the potential profitability of a real estate investment and make informed decisions based on their cost structure and market conditions.


      Within these reports, you will also see the following information.  Please take notice of the “notes” under the definitions of these terms.  Proper interpretation of the data is essential for an accurate understanding of the performance of your investment.  


      • Total capitalization: refers to the sum of all the financing sources used to capitalize the acquisition, development, improvement, and execution of the proposed business plan. It encompasses both equity and debt components.
        • Note: It's important for investors to understand where their investment lies within the greater capital stack.  This figure has the potential to change over time as additional equity or debt is placed on the project. Please reference the following article for an overview of capital stacks. 
      • Holding period: refers to the length of time a Sponsor intends to hold onto a property before selling it or exiting the investment.  It is measured from the date of transaction or investment date to the sale date or recapitalization of the property. 
        • Note: The projected holding period is often not the realized holding period.  Investors need to understand that their investments are illiquid.  Oftentimes the end of the projected hold period is not the ideal time for the sponsor to liquidate the investment.   
      • Occupancy:  refers to the extent to which a property is currently being utilized by tenants or occupants. It is a measure of how much space within a building or property is leased or rented out compared to the total available space.
        • Note: This report will document the property’s occupancy at acquisition, the projected occupancy at exit (at the time of initial underwriting), and the property’s current occupancy as of the previous reporting period. It is important to understand how this figure relates to the individual project’s business plan.  For example, a development deal will show a 0% occupancy figure up until the start of lease up.  Likewise, a value-add deal might witness lower occupancy figures during the time of renovations due to the need to move tenants out of the space for renovations.  
      • Net operating income (NOI):  represents the operating cash flow generated by a property after deducting all operating expenses (excluding non-cash items such as depreciation, amortization, etc.) but before deducting debt service (mortgage payments) and/or capital improvements and reserves. 
        • Note: This report will provide the property’s initial annualized NOI at acquisition, Projected annualized NOI at Exit (at the time of initial underwriting), and the project's current NOI as of the previous reporting period.  While you should always look at this metric under the greater lens of the business plan, this is a key indicator of an asset's performance, and monitoring over time is essential to understanding the ongoing success of a given project. 
        • Note: Market Capitalization Rate:  This metric is provided by CoStar and updated quarterly.  This figure is both asset class and submarket specific, oftentimes, property class (Class A, Class B,...) specific. 
        • Note: Yield on Cost: Please reference the above commentary about how to analyze Yield on Cost and market capitalization rates together. 
      • Senior Debt: This section is aimed at providing investors with an understanding of the asset's debt obligations.  While some of this information is contained within the total capitalization section of the report, this section goes into detail surrounding maturity dates and extensions.  
        • Note: Maturity dates on loans are a key piece of information investors should know.  The maturity date is going to be the time when the sponsor will be forced to take action.  These actions can range from refinancing, extending the loan, and selling the asset among other alternatives.   


      Definitions


      • … at acquisition: The point in time when investors' funds are released from Escrow.  
      • ….at exit:  This is the initially targeted sale date for the property.
      • Total capitalization: refers to the sum of all the financing sources used to capitalize the acquisition, development, improvement, and execution of the proposed business plan. It encompasses both equity and debt components.
      • Holding period: refers to the length of time a Sponsor intends to hold onto a property before selling it or exiting the investment.  It is measured from the date of transaction or investment date to the sale date or recapitalization of the property. 
        • Recapitalization refers to the process of restructuring the capital or financing structure of a property or portfolio of properties. It involves making changes to the existing capital stack, which includes debt, equity, and other financial instruments. Recapitalization is often used as part of exit strategies for commercial real estate investments. It may precede a property sale, partnership buyout, or transfer of ownership, allowing investors to transition to new investment opportunities.
      • Occupancy:  refers to the extent to which a property is currently being utilized by tenants or occupants. It is a measure of how much space within a building or property is leased or rented out compared to the total available space.
      • Net operating income (NOI):  represents the operating cash flow generated by a property after deducting all operating expenses (excluding non-cash items such as depreciation, amortization, etc.) but before deducting debt service (mortgage payments) and/or capital improvements and reserves. 
      • Market Cap Rate: The capitalization rate, or cap rate, is a fundamental metric used to estimate the value of a commercial property based on its income potential. The cap rate indicates the income yield that an investor can expect to receive from a commercial property. It represents the relationship between a property's net operating income (NOI) and its market value or purchase price. The cap rate is expressed as a percentage and is calculated using the following formula:
        • Cap Rate =  (Net Operating Income (NOI)/Property Value or 

      Purchase Price) ×100%

        • Yield on cost (YOC): is a financial metric used in commercial real estate investment analysis to measure the return generated by a property relative to its total project cost or total capitalization. The formula is calculated as follows: net operating income / total capitalization. 
        • Distributions: Refers to the periodic payments made to investors or partners in a real estate investment entity. These distributions represent the portion of income or profits generated by the property or portfolio of properties that is distributed to the investors according to their ownership interests.  A distribution can represent both a return on capital and a return of capital. However, it's important to note that distributions are never guaranteed.
        • Senior Debt: refers to the first mortgage loan that has priority over other debt obligations secured by the property. It is a form of debt financing provided by a lender, typically a bank or financial institution, and is secured by the property itself, giving the lender a priority claim on the property's cash flows and collateral in the event of default.
          • Loan Maturity Date: refers to the date on which the full balance of a commercial mortgage loan is due to be repaid to the lender. It is the deadline by which the borrower must either fully repay the loan amount, agrees to extend the existing loan with the current lender, or refinance the loan.
          • Loan Amount: refers to the total principal balance of a loan that a borrower receives from a lender to finance the purchase, refinancing, or development of a property. 
          • Interest-only end date:  refers to the date when an interest-only period on a loan ends, and the borrower begins making payments that include both principal and interest. Interest-only loans allow borrowers to make payments that cover only the interest accrued on the loan for a specified period, typically the initial part of the loan term.
          • Current senior loan balance: refers to the outstanding principal amount of the primary loan at the time of reporting.
          • Current subordinate loan balance: refers to the outstanding principal amount of any secondary loans at the time of reporting.
          • Other loan balance: refers to the outstanding principal of any additional loans on the property that are neither senior or subordinated debt at the time of reporting.
        • Debt Service: refers to the total amount of principal and interest payments required to be made by a borrower on a commercial mortgage loan. 
        • Debt service coverage ratio (DSCR): is a financial metric used by lenders to assess the ability of a property to generate sufficient cash flow to cover its debt obligations, specifically the principal and interest payments on a mortgage loan. The DSCR is a critical measure of the property's financial health and its ability to support the debt burden. 
          • The Debt Service Coverage Ratio is calculated by dividing the property's Net Operating Income (NOI) by its Debt Service (DS). The formula for DSCR is:
            • DSCR=Net Operating Income (NOI)/ Debt Service (DS)
        • Debt Yield: is a financial metric used by lenders to assess the risk associated with a commercial mortgage loan relative to the property's income-generating potential. 
          • Debt yield is calculated by dividing the property's net operating income (NOI) by the loan amount. The formula for debt yield is:
          • Debt Yield =Net Operating Income (NOI) / Loan Amount × 100%
        • On time: refers to whether a development project is adhering to the originally established schedule or timeline for completion. This includes meeting deadlines for tasks such as obtaining permits, completing construction milestones, securing financing, and ultimately delivering the completed project according to the planned schedule.
        • On budget: refers to whether a development project is adhering to the predetermined financial plan or budget established for the project. It means that the total project costs, including land acquisition, design fees, construction expenses, permits, financing costs, and other associated expenses, are in line with the original budgetary estimates or projections.
        • % budget spend to date: refers to the percentage of the total budgeted funds that have been expended or utilized up to the current point in time during the development process. It is a measure used to track and assess the progress of expenditures relative to the planned budget throughout the project.
      • Target completion date: refers to the planned date by which a construction or renovation project is expected to be finished and ready for occupancy or use. This date is crucial for project scheduling, financial planning, and coordinating leasing or sales activities.  This is also referred to as a Certificate of Occupancy date “CofO”.
      • Preferred equity: refers to an investment structure where investors receive a preferential return on their equity before common equity holders receive any distributions. This type of equity often comes with specific terms and conditions, such as a fixed rate, and has priority over common equity in both cash flow distributions and in the event of liquidation.
      • Common equity: refers to the ownership interest held by investors who have the residual claim on the property's income and assets after all debts, including preferred equity, have been paid. These investors have the potential for higher returns, but they also bear the highest risk as they are last in line to receive distributions in the event of financial distress or liquidation.
      • Other equity: refers to forms of equity investment that do not fall under common or preferred equity, such as joint venture equity, mezzanine equity, or strategic partnership investments. These investments often involve specific terms and conditions tailored to the unique structure of the deal, providing customized risk and return profiles for the involved parties.