The Real Estate Analysis Land Investment Simulation Model (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.