421a Loan Sizing

Based on the most helpful WSO content, here are some insights on loan sizing for a 421a deal:

1. NOI Consideration:

   • When sizing a loan, lenders typically consider the Net Operating Income (NOI). For a 421a deal, the question is whether to use NOI with or without abatement.
   • In your example, the stabilized deal has $1MM NOI unabated and $1.375MM abated.

2. Value Calculation:

   • The value of the property is given as $27MM, which includes $1MM at a 5% cap rate plus $7MM NPV of the exemption.

3. Debt Yield (DY) and Debt Service Coverage Ratio (DSCR):

   • Debt Yield (DY): This is a critical metric for lenders, especially for opportunistic deals and private lenders. It is closely correlated to cap rates and is a key factor in determining the comfort level of the lender with the deal.
   • DSCR: This is another important metric, particularly for balance sheet lenders. It measures the ability of the property to cover its debt obligations.

4. Lender Requirements:

   • Lenders will look at both DY and DSCR when sizing the loan. The specific requirements can vary, but generally:
     • DY: Lenders may look for a certain minimum debt yield to ensure the loan is generating sufficient return on their committed capital.
     • DSCR: Lenders typically require a minimum DSCR to ensure the property can cover its debt service. This is often calculated using NOI after debt service and reserves.

5. NOI Before or After Abatement:

   • The decision to use NOI before or after abatement can depend on the lender's policies and the specifics of the deal. However, it is common for lenders to consider the stabilized NOI, which may include the abatement, to get a more accurate picture of the property's performance.

In summary, for a 421a deal, lenders will consider both DY and DSCR, and they may use the abated NOI to size the loan. The specific requirements for DY and DSCR will depend on the lender's criteria and the nature of the deal.

Sources: Interactive Debt Sizing Matrices, Lender/Debt Fund Modeling vs Broker Modeling, How do Tax abatements make projects feasible?, Arbor just foreclosed on $230mm of multifamily in Houston, Looking for Multifamily model with Loan Sizing Constraints