Real Estate Case Study

March 17, 2012
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City Realtors, a start-up, approached a PE Fund to get financing of its upcoming Luxury Apartment project. The start-up has provided the required financial information to value its pre- and post-money worth. In order to initiate the negotiation both the party will do their independent valuation.

Use Worksheet: APV

City Realtors, being a start-up firm has hired Mr. Pankaj Baheti, a business school graduate, to work on the financing from the PE firm. Pankaj is interested to understand the Pre-money and Post-Money valuation numbers that he has been hearing since his B-school life. During his research, he learned that these numbers depends on different perspectives and therefore would be different depending on the side he’s viewing this funding.

You need to help Pankaj to calculate the Pre-Money and Post Money numbers from the City Realtor’s and PE Fund’s perspective.

Use Worksheet Round 1, 2, 3

After understanding different perspectives, Pankaj has also learned that start-ups often raise capital in multiple rounds of financing, so that they can take advantage of higher pre-money valuations at each subsequent round. Valuations may rise over subsequent rounds as companies demonstrate better performance, grow their customer bases, or otherwise increase their probabilities of success. Here each round is priced independently and involves a new term sheet specifying the characteristics of the investment.

After getting the financial numbers for the project, Pankaj realized that his Project can’t proceed without funding in the first year but the project can sustain itself from the next year onwards when it will start a stable Rental Income. Now help Pankaj to find the number of shares issued and ownership percent for each investor.

After working on the Round 1 sheet, Pankaj understood that his project is looking for multiple round of financing. Also, he learned that the negotiated term sheet offers the PE investors an opportunity to purchase convertible preferred shares at a par value/share. Here’s the information he extracted from the term sheet -

Real Estate Case Study

The proposed transaction would result in ownership of the company by the PE immediately after each round. Also we assume that new as well as old investor participates in each subsequent round of financing.

Here’s the excerpt from the term sheet and other legal documents:

Entrepreneurs get PE money only when they need it, or when they achieve certain goals or milestones set by the PE in the term sheet. In this case the start-up needs investment from the PE equal to its cash-outflow required in each period.

That is, in round 1 FY “0” has a negative cash flow of 32,000 – so the firm will need only 32,000 funding from the PE and so on will be the case for other rounds. This negative cash flow doesn’t mean that the start-up is not performing well or facing financial distress, actually this negative cash flow is the result of heavy investment (capital expenditure) required in the initial few years.

Real Estate Case Study

Templates to download

I have created a template for you, where the subheadings are given and you have to use the functions to get the right values for you! You can download the same from here (Note: Please read the Adjusted Present Value write-up before attempting the case).

I also recommend that you try to create this structure on your own (so that you get a hang of what information is to be recorded).

Also you can download this filled template and check, if the information you recorded, matches mine or not!


About the Author

Pankaj Baheti is a CFA Level III Candidate currently working with Pristine. Prior to Pristine, he was working with Achi Group. He has done his Post Graduate Diploma in Management and loves trekking in the hills of Arunachal.


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