When considering a real estate acquisition there are complex cash flow streams to model that include a number of assumptions (vacancy, inflation, operating expenses, lease renewals, and more). ARGUS provides a way to model these cash flows and conduct sensitivity analyses without tearing your hair out. Here’s a quick overview of how it works:

ARGUS DCF

A basic version of ARGUS, such as the discounted cash flow (DCF) version can be purchased through www.argussoftware.com. The full version of the software may cost up to a few thousand dollars. Educational licenses can be obtained for much less.

The software itself has a very intuitive interface that allows you to create a new file on a project by project basis. The basic idea of ARGUS is that it walks you through the creation of a cash flow model that you can use to value a commercial real estate property.

10-Year Cash Flow Modeling

The most important, and useful, aspect of ARGUS is that it allows you to enter in each lease for the property in question. For large properties such as a retail center with 50 or more leases, this is invaluable. You enter in all the lease details for each lease and make assumptions that tell ARGUS what to do upon lease expiration.

Once you enter in your leases, operating expenses, and market assumptions (including assumed inflation rates etc), ARGUS will produce your 10-year cash flow. If you wish to produce a shorter or longer cash flow you can adjust the settings to do so. A 10-year cash flow is industry standard since most commercial mortgages have a 10-year term and 30-year amortization.

Important Assumptions

Once you see the initial cash flow you may want to tweak some of your assumptions in order to make the cash flow more aggressive or more conservative. Here are a few examples of assumptions you want to monitor carefully:

• Renewal Rate – you will have to make an assumption about how likely it is that a current tenant will renew his lease upon expiration. This assumption is critical because a space roll-over will cost you money in tenant improvements and broker fees.

• Down Time – ARGUS asks you to assume how much down time a space will go through upon lease expiration. Be sure to add plenty of buffers here if you are experiencing a slow market.

• Brokerage Expense – ARGUS will let you specify broker fees for both new tenants and renewals. Be sure your assumptions match the industry standard in your market.

• Tenant Improvements – Be sure to put in a realistic estimate for any expenses you will have for tenant improvements in the 10-year term.

Sensitivity and Financing

Once you are secure with your base assumptions, ARGUS will let you do a sensitivity analysis around key assumptions especially financing assumptions. The financing tab on the software allows you to explore a variety of purchase prices that will give you different returns on a cash-on-cash, cash-on-cost, levered, and un-levered basis. Be sure to explore the sensitivity options using the best information you have from your financing partner in order to make a realistic projection for your project.

Broker Standard

ARGUS is industry standard because it can be easily produced, manipulated, and shared by brokers. Often times the ARGUS file is e-mailed around with the marketing package for a building. Many real estate investors will create their own template in Excel with unique assumptions. After you have a completed ARGUS file you can copy and paste it into your own proprietary Excel spreadsheet to make final calculations that the other party to your transaction will not have access to.