What is the appropriate equity denominator to use when calculating cash on cash/equity multiple when the investment is all equity upfront and leverage is applied later during the hold period? For the equity multiple, do you use your peak equity investment or a weighted average of equity invested? For Cash on Cash, is the denominator the peak equity amount, the equity outstanding, or the average?
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For equity multiple, I would use peak equity involved as the denominator.
Cash on cash (ROE) is more of a yearly snapshot of an investment, as opposed to a full time-horizon valuation metric. Therefore, I assume that the ratio would only be beneficial to utilize during the year of financing and going forward, as then it would reflect the true denominator.
It's a case by case kinda thing, but I would say if you close an acquisition all equity, and then put post acquisition financing on it, I would use the denominator as the revised equity basis post leverage. I kinda look at this like I would for a "stabilized cash-on-cash" viewpoint. For all of our investments, we do 10-year holds where we refinance post stabilization. The stabilized cash-on-cash should be your new equity basis post your return of capital from the refi.
If you were to close all cash, re-entitle, and then you are looking to put debt on the investment in year 2 or year 3: In this instance you to continue to use your peak equity as the denominator.
Thanks, this is very helpful.
depends when you are calculating...if during a specific period of time, use the contributed equity at that time. If you're looking at a GROSS MOC or COC return, then use peak equity. There could be some debate about using a weighted average throughout the deal, but a safe bet is to just use peak equity for deal level cash on cash.
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