Guaranteed Returns: A Guarantee of What Exactly?
Five years at 10% per annum seem straightforward and attractive until it turns out that the payments depend on the very same company that still has to complete the property.
That is why we do not try to answer “yes” or “no” straight away. First, we distinguish between what has already been confirmed, what is merely projected, and what depends entirely on a third party.
What We Check First
First, we identify the legal entity that actually provides the guarantee.
For the investor, this changes the way the question is framed. Instead of a subjective “like it or not,” there is a specific parameter that can be checked before entering into the deal.
It is important to understand:
- who exactly guarantees the payments;
- which assets and cash flows back the obligations;
- whether the guarantee is set out in the contract;
- what will happen if construction is delayed or the company fails to meet its obligations.
Where the Presentation Often Oversimplifies Reality
We separately check the source of the guaranteed payments.
This figure needs to be taken out of the presentation and placed on a separate line in the financial model. If it is not supported by a contract, financial data, or clear economic logic, it cannot automatically remain in the base case.
It is also important to carefully read the exceptions, time limits, guarantee termination terms, and possible grounds for refusing payments.
These details are often where the difference between expected and actual results arises.
How the Guarantee Affects the Financial Model
The word “guaranteed” only makes sense once three questions have been answered:
- who provides the guarantee;
- what funds will be used to make the payments;
- what will happen after the guarantee period ends.
That is why we analyze not just a single figure, but the entire chain of cause and effect.
We separately check whether the cost of the guarantee is built into an inflated entry price. To do this, we make the relevant parameter in the model less favorable and observe how the cash flow, payback period, and property liquidity change.
If the entire investment rests on one ideal assumption, that is a risk in itself.
What Happens After the Guarantee Ends
We always model the sixth year, when the protection promoted in the marketing has already ended.
At the purchase stage, this receives less attention than the advertised returns. However, at exit, actual operating performance may determine how long the sale takes and what discount the next buyer will demand.
It is important to understand what returns the property can generate without the guarantee program and whether it will be competitive on the secondary market.
Conclusion
There is no universal answer on this subject. There is a specific deal, specific documentation, a financial model, and the investor’s time horizon.
Guaranteed returns only make sense when it is possible to explain in plain language who guarantees them, what sources will fund the payments, and what will happen after the guarantee period ends.
If this can be supported by documents and demonstrated in figures, then a substantive discussion of expected returns becomes possible.
About the Authors
Vladyslava Kravchenko and Volodymyr Kharlov are co-founders of NESTRA REAL ESTATE GROUP and the team behind the analytical platform Nestra Insights.
They work with international investment real estate, analysis of rental economics, development risks, property capitalization, and investment exit strategies.