S&U: Sources and Uses in Commercial Real Estate
A S&U, or sources and uses statement, is a document that shows where the funding for a commercial real estate project is coming from-- and how that capital is used. For S&U statements, the combined sources of funds needs to exactly match the combined uses of funds.
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What is an S&U in Commercial Real Estate?
An S&U, or sources and uses statement, is a document that shows where the funding for a commercial real estate project comes from and how that capital is used. For S&U statements, the combined sources of funds must exactly match the combined uses of funds. On a typical S&U statement, sources of funds might include funding from loans, equity from investors, and net operating income (such as rental income) from the project. In contrast, uses of funds usually includes the purchase price, construction and renovation costs, acquisition costs, and the project's annual debt service.
For example, in the S&U statement above, sources of income include a new loan, and owner equity. The uses include purchase of property, escrows, and loan costs.
If, after creating an S&U statement, the use of funds is higher than the sources of funds, a new category is added titled "additional equity required." However, if the sources of funds is larger than the uses of funds, a category called "cash flow distribution" is added.
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Related Questions
What is the definition of Sources and Uses in commercial real estate?
In commercial real estate, the sources-uses form essentially lays out all the sources of funds (i.e., owner equity and first mortgage loan), which generally equal the purchase price, the as-is value, or the total cost (depending on the type of project being analyzed). The use of funds refers to where the money is going (purchase price, rehab costs, closing costs, escrows, construction costs, loan fees, etc.).
What are the most common sources of financing for commercial real estate?
The most common sources of financing for commercial real estate are banks, private debt funds, and commercial mortgage-backed securities (CMBS). Banks typically offer the most competitive rates and terms, but private debt funds can provide financing for scenarios that banks may shy away from, such as lease-up financing for multifamily properties or a loan to rehabilitate an office asset. CMBS are a type of security backed by a pool of commercial mortgages, and they can provide a more liquid form of financing for commercial real estate.
For more information on commercial real estate loans, please visit this page.
What are the most common uses of financing for commercial real estate?
The most common uses of financing for commercial real estate are commercial real estate loans. These loans are typically used to purchase, refinance, or renovate commercial properties. Commercial real estate loans typically require a larger down payment and a shorter repayment schedule than residential loans. Additionally, they may require additional collateral or a personal guarantee from the borrower. Some of the most common types of commercial real estate loans include:
- Bridge Loans - short-term loans used to purchase a property quickly, often before long-term financing is secured.
- Construction Loans - loans used to finance the construction of a commercial property.
- Permanent Loans - long-term loans used to purchase or refinance a commercial property.
- Mezzanine Loans - loans used to finance the purchase of a commercial property when the borrower does not have enough equity to qualify for a traditional loan.
What are the advantages of using Sources and Uses in commercial real estate?
The main advantage of using Sources and Uses in commercial real estate is that it provides a comprehensive overview of the sources of funds and the uses of those funds. This helps lenders to understand the financial structure of the loan and to assess the risk associated with the loan. Sources and Uses also helps to ensure that all parties involved in the transaction are aware of the financial commitments being made and that all parties are in agreement with the terms of the loan. Additionally, Sources and Uses can help to identify potential areas of risk and to ensure that all parties are aware of the potential risks associated with the loan.
Sources: Commercial Real Estate Forms and Templates, 2021 Apartment Finance Documents, Forms, and Templates
What are the risks associated with Sources and Uses in commercial real estate?
The risks associated with Sources and Uses in commercial real estate include tenant default, longer lease terms, and slower leasing velocity. Tenant default can occur when a tenant fails to make payments on their lease, resulting in a loss of income for the property owner. Longer lease terms can also be a risk, as it can take longer to fill a vacant building than a residential property. Finally, leasing velocity is much slower than in multifamily or single-family residential real estate, which can also be a risk.
For more information, please refer to the Commercial Real Estate Forms and Templates and Commercial vs. Residential Real Estate: A Comprehensive Guide.
How can Sources and Uses be used to maximize returns in commercial real estate?
Sources and Uses can be used to maximize returns in commercial real estate by examining the potential uses for a property that are both legal, physically possible, and financially feasible. An appraiser will then rank them based on risk adjusted returns. In many cases, the options with the highest potential for returns will ultimately be too risky for investors, so appraisers often apply a discount rate based on risk to adjust a property’s IRR. For more information, please refer to Highest and Best Use in Commercial Real Estate.