Debt Based vs. Equity Based underwriting
I know how to underwrite from the equity side, but what is the difference in how you underwrite something from the debt side vs equity side?
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Technically there is no difference. In reality, you’re more concerned with capex on the equity side. Also, you are more concerned with blowing your opex budget on the equity side as well (as well as rental rates). But underwriting debt and equity are two flips of the same coin.
Tend to disagree somewhat, but you’re right that they’re two sides of the same coin. My underwriting on the debt side focuses squarely on downside scenarios. I’ll rarely present a deal to investment committee without a discount to key assumptions - rent is lower, construction takes longer, cap rates are higher, etc.
I’m also less concerned with the granularity of assumptions typically seen on the equity side. For example, our MF acquisitions team dives very deeply into calculating the real estate taxes for an asset post-acquisition. I’ll typically just take last year’s actual taxes paid and increase them by a certain percentage.
Overall, I’d say debt modeling, especially with respect to calculating IRR/MOIC on an investment (as opposed to valuing an asset) is a little easier than equity modeling.
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