Sources and Uses: Reading the Deal's Own Budget
Two columns that have to balance. What they show is what proportion of your money buys the building and what proportion pays for the transaction.
Almost everything in an offering package is an assertion about the future. The sources and uses table is not. It is arithmetic about the present: what money is coming in at closing, what it is being spent on, and the two sides balance.
That makes it the most reliable page in the document.
What it contains¶
Sources — the capital coming in: the senior loan, any subordinate debt or preferred equity, the equity raise, any seller financing, any assumed debt.
Uses — where it goes: the purchase price, closing costs, financing costs including any rate cap purchase, the capital improvement budget, reserves, organizational and offering costs, and the fees paid at closing.
The four calculations worth doing¶
Neither side alone answers anything. Four ratios drawn from both do.
What proportion of the equity buys the building? The equity raise is $3,500,000 including the sponsor. Of the uses, $8,600,000 is the property and the loan covers $6,500,000 of it, so $2,100,000 of equity is buying the building and the remaining $1,400,000 is funding the capital budget, costs, reserves and fees. That distribution is the point of the exercise, and it is not stated anywhere in the offering.
What proportion pays for the transaction rather than for the asset? Closing costs, fees and organizational costs together are $450,000, or 12.9% of the equity raised. A figure that is not high or low in the abstract, and is worth knowing.
How thin are the reserves? $250,000 against a $700,000 capital budget and a $6,500,000 loan. Whether that is adequate depends on the debt structure and on how much can go wrong, and it is the number that determines whether an ordinary setback becomes a capital call.
Is there a rate cap in the budget, and for how long? If the debt is floating, the cost of the cap sits in financing costs and its term is in the debt section. A cap purchased for two years on a five-year business plan means a replacement has to be funded from somewhere, and that somewhere is usually not in this table. See floating-rate debt and rate caps.
When the table changes between the deck and the closing¶
The sources and uses shown in marketing material is a projection of the closing. The one that matters is the final version, and deals move between the two.
A purchase price can be renegotiated after diligence. A loan can be sized differently from what the term sheet indicated. An equity raise can come up short, in which case something on the uses side has to shrink — usually the reserve, occasionally the capital budget, rarely the fees.
Two requests are reasonable and easy for a sponsor to satisfy. Before closing: the current sources and uses, dated. After closing: the final version, showing what actually happened.
The comparison between them is informative in a way that neither is alone. A deal that closed with a smaller reserve than it advertised has less tolerance for the ordinary than the offering described, and nobody will point that out unaided.
What the table does not show¶
Two costs that are real and sit outside it.
Ongoing fees. The asset management fee, the property management fee and anything else recurring are paid from operations over the hold, not from closing proceeds. They do not appear here, and they are frequently the largest part of the fee stack by the end.
The disposition fee. Paid at sale, from sale proceeds, years later. Also absent.
So the sources and uses shows the transaction costs and understates total sponsor compensation, sometimes substantially. It is the best single page in the package and it is a snapshot of one day.
Cross-checking against the rest of the document¶
The sources and uses table is where several other claims can be verified.
The acquisition fee stated here should reconcile with the percentage and base in the fee schedule. See acquisition fees. Where they do not reconcile, ask.
The sponsor co-investment shown here is the amount actually contributed at closing — the figure that matters for skin in the game. Compare it against the acquisition fee on the uses side and note the net position.
The loan amount should match the debt terms described elsewhere, and the ratio of loan to purchase price should match any loan-to-value figure quoted.
The capital budget should equal the amount the business plan says will be spent, and the per-unit figure implied should match what the plan claims.
Four cross-checks, five minutes, and they occasionally surface a discrepancy that a sponsor then has to explain. That explanation, whatever it is, is worth more than the table itself.
Primary sources
Every factual claim above is traceable to a filing, a rule or an agency publication. These are the ones this article relies on.
Questions readers ask
What is a sources and uses table?
A two-sided statement showing where the capital for a transaction comes from and what it is spent on at closing. Sources lists the debt and equity; uses lists the purchase price, closing costs, the capital budget, reserves and fees.
Why is it the most useful page in an offering?
Because it is arithmetic rather than assumption. Every figure is a known amount at closing, the two sides must balance, and nothing in it depends on a projection about the future.
What proportion of the raise should buy the property?
There is no benchmark this site will invent. What matters is that you calculate the figure for the deal in front of you and know what the remainder is paying for.
What are reserves and why do they matter?
Cash set aside at closing for capital work, operating shortfalls, interest, or replacing an interest rate cap. Thin reserves are the most common reason a deal that hits a difficulty needs a capital call.
Where do I find it?
In the memorandum, usually near the offering summary, and often as a single page. Where it is absent, ask for it; there is no reason for an offering not to have one.
Read next
- DocumentsHow to Read a Private Placement MemorandumThe memorandum is written to protect the issuer by disclosing what could go wrong, which makes it the most informative document in the package.
- DocumentsThe Risk Factors Section: Boilerplate vs Deal-SpecificMost of the list appears in every offering and carries no information. The entries written for this deal are where the sponsor's real concerns show.
- DocumentsThe Operating Agreement: Control, Voting and Removal RightsThe binding document. It holds the real waterfall, the short list of things you vote on, and the conditions under which a sponsor can be replaced.