Debt Sizing Issue: Early Repayment

Based on the most helpful WSO content, here are some insights and potential solutions for your debt sizing issue:

1. Adjusting Amortization Schedule:

   • One approach to ensure the loan amortizes over the entire tenor is to adjust the amortization schedule. You can do this by setting a lower periodic amortization amount. This can be achieved by:
     • Using the PMT Formula: Calculate the periodic payment required to amortize the loan over the desired tenor. This ensures that the loan is paid off exactly at the end of the term.
     • Adjusting CFADS Allocation: Instead of using the entire CFADS for debt repayment, allocate a portion of it to a reserve or other uses, ensuring that the remaining amount is sufficient to cover the periodic amortization.

2. Dynamic Pro Forma Setup:

   • Ensure your pro forma is dynamic and can adjust to changes in assumptions. This includes:
     • Setting Up Inputs Nicely: Avoid hard-coded values and use cell references and formulas to make the model flexible.
     • Calculating Remaining Principal: Regularly update the remaining principal on the loan to reflect the adjusted amortization schedule.

3. Loan Sizing Constraints:

   • When dealing with loan sizing constraints, consider the following:
     • DSCR Constraints: Calculate the maximum loan value based on DSCR constraints by dividing the interest expense by the interest rate.
     • LTV Constraints: Divide the NOI by the cap rate to arrive at the value of the building, then multiply by the maximum LTV to find the maximum loan value.
     • Minimum of Two Max Loans: Take the minimum of the two maximum loan values (DSCR and LTV) to determine the appropriate loan size.

4. Exit Analysis:

   • Be comfortable with calculating the remaining principal on the loan for exit analysis. This involves:
     • Discount Rate and Property Value: Use the given discount rate to come up with the value of the property (Debt plus sum of PV of CFADS).
     • IRR Calculation: Ensure that the IRR equals the discount rate if you use the value you came up with as the purchase price in the calculation.

5. Terminal Value Calculation:

   • For a holding period of 10 years, calculate the terminal value by dividing the year 11 NOI by the exit cap rate. If no exit cap rate is given, add 50 to 100 bps to the stabilized entry cap rate.

By implementing these strategies, you can better manage the amortization schedule and ensure the loan is paid off over the desired tenor without early repayment issues. Good luck with your deal!

Sources: Looking for Multifamily model with Loan Sizing Constraints, Multi-Family Acquisitions Excel Test, Trick (?) Technical Question, Rational behind a lender choosing a loan term, Real Estate Private Equity Technical Qs