What job does the acquisition financial model actually perform?
I've seen many smaller 1-15 people, &lt;$1B AUM make small use financial models when looking to purchase an asset. Instead, relying mostly on the experience of the senior leadership to ballpark a figure, then negotiate from there. To be clear I'm not talking about development.

Is there a real use for financial models during the acquisition phase of already built properties? Do they need to be created just as a means to appease the board, with as little effort as possible? Are they only to give a ballpark figure of IRR? To show investors a forecast?

What do you think the core "job" or "jobs" of the acquisition model is at CRE firms?
[{"id": "hby43bm", "text": "I work for a smaller PE firm and for us its a critical part of the evaluation process. The partners at my firm each have enough experience to make an educated guess about how the investment could and should turn out, but even then we would never move forward without a thorough model. We like to run different scenarios (base, downside, upside cases) to make sure we understand how things could play out and, more importantly, to be prepared for any potential pitfalls. The investors, of course, also like to look through projections during due diligence. Once we actually own a property, it's a good accountability check.", "replies": [], "depth": 1}, {"id": "hby4vy3", "text": "Fancy models primary purpose are to make everyone else feel good, like there was some actual due diligence done, and to cover the principals asses with a paper trail when shit goes sideways. Side benefit - provide analysts jobs (also scapegoats).\n\nGIGO. You can make a model say whatever you want. Change a few assumptions and everything else changes. Which is why experienced folk ignore complex models and look to base principals.", "replies": [{"id": "hbyfmqs", "text": "This is where I land, more or less. At a certain point, with enough familiarity and experience with properties of a given size, location, and asset class, I can spitball the range of outcomes a thorough model would spit out. And thus of course the valuation I'd assign to it.\n\nI mean, I can and have built extremely thorough models with all sorts of stress testing built into them so I can easily play with assumptions, etc. But realistically speaking the output is extremely similar to back of the envelope math.\n\nDisclaimer: this is mostly MF in places I'm familiar with.", "replies": [{"id": "hbys1a0", "text": "But do you still make use of a model? Do you use it as a sense check at all?", "replies": [{"id": "hbz26vr", "text": "Not any more, no.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hbyetvd", "text": "A model doesn't need to be fancy, but it's a good plausibility check. The key with models is that you are inputting a lot of variables even for a very simple property.... what will taxes do in future years, what will maintenance costs be, what about loan costs, leasing costs, etc. Even a tiny change in each of these inputs leads to a wildly different number at the end of the calculations, so it's good practice to either run the model again with some changes, what is worst case scenario like losing a main tenant? What would it take to break even, etc.\n\nAnyone who acts like a model is gold and will 100% predict the future for an asset hasn't been in the game very long, but it is another tool in the toolbox in addition to sales and leasing comps, market analysis, price per sf, etc.", "replies": [], "depth": 1}, {"id": "hbyodxr", "text": "The acquisition model is more about the business plan for the deal (hold timing, lease up, capital spending amounts/timing, etc) and how all of the variables impact your projected returns (IRR, NPV, multiple, etc) so that you can evaluate a deal and see how different factors impact those returns. \n\nTwo buyers likely have very different plans for a property, and different economic outlooks. The model allows them to determine how their investment will perform based on those factors, so that they can compare it to other potential deals.", "replies": [{"id": "hc1thkj", "text": "What do you think the best presentation for assessing the asset's business plan is? Do you remember the way ValCap would present Cashflows? \n\nFor example Tenant Audit cashflows, or just simple graphs showing lease expiry &amp; capex by year/period?", "replies": [{"id": "hc2c17j", "text": "A 10 year pro forma (or less if the proposed investment has a shorter life cycle), accompanied with assumptions (LTV, interest rates, cap rate, market rent, renewal %, downtime assumptions, sources &amp; uses including any capex on top of acquisition price). These two with each other you can generally tell how conservative/aggressive someone is being. Broker offering materials generally have good way of presenting this information without information overload.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hbzmy1v", "text": "As an analyst I would say that it\u2019s used to compare investments apples to apples. The time value of money comes into play in a lot of these. Sometimes a deal looks good because of an expected \u201cpop\u201d in value, either market or capital expenditure driven, at a later date. But if that pop doesn\u2019t happen till say year 10, it may not end up as good comparatively to a similar investment that has a smaller pop 2-3 years from now. \n\nA model is only as good as it\u2019s assumptions so yes it can be abused to show anything you want to whatever audience you want. But even the most experienced leaders may have an idea of what a particular scenario will do to an investment but until you actually put it into a model you may not be able to accurately see how much it impacts an investment.\n\nFurther, if a company is not using entirely its own equity chances are they are in a JV or a fund where the cash flow splits are driven entirely off metrics like IRR or equity multiple (a waterfall). These set hurdles so the better investment does, the more profits are split by the sponsor who is doing most or all of the work in an investment. Senior leaders absolutely cannot ballpark this on a napkin and thus it is absolutely important to model a deal realistically before negotiating any partnership terms as missing the mark slightly on a deal could result in millions of dollars being costed.", "replies": [{"id": "hc08h6d", "text": "Agree with any complex partnership. The model tells you exactly what scenarios need to play out before you either screw someone or you get screwed.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hc1x31d", "text": "I wouldn\u2019t say most acquisition models are fancy, it\u2019s usually just a basic cash flow and simple waterfall.\n\nThey\u2019re used for a few reasons - for the company itself, to vet investments relative to one another and create a paper trail showing the decision was made based on reasonable assumptions.\n\nLenders require at least a summary proforma for larger deals.\n\nMost importantly though, it\u2019s used for fund raising. Yes, a small fund can raise from friends and family and a handful of HNW contacts, but if you want to grow you need to talk the talk and that means having sophisticated financial analysis.", "replies": [], "depth": 1}, {"id": "hcb7xl6", "text": "IMO the point of any acquisition model is to make the assumptions used to evaluate the deal (internal, investors, lenders) reasonably transparent. In other words, you might not agree with a 3% annual expense growth but you need to be able to see that it was used in the future cashflow assumption. It's complexity depends on the audience and sometimes deal size. A decent model lets anyone with moderate experience quickly understand how the deal is priced and what an exit could look like with cashflow along the way.", "replies": [], "depth": 1}]