Acquisition Modeling Hold
My boss just asked me to model a deal for a slug of pref equity in a stablized MF deal. He wanted me to model out a refi instead of a sale in year 5. Any thoughts on this?
My boss just asked me to model a deal for a slug of pref equity in a stablized MF deal. He wanted me to model out a refi instead of a sale in year 5. Any thoughts on this?
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Not particularly difficult if you can already model the cash flows a few years out along with a sale. Instead of cashing out 100% of the value, cash out however much of a loan you expect to get. Probably between 65% - 75% of the value at that time would be reasonable, depending on property type and location.
Obviously if your model is calculating IRR/NPV jus based on those five years of cash flows, then it won't be accurate considering there will be additional cash flows down the road. What you could do is calculate the NPV of the five years including the partial cash out, and then discount the future property-level cash flows beyond that and just add it on top.
cool, I did that.
However b/c of the short hold the unlevered IRR is negative.
By that logic - it should be negative with a sale instead of a refinance as well. You shouldn't be leaving that much value (time considered) on the table when you're cashing out ~70% and just discounting the remaining 30%.
This is probably a deal problem, and not a modeling problem. If your investment goal is to maximize IRR - selling earlier is almost always better. That's where the saying "you can't eat IRR" comes from.
The scenario of refi instead of a sale is generally a mark to market event that can get you cash immediately by obtaining the net proceeds from the new debt after paying off the original loan principal, without paying any capital gain taxes.
At the same time, you boss must have a bull view on the property itself in a longer period holding perspective that you would further gain in property appreciation.
Lastly. the refi scenario will face a new interest rate environment which generally is underwritten higher than the original loan. However, from an interest rate perspective, I would't think the rate five years later will be even lower, since we are already in the lowest level for too long.
Good perspective, thank you both. Here are some SB's, keep the advice coming.
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