I created these interactive Debt Sizing Matrices after I observed that my colleagues and I were continually running the same calculations when trying value a property and/or size a loan.
Feel free to post/send some feedback.
| Attachment | Size |
|---|---|
| Excel File 59.5 KB | 59.5 KB |
| Instructions 125.99 KB | 125.99 KB |
TL/DR: Debt yield is a critical metric for any opportunistic deal and for most fund/private lenders.
I see or discuss DY on almost every deal we look at, especially for transitional or construction deals. Banks and lifecos tend to get stuck in their old ways (and many don't touch construction or opportunistic deals), but all the funds look at this metric very closely. Think of a value-add deal - if you as a lender are going in at a 4% debt yield, and the property stabilizes at a 5% DY for an office, is that enough to get you comfortable? Was enough value really added regardless of what DSCR and LTV you are at in the end? It's the metric that is most closely correlated to cap rates - if you as a lender are at a stabilized 5% DY (essentially the lender's cap rate) and office buildings in the area are trading at a 7% cap rate, how are you going to trade out of the asset and get all your money back in a downside scenario?
Appraisals can be total bs, and as a result, LTV is a metric that can be easily manipulated by the appraiser if they are pushed "to get there" by any of the involved parties. Also, LTV can drastically change in just a few months based on the market sentiment and therefore the appraisers outlook. Just think of a land appraisal in NYC now vs. two quarters back.
DSCR is a metric that can't be manipulated as easily as the last cycle as banks now define DSCR tests based on a predetermined rate/constant and amortization regardless of the actual loan terms. Either way, this will tell a lender nothing about how much yield they will make on that money that they put out. How good is a loan for a lender if it's getting 1.50x coverage, but generating only a 2% debt yield? Not an issue for lenders that aren't yield focused (see: banks and lifecos) and just need to put out lots of money primarily on core/stabilized assets. On the other hand, all funds and private lenders will look at this as their main metric since they need to make a certain return on their committed capital, so if their loan is at 60% LTV and 1.50x DSCR but only generating a 5% DY when they need to make 9%, it's not going to cut it.
Intrinsically, all of these metrics are tied together and should be looked at by all lenders as another factor to help manage risk and raise any red flags during underwriting. Just my $0.02.