GG+A analysts have always utilized the latest computer technology available, and pioneered the development of economic and real estate computer models. In 1970, the firm leased mainframe computer time and developed programs in Fortran. As they became available, minicomputers were adopted. Very quickly thereafter, GG+A acquired a micro-computer and began to build an inventory of proprietary programs to aid in market, economic, demographic and real estate financial analysis. These programs include REALISM™, NET™, GG+A Capital Facilities Financing Model, and SPACEWALK™. Descriptions of these programs are provided below.
The Real Estate Analysis Land Investment Simulation Model (REALISM™)
REALISM™, a proprietary GG+A program, is probably the most sophisticated and flexible real estate cash flow simulation model in use today. Able to accept separate financial parameters for up to 40 components of a single or mixed-use development project, REALISM™ produces year-by-year projections of rental income, sales profits, interest payments, taxes, depreciation and the net cash flow. The model also produces estimates of the total take-out that would result from the sale of the project in every year of operation, based on the estimated market value of the project, book value, recaptured excess depreciation, capital gains tax and the principal due on all mortgages.
For each year of the project’s operation, REALISM™ calculates non-time-discounted measures of return including the ratio of operating income to total investment and the cash-on-cash (or net cash flow to equity) ratio. As time-related measures of return, REALISM™ calculates the internal rate of return (IRR), the net present value of the cumulative cash flow and the value of the reinvested return. The debt coverage ratio is calculated on a yearly basis as well. The model is designed to facilitate multiple comparisons of alternative development schemes.
REALISM™ is particularly useful for calculating the supportable residual land value given a target internal rate of return for alternative development projects. Specifically, the model may be used to estimate the net revenue surplus attributable to a development use given a target internal rate of return for the project. If the net revenue surplus forecasts are positive, then it is clear that the proposed development can pay for the associated development costs. Furthermore, a comparison of net revenue surplus with the capital and infrastructure costs associated with the project sheds light on the issue of whether the proposed development can support these capital costs either with payments by the developer or with the use of an assessment or redevelopment district. If the capital costs exceed the net revenue surplus, then appropriate phasing of the project may be called for so that the infrastructure requirements can be paid for.
NET™ – Testing the Contribution to Profit of a Single Land Use Component
The NET™ program assists GG+A analysts in formulating quick initial assessments of the contribution of each type of land use to the profitability of a given real estate venture. The strength of the NET™ program may be viewed in its ability to identify the impacts of various development specifications and/or requirements as well as its ability to provide a basis for which developers can negotiate construction and financing terms.
Capital Facilities Model
The GG+A Capital Facilities model has proven to be a very useful tool to estimate the most appropriate way to finance the capital improvement costs required for new development. Capital projects are often very costly, and the greatest hurdle encountered is identifying strategies to finance those improvements required at the beginning of the development cycle. The Capital Facilities model considers three primary financing sources (bonds, fees and developer loans/reimbursement agreements) and identifies which financing mechanisms are most appropriate for a particular project and how the financing should be structured. Specifically, the model considers proposed development, likely absorption rates, estimated market and assessed values and sustainable fees. Annual cashflow projections are then made to assess supportable levels of alternative capital financing tools. The model is particularly useful for conducting sensitivity analyses to identify potential cash shortfalls under alternative capital financing scenarios and how those shortfalls can be mitigated.
SPACEWALK™ is a Gruen Gruen + Associates (GG+A) proprietary three-dimensional spreadsheet-based computer model used to estimate the demand for nonresidential development in a region based on changes in employment by sector. Projections of employment change are converted into projections of demand for office, manufacturing, warehouse and retail space based on the space use characteristics of occupational groups within economic sectors. The final step in the determination of space demand from employment projections is the multiplication of the number of workers expected to occupy space by the number of square feet of space needed to accommodate each worker.
Continued Research and Custom Modeling
The list of computer models, programs and systematic processes presented above is neither complete, not static. As it has since 1970, the arsenal of computer tools we use will continue to evolve to meet our clients’ needs for accurate, timely and cost-effective information.