The INVIZEN Rental Multifamily Program modeling is predicated upon an assumed set of assumptions, data requirements and resulting data manipulations in order to generate reporting at each level of the INVIZEN system. Each level of the reporting system is designed by the INVIZEN programming approach to drive the final outcome of a sustainable reporting program that qualifies the given project asset investment for the RTS Investment Protection Program. The RTS Investment Protection Program is intentionally designed to provide the tools necessary to allow the risks associated with the given Rental Multifamily property to be managed to a level wherein the stated financial results and returns become potential outcomes that are realistic, but cannot be guaranteed, as management must ultimately make the necessary decisions and take the necessary actions to allow payments to be made when and where required. In cases where management elects to not make these decisions and take the corresponding actions, INVIZEN provides all of the project financial stakeholders with notice of management’s conduct so that concrete steps can be taken to correct these actions or replace management.
The RTS outcome goal is predicated upon a series of component reporting steps that are intended to serve that outcome at each level of the transaction’s market opportunity. These steps start with the RTA, proceed to the RTAF, then to the RTU and then are complete with the election to enact the RTS opportunity.
The RTA Model
The RTA Model for Rental Multifamily Income-Producing Property Development or Acquisition Programs focuses on determining the potential value of a given site to a Rental Multifamily income-producing property development project. In the classic project feasibility analysis structure, the site value is already known by the developer/sponsor of the project. What is not known is if the resulting market opportunity economics attending the given site and primary marketing area that support the project opportunity would in fact be reasonably expected to provide the opportunity for the developer/sponsor of the project to realize their investment yield objectives that serve as the profit-motive for the developer/sponsor to move forward with the development project. With research and analysis documentation, all other matters can be (relatively speaking) determined to a large degree. In the RTA program model, the return requirement is already assumed to be present and is stated as a condition precedent up front. Accordingly, the RTA simply reverses the process and eventually creates a project budget that serves to generate an internal rate of return that is at least as great as the return requirement condition precedent. Any remaining excess in the pro forma project budget is then allocated to the purchase price of the site. This gives the seller of the site a logical basis for pricing the tract and the developer/sponsor a maximum price point level for purchasing the site, all other things being equal.
The RTA model makes heavy usage of the term, “all other things being equal”. There are certain things that cannot be known, and therefore must be assumed to be present or in an acceptable condition state to allow the ensuing project development model to work consistently with the resulting economic requirements, whether this is the case in fact or not. This is due to the fact that no two (2) development programs that are essentially similar will have the same outcome and neither will face the same development issues, requirements and/or impediments.
The RTA Analysis Process
The RTA analysis process is unique to INVIZEN. The creation of market feasibility studies is the subject of much contention, making it as much an art as a science. The reality is that none of the complex models are full-proof. If they were, we would not see business failures, dark stores and/or failed property operations. The INVIZEN model focuses on the following key issues to build a working analysis:
- Define the demographic profile of the prototypical end-user or consumer of the product(s) or service(s) in question. This process tells INVIZEN what types of data sets may be required to undertake the market analysis; then
- Define the geographical primary marketing area of the project site for each specific intended-use scenario, as these boundaries differ based upon the intended-use being tested at any one time; then
- Create a set of baseline empirical assumptions that would be critical to the production of the market analysis process; then
- Create the data sets necessary to the analysis process that would pertain to projecting the demand for future development of the particular intended-use scenario being tested in each case; then
- Create a baseline analysis of the potential future trends pertaining to the data sets to determine if the market area demonstrates underlying long-term market support for the intended-use scenario being tested at any one time; then
- Create the demand model for the purposes of forecasting the future net buildable new construction demand for each type of intended-use scenario being tested at any one time; then
- Create the resulting conclusions pertaining to the market analysis findings; then
- Create a pro forma financial analysis to test the resulting conclusions, findings and key empirical assumptions to determine if they have a reasonable basis for inclusion in the market analysis, and then utilize the assumed profit requirement of the developer/sponsor as the means of determining the final value of the subject site (in each intended-use scenario tested) to the resulting development program budget and transaction.
The RTAF Model
The RTAF Model reverses the RTA Model back to the prototypical project feasibility analysis report design because, at this stage of the process, the value of the site and/or assets (i.e.: the acquisition price of the site or the acquisition price of the site, improvements and operations for an existing property) is already known as it is either cited in a purchase agreement or is already held in fee-simple title. The RTA process allowed the developer/sponsor to choose the intended-use scenario that will be the target of the development program, so no other intended-use scenarios are run under the RTAF program model approach. That being the case, the purpose of the RTAF is to provide documentation of potential market opportunity for the resulting project, thus making the RTAF conform to the classical project feasibility study structure. This approach is used to create the outcome of the market analysis process via the testing of the market feasibility analysis key empirical assumptions and conclusions. The reasoning is simple: the analyst must determine if these assumptions and conclusions would have a reasonable expectation of creating the opportunity for the sponsor to achieve their stated financial goal requirements that are the condition precedent to moving forward with the investment opportunity represented by the proposed business transaction. Accordingly, the RTAF model is designed to solve for the expected-case internal rate of return on the sponsor’s investment of capital over an assumed 5-year holding period under the expected-case business operating scenario condition assumptions. If this process is successful, then the project opportunity is ready to move to the next stage with the creation of the RTU report model (below).
The RTU Model
Once the developer/sponsor of the subject transaction has assembled all of the necessary due diligence documentation required to substantiate the statements of materially-significant facts pertaining to the proposed transaction, the RTU program model can then be used to short-circuit the underwriting process and accomplish the following objectives:
- Create an underwriting approach that is designed to be compatible with the RTS Investment Protection Program (see below) so that the resulting business deal between the developer/sponsor acting as the issuer of the securities, and the investors (or lender, as the case may be) reflects the capital requirements necessary to safeguard the transaction for the entire holding period to the greatest extent possible from a default or impairment of the business that is materially-significant.
- Re-create the project feasibility study (using the RTAF) on an ongoing basis to help ensure the latest market information is reflected in the business plans, schedule and budget of the subject transaction, thus providing additional potential credibility to the resulting conclusions of the RTU report by providing constant updates of the RTAF as the principals may require.
- Provide a real-time solution designed to dramatically reduce the liability exposure of all parties to the transaction, by compressing the underwriting time requirements, and increasing the potential satisfaction of all parties due to the safety and security aspects of the RTU and RTS programs.
The RTU Production & Analysis Approach
The production of the RTU report is predicated upon the overall INVIZEN program philosophy of matching outcome expectations with the overall market opportunity demonstrated by the changes in sizes of end-user cohorts and their accompanying purchasing preferences. Accordingly, the RTU production approach includes the realization of the following fundamental requirements or conditions precedent in its development:
- Create the underlying RTAF report as the initial starting point in each case; then
- Undertake a comparative analysis of the market and financial representations of the sponsor/issuer regarding the transaction economics using the latest capital market expectations information available to the INVIZEN system using the INVIZEN model designed to support the RTS Investment Protection Program conditions precedents; then
- Undertake the same comparative analysis not using the RTS conditions precedent; then
- Provide a composite report that details the differentials uncovered in the process and highlight the degree of deviation in each case, and the potential underlying impact these issues may have on the potential economics. Provide the INVIZEN analysis of the resulting economics and provide an additional comparison between the INVIZEN model findings and those of the sponsor/issuer with highlights on issues of concern.
The process used by the INVIZEN model follows, more or less, the Commercial Real Estate Finance Council’s (CREFC) guidelines for underwriting that include the following (with deviations from the guidelines being appropriately noted and disclosed):
- Capacity Risk Underwriting Review. The INVIZEN model relies heavily upon the capacity risk underwriting review, as all of the remaining component elements of the underwriting review are heavily dependent upon the outcome of the capacity underwriting analysis. The capacity analysis focuses on using the RTAF market analysis findings, conclusions and key empirical assumptions as the basis for creating a pro forma financial presentation that reflects the collected market information that would be reasonably expected to represent the expected-case business operating scenario – less some discounting to reflect an additional measure of conservatism for the sake of protecting the financial interests of all of the stakeholders in the resulting transaction. The outcome reflects the best estimates of the INVIZEN model system regarding the projected potential gross effective income, operating expenses, net operating income and net cash flow the project may be reasonably expected to sustain. The resulting net operating income is projected for a full 10-year period and then discounted to present value using an annual discount rate equal to the current surveyed capitalization rate for the asset class, plus the addition of a 350 basis point spread to account for the requirement to provide an acceptable level of economic remuneration for the benefit of the at-risk capital investors in the proposed transaction. The resulting present value of the potential net operating income is then used as the basis for limiting the portion of the sources of project funds that may be attributable to debt capitalization, with the remaining balance of funds required to close on said debt being assumed to come from the at-risk capital investors (sponsor/issuer plus assumed third-party at-risk investor participants). These findings are transferred directly into all of the remaining underwriting process elements below.
- Collateral Risk Underwriting Review. The collateral risk underwriting review deviates from the CREFC model, in that, the collateral analysis includes the site valuation (as evidenced by title or contract disclosed by the sponsor/issuer) that is compared to the INVIZEN RTA model for the specific intended-use being underwritten with deviations being noted. The collateral value of the improvements is demonstrated in the attending component development program budget to demonstrate the “as-built” value modeled and forecasted by the INVIZEN model for the specific intended-use being underwritten with deviations being noted. The “stabilized value” is predicated upon the RTAF findings and the component balance sheet is created based upon issuer/sponsor disclosures being compared to peer group data wherever possible, with appropriate empirical assumptions replacing same where peer group data is not available. The reasoning is simple: the property is assumed to undertake its operations within the context of a market economy, therefore; as long as the market opportunity remains intact, the resulting collateral value would not be compromised, all other things being equal. This ties back again to the underlying INVIZEN model requirement that all business decisions be predicated upon market feasibility considerations only, so as to maximize the opportunity for the resulting business to successfully penetrate the market and sustain operations over the long-term forecast window.
- Credit Risk Underwriting Review. The CREFC guidelines call for credit reports and other subjective elements to be analyzed in the credit risk underwriting review process. The INVIZEN model totally discounts these considerations, as these measures have been proven by the historical record and the universal application of Rational Choice Theory to be an unreliable means for decision-making purposes. In lieu of these elements, the INVIZEN model functions on the condition precedent that as long as sufficient revenues are generated by the subject business, then absent management abuse/fraud/negligence, all credit requirements will be routinely satisfied. This is further amplified in light of the operating requirements of the RTS system (see below) that serves as the basis for helping to eliminate the management negligence issues that may lead to increased default risk (see below) that may result in an administrative foreclosure and impairment of the assets of the business. Accordingly, the INVIZEN model empirically assumes that the market opportunity for revenue capture by the subject business will be continually reassessed each calendar month for the entirety of the investment holding period to help ensure the revenue-generating opportunity of the business remains sustainable for the purposes of satisfying all creditors, and is further amplified by the requirements of the INVIZEN model regarding the maintenance of liquidity standards necessary to provide sustainable operations under the expected-case business operating scenario on a 24-month forward-looking basis for the entire term of the holding period of the investment. This requirement is “baked in” the collateral underwriting review process in terms of building the pro forma balance sheet and resulting capital contributions requirements necessary to sustain the credit underwriting considerations created by the INVIZEN underwriting approach, whether this is the case in fact or not.
- Default Risk Underwriting Review. The CREFC guidelines call for a full review of all related transaction documents to determine whether or not adequate protections are provided by the issuer regarding the securities at issue with respect to technical default risk. This requires complex reviews by legal experts that are outside the purview of the INVIZEN model. As is the case in the other underwriting elements (see above), the INVIZEN model empirically assumes the sponsor/issuer and other financial stakeholders will seek to have the transaction qualified for inclusion within the RTS Investment Protection Program plan once the transaction closes escrow. Accordingly, the documentation issue may be rendered, more or less, moot by the fact that the key covenants in the securities issue are being monitored on an ongoing basis by the INVIZEN RTS program system to help ensure that compliance is maximized for the benefit of all of the financial stakeholders. In addition, the underwriting review regarding maturity default risk is dealt with via the maintenance of term default risk requirements that are constantly surveyed by the RTS program model to prevent term default risk from accruing to a point wherein maturity default risk becomes a materially-significant issue at the end of the term of the securities holding period.
The results are then consolidated and reported out for the benefit of the parties to consider in light of both standard underwriting considerations that, more or less, mirror current capital market investment preferences, as well as the INVIZEN model that is designed to provide enhanced protections for the benefit of all parties with the option for election being left entirely up to the parties at interest.
The RTS Model
The RTS Investment Protection Program model focuses on managing term default risk and technical default risk. The reasoning is that as long as term default risk remains, more or less, manageable, then maturity default risk would not be expected to become a materially-significant issue at any point in time. Accordingly, the RTS reporting system undertakes a complete feasibility analysis of the market opportunity using the RTAF reporting system and then undertakes a new underwriting review via the RTU reporting system on a calendar month basis. This review is intended to be a forward-looking analysis of market conditions limited to the 24-month forward-looking window on a rolling basis and coincides with the INVIZEN model requirements of providing sufficient liquidity reserves to sustain the property over that period under the expected-case business operating scenario. In cases where the market revenue capture opportunity is forecasted to be degraded to a point wherein the at-risk capital investors may experience a deviation in terms of their receipt of distributable income, the RTS system provides a caution notice to all financial stakeholders in the form of an email with the attached RTS report that highlights the issue at hand and potential remediation plan measures that may be adopted to mitigate these issues. In cases wherein the market revenue capture opportunity is forecast to be degraded to a point wherein the income-generating assets of the business are expected to be impaired within the 24-month forward-looking forecast period, the RTS system provides a warning to all of the financial participants informing them that disposition of the assets and/or exchanging of the assets is now a material issue that should be immediately undertaken.
In addition, the RTS system also monitors technical default risk issues pertaining to all operations of the resulting business assets and provides flags wherever failures to act in accordance with the securities covenants are found to exist by virtue of the INVIZEN system reporting requirements provided for the benefit of all property management personnel on an ongoing basis to provide a high level of confidence to the financial stakeholders at interest regarding the elimination of these risks to the greatest extent possible.
For more information, please feel free to contact INVIZEN at 833-INVIZEN.