I'm trying to compare different lease-up scenarios (purely from a returns perspective), by using IRR and equity multiple return metrics. Problem is I don't currently have debt inputs that could get me to a levered IRR/EM.
Can I still find value in comparing unlevered return metrics between different scenarios, even though the actual deal will be levered (note: whatever leverage we end up using will be identical across any of the scenarios)? I know the effect of introducing leverage won't affect any two scenarios in a 1:1 manner, but is the effect of debt enough to produce completely different answers to "Which leasing strategy should we go with" when now looking at levered return metrics?
Yes, you can gain some insight from comparing the unlevered return metrics between different scenarios. If you are running a tenant re-leasing comparison to compare whether a renewal or new leasing adds more value, you could also calculate the PV of the lease cash flows (renewal vs new lease). The higher PV scenario is going to add more value to the property.
In theory, the effect of debt shouldn't produce completely different answers to your leasing strategy, since the debt will be identical and is really only going to amplify returns (positive returns become more positive and negative returns become more negative).
This is a great idea. I'm using Argus to run the cash flow/returns analysis and one of the metrics it gives is NPV so if I have nothing else, I'll focus on that metric.
I agree that, in theory, debt simply amplifies returns (positively for positive returns, negative for negative returns). However, the worry is that it doesn't amplify returns linearly. I guess it comes down to understanding how the IRR formula calculates cashflows, which I don't.
Any mathematicians?
For the debt, are you assuming that some of the loan proceeds will be used for the leasing costs? To clarify, are you looking at a refinance deal with dollars for leasing costs included in the request?
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