Real Estate Calculation Models

Competition in today's real estate markets is more ferocious than ever, which is why investors negotiating multimillion investment deals require evidence that their investment is solid. To reach optimal investment returns, a thorough understanding of tax effects is vital. The complexity of real estate transactions, however, makes the combined impact of relevant tax factors on future returns difficult to assess and impossible to guarantee.

The PwC Real Estate Calculation Models (RECMs) is a tool to optimise investment performance by providing detailed insight into after-tax returns of real estate investments. RECMs are tailor-made financial models that simulate investment structures, including tax factors, in order to project cash flows and calculate financial metrics, such as after-tax returns and NPV. Using these models, investors can see, at a glance, when and where taxes leak from the investment structure.

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The inner workings of a RECM The RECM transforms commercial data, tax data and structuring data into various financial metrics, using tailor-made calculations that incorporate all relevant tax, legal and accounting aspects of real estate investments. The commercial data are property-related and provided by the client, while tax and structuring data are typically supplied by PwC. The model's output data include projected financial statements and KPIs, such as IRR and NPV.

RECMs are not only aligned with investors' goals (e.g., they maximise IRR rather than simply minimise the nominal tax burden), but they also provide clear answers to questions, such as:

• Should we prefer an asset deal or a share deal?
• How much discount for a deferred tax should we account for?
• What is the optimal (internal) financing structure?
• How can we repatriate cash fast and efficiently?

Unlike the traditional approach to giving tax advice, RECMs factor in the influence of tax factors and future cash flows, thus making it a reliable tool for assessing potential investments.