Finding Balance in Real Estate: S&U

These 2 things must be balanced in your underwriting model – The Sources and Uses

An important component of any acquisition, development, or value-add model is the Sources and Uses of Cash section. Also referred to as sources and uses of capital.

The sources and uses (S&U) is the section of a real estate model where the uses of capital (e.g. project costs, acquisition costs, etc.) and the sources of capital (e.g. debt, equity, etc.) are calculated.

This section will generally include a S&U of Capital schedule that summarizes what those sources and uses of capital are. It will also include a forecast of the cash flow of sources and uses in each period.

The total sources and uses must be equal to each other (all the money has to go somewhere).

I remember the first time I heard the words ‘sources and uses of cash’ and it sounded like a different language to me.

Good thing you’re subscribed to this newsletter! I’ll show you how easy it is to understand.

Sources of Cash

The “Sources” side details how exactly the deal is going to be funded, including the required amount of debt and equity financing.

Real estate investments have two primary sources of funds: debt and equity. Most real estate transactions include some form of senior debt, but there could also be mezzanine loans, supplemental loans, etc.

Equity is the cash contributed by the general partners, limited partners, or other sources. There may be multiple equity classes, such as preferred and common.

In simple terms, the sources section is where you will include all your sources of debt and equity.

Uses of Cash

The “Uses” side calculates the total amount of capital required to make the acquisition (or development) possible.

This is where you will enter the amounts that are expected to be spent to acquire, renovate, or develop the project. This can include anything and everything required to get the deal done. The uses can easily be broken down into the purchase price, and hard & soft costs.

Hard costs are items that directly add to property improvement, such as materials and labor. In addition, hard costs can include contingencies for direct cost overruns.

Soft costs arise from a project but don’t tangibly improve the property’s value. These can include the acquisition fee, closing costs, legal fees, loan fees, etc.

In summary, the sources and uses show how the different layers of financing are being used to fund the acquisition/development of a transaction (sources), and what those funds will be used for (uses).

The total sources and uses must be equal to each other!