Financial modeling provides a mathematical perspective of current or prospective events. It often considers myriad options and permutations. Financial modeling is essential for making decisions  to acquire, keep or sell investment real estate. Steps in financial modeling include gathering data, analysis and constructing a mathematical model to evaluate revenue, expenses and capital events (capital investments, loan proceeds, refinancing, and proceeds from sale). The central aim is to provide a framework evaluating options and risks.

Decision Making Tool

 Financial modeling is also utilized for decisions regarding material capital expenditures and leases. Management often develops an intuitive sense of what is likely to occur and the appropriate financial decision. The research and analysis involved in performing a financial analysis provides a more factual basis for making decisions. Financial modeling is used regularly by operating businesses to make a variety of decisions. Properties with multiple complex leases particularly benefit from the use of complex software such as Argus to evaluate the effect of leases terminating and being renewed overtime. Financial modeling is also used to evaluate complex iterative scenarios with multiple options.

Study Uncertainty

A financial analysis engagement sometimes involves modeling a specific proposed action or event. However, most engagements involve considering the best alternative given an uncertain fact situation. Research and analysis for the subject property or business, industry and submarket is the first step in preparing a financial model. Research related to performing a financial analysis can be a time-consuming process. Simply estimating the likely market rents and market occupancy for an office building in downtown Atlanta is a relatively straightforward task.

Subjective Analysis

Estimating the demand for single-family housing 10 years hence in Atlanta is a more difficult and complex analysis. The research would involve many factors such as national growth, local growth, estimated interest rates, and the capture rate for houses as a percentage of total new households in the metropolitan area. The financial analyst reviews three to 10 years of historical data including both revenue and expenses, with as much detail as possible. (In many cases, 30 to 100 line items of expenses are analyzed.) "Spreading the data" provides insights into typical levels of revenue and expenses and anomalous data points. The analysts should obtain further data regarding material anomalous data points. Are they a true anomaly or are they a periodic event? Industry data such as IREM and BOMA for real estate provides additional context for evaluating whether historical expenses are typical, low or excessive. There are similar industry data reports for a variety of businesses, organized by SIC code.

Start with Research

Research and analysis regarding the current status and health of the market and probable future prospects for the market are the next step in preparing a financial model. Estimates of future revenue are worthless if not based upon credible research and analysis regarding current rental rates, proposed construction and probable construction.

Real Estate

For real estate, data such as occupancy rates, rental rate trends, economic vacancy, properties under construction in the metropolitan area, properties under construction in the submarket, proposed construction in the metropolitan area, proposed construction in the submarket, and likely trends for operating expenses are considered in developing a financial model. Obtaining accurate data regarding proposed construction is difficult. While there is relatively accurate data available regarding properties currently being built, it is difficult to obtain accurate information on all the proposed projects. An additional challenge is determining which of the proposed projects will be built and when they will be completed. Similar financial model research is performed for operating businesses to gain insights into current and future trends.

Develop a Model

The financial model considers both historical data and research regarding the current health and outlook for the market. The conclusion is summarized in a presentation of probable future cash flows. In some financial models, multiple scenarios are prepared to address the possible impact of uncertain material influences. Analysis of the cash flows often includes calculations of net present value or internal rates of return (IRR).

O'Connor & Associates has prepared financial models of income and expenses and projections of future income and expenses for over 10,000 commercial properties. O'Connor and Associates is the largest independent appraisal firm in the southwestern United States and has over 40 full-time staff members engaged full-time in valuation and market study assignments. Their expertise includes financial models, valuing businesses, commercial and single-family real estate, business personal property, purchase price allocation for businesses, valuation for property tax appeals, partial interest valuation, estate tax valuation, expert witness testimony, and valuation for condemnation. They have performed over 20,000 appraisals since 1988.

To obtain a quote or further information regarding financial model, contact To obtain a quote or further information regarding financial model, contact Larry Brewster at 713-686-9955 or fill out our online form.