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Some real estate transactions entail a “value add” strategy, wherein the property will receive at a minimum some cosmetic upgrades, and perhaps much more. Using an apartment building as an example, you might replace carpet with hardwood floors, paint or replace the kitchen cabinets, upgrade bathroom fixtures, etc.

If you are modeling a property renovation, whether for a long-term hold or for a flip transaction, there are two ways to have the renovation budget and monthly amounts spent treated by Valuate.

Option #1: Include the Renovation Budget in the loan sizing and exclude the Renovation Outlays from monthly cash flow

In this set-up, the following is the case:

1. The Renovation Budget is funded in the same debt/equity ratio as the property Purchase Price. For example, if the Property Purchase Price is $105,000 and the Loan LTV is 70%, 70% ($73,500) of the price is funded by the loan and 30% ($31,500) of the price is funded by equity. If the Renovation Budget is $10,000, the Eligible Loan Cost becomes $115,000. 70% ($7,000) of the $10,000 Renovation Budget will be funded by debt and 30% ($3,000) will be funded by equity, with the full Renovation Budget amount funded at the point of Closing (Time 0).

Included1

2. As a result of the full Renovation Budget amount being funded at Closing, the actual spending of that budget (the Renovation Outlays) will purposefully NOT impact your monthly cash flow.

Included2

The Sources and Uses of Funds table on the Levered Analysis screen will reflect this set-up as shown below:

SandUIncluded

Note that the Renovation Budget is purposefully reflected in the Acquisition Costs line. Total equity invested is $38,506, composed of $34,500 towards property purchase and renovation, and $4,006 towards Holding Costs and Debt Service.

The Annual Cash Flow report will reflect this set-up as shown below:

ACFIncluded

Note that the Renovation Budget amount displays in the Acquisition Transaction Costs line, and that $4,006 of equity for Holding Costs and Debt Service show in the Sponsor Deficit Draw.

Option #2: Exclude the Renovation Budget from the loan sizing and fund the Renovation Outlays from monthly cash flow and/or equity

In this set-up, the following is the case:

1. The Renovation Budget is not included in the loan sizing, and the Eligible Loan Costs therefore do not include the Renovation Budget amount.

Excluded1

2. The monthly Renovation Outlays are funded in each month by property operating cash flow. If a month’s cash flow is not sufficient to fund that month’s Renovation Outlay amount, equity investment will be made for the amount not funded by cash flow.

Excluded2

The Sources and Uses of Funds table on the Levered Analysis screen will reflect this set-up as shown below:

SandUExcluded

Note that the Renovation Budget is purposefully NOT reflected in the Acquisition Costs line. Total equity invested is $45,419, composed of $31,500 towards property purchase, $10,000 towards Renovation costs, and $3,919 towards Holding Costs and Debt Service.

The Annual Cash Flow report will reflect this set-up as shown below:

ACFExcluded

Note that the $10,000 towards Renovation costs and the $3,919 towards Holding Costs and Debt Service show in the Sponsor Deficit Draw.

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