For those of you with capital market expertise, how low can the debt yield (in-place NOI) be for a value-add apartment acquisition? Top 5-20 MSA’s, class B to A conversions, institutional sponsor.
There was a post recently about DY, but that post was in regards to permanent CMBS financing in NYC which is lower risk.
| +83 | LP coming into deal at higher land basis. How to model returns to GP? | 19 | 13h | |
| +76 | Increasing RE Industry's Cash Compensation, Collectively | 43 | 1d | |
| +73 | Major Decisions | 13 | 2d | |
| +44 | Being asked to stay behind and train my replacement | 11 | 10h | |
| +34 | Niche down to an operator or stay an allocator | 11 | 11h | |
| +24 | Breaking into CRE late 20s | 7 | 5d | |
| +23 | Thoughts on joining an early-stage REPE fund | 7 | 1d | |
| +22 | Self Storage ECRI | 9 | 3d | |
| +20 | Public Homebuilders | 7 | 9h | |
| +20 | How to get good at RE Modelling? | 18 | 13h |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
It really varies on market and the value you are adding. For example, I am sure NYC, SFC, Miami, will get lower debt yields. I seen a debt yield as low 5.8%, but the value add was very simple in this, the apartment rents were 30% lower than the comps and the OpEx % was like 60%. Also the sponsor buying, was a top MF investor. So if you went to a lender you could clearly show that the NOI is artificially too low and can be improved very easily. In this situation, lenders will give you some credit and can accept a lower DY since they know that the DY is likely to be higher after raising rents to market and managing expenses a little better.
There's no right answer to this one, as it will depend on the lender. At lower leverage, you may be looking at bank financing with a bank whose dictionary might not even include debt yield. At higher leverage, you probably need a bridge lender/debt fund.
Most of those lenders (I work for one), will want debt service coverage day 1. You can extrapolate required debt yields from there, but assuming an IO loan and what I perceive to be the range of rates in the bridge lending sphere today, you probably need an in-place debt yield in the 5-6% range.
If you want to talk specifics feel free to PM me. I look at a lot of limited repositioning plays for multifamily ($5,000-$15,000 per unit renovations, typically), so I may be able to offer more guidance with details.
Yeah, to your point--I've worked for several lenders and debt yield wasn't even a standard metric used in underwriting. Now, that's not to say that on a particular deal the debt yield wasn't presented as a relevant fact, but I've yet to be at an organization that utilized debt yield as a key underwriting metric, i.e. they had no minimum debt yield metric. DSCR would be a more used metric, but that would vary widely depending upon leverage, location, and loan size.
We have a debt yield "exit test" that is stabilized cap + 200bps. We use it for loans that don't meet our normal exit test because they have some sort of repositioning or value add component to them.
CMBS lenders have a somewhat arbitrary debt yield requirement that is generally so low that no normal loan would ever breach it. 5-6%....very rare that the NOI DY gets that low, and frankly I'm sure if it was a good enough asset the credit officers would pass it through anyhow.
You wouldn't have sufficient debt service coverage on an amortizing basis to securitize a fixed-rate CMBS loan with a debt yield that low. Realistically, given current spreads for a standard CMBS loan on a stabilized asset, you're looking at a debt yield constraint in the low 7%s. Even though DY is a popular metric in CMBS today, I'm still not seeing many deals (at least in the lower-middle market) securitized with a DSCR below 1.15x.
The 5-6% range I offered above was on floating rate debt that you'd find from debt fund/bridge lender/whatever you want to call them, and many such firms will structure deals with an interest reserve/carry if the period where there will be a debt service shortfall can be relatively accurately identified.
Porro perferendis repellendus fuga asperiores. Perferendis velit est quisquam aperiam praesentium. Dolor debitis omnis rerum quia numquam officiis. Sint delectus assumenda laboriosam eum aspernatur voluptatum adipisci.
Cum sit accusamus unde non. Et ut ducimus delectus cumque quidem maxime recusandae modi. Et et quisquam dignissimos.
Rem sit sapiente magni. Tempore voluptatem id asperiores optio amet ex harum. Labore at aut quam voluptates. Nihil ex fugiat temporibus sint. Ut expedita aut nostrum iste et nam placeat. Quisquam et iusto vel aut alias fugit. Dicta ea ea distinctio corporis voluptatem.
Commodi vel a voluptatum sit voluptatem est adipisci. Maiores quia hic officiis natus sint voluptatibus fuga debitis. Cumque alias quisquam non qui magni totam nemo. Tempore voluptatibus et praesentium atque placeat unde qui accusantium. Maiores ut ad et incidunt consectetur eos. Occaecati voluptatum voluptas sit asperiores recusandae soluta. Et ut omnis ullam debitis architecto iure.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...