How do you create a sources and uses statement for a real estate deal?

Creating a "Sources and Uses" statement is an essential part of real estate financial analysis, particularly for development projects or large acquisitions. Here's a step-by-step guide on how to create one:

Sources of Funds

1. Identify All Sources: List all the sources of capital for the project. This typically includes:
2. Equity: Money invested by owners or partners.
3. Debt: Loans from banks or other financial institutions.
4. Mezzanine Financing: A hybrid of debt and equity financing.
5. Grants: In some cases, government grants or subsidies.
6. Other Sources: Any other funding sources, like private investors.
7. Quantify Each Source: Determine the amount of capital coming from each source. This involves:
8. Calculating the equity contribution.
9. Determining the loan amounts, considering the loan-to-value ratio.
10. Assessing any conditions or costs associated with each source.

Uses of Funds

1. List All Expenses: Enumerate all the costs associated with the project, including:
2. Acquisition Costs: The purchase price of the property and related expenses.
3. Construction or Renovation Costs: If applicable, include all costs related to physical development or improvement.
4. Professional Fees: Costs for legal, architectural, and other professional services.
5. Financing Costs: Interest payments, loan origination fees, etc.
6. Contingency Reserve: A buffer for unexpected expenses.
7. Allocate Costs: Assign a monetary value to each cost category. This may involve:
8. Getting quotes from contractors or service providers.
9. Estimating based on past projects or industry standards.
10. Considering any potential cost overruns.

Balancing the Statement

• Ensure Balance: The total sources must equal the total uses. If there's a discrepancy, you'll need to adjust either the sources (by finding more funding) or the uses (by cutting costs or re-allocating expenses).

Ongoing Review and Adjustment

• Regular Updates: As the project progresses, continually update the sources and uses statement to reflect actual expenses and any changes in funding.
• Adjustments: Be prepared to make adjustments as needed, such as securing additional funding or reducing costs.

Presentation

• Clear Format: Present the information in a clear, easily understandable format, often in a spreadsheet.
• Detailed Breakdowns: Provide breakdowns of costs and sources for transparency and clarity.

Example

Here's a simplified example for a real estate project:

Sources:

• Equity: $2,000,000
• Bank Loan: $3,000,000
• Mezzanine Financing: $500,000

Uses:

• Acquisition: $3,000,000
• Renovation: $1,500,000
• Professional Fees: $200,000
• Financing Costs: $300,000
• Contingency: $500,000

In this example, both sources and uses total $5,500,000, showing a balanced statement.

This is a basic overview. For more complex projects, you might need to consider additional factors like phased funding, revenue projections, and more sophisticated financial models.