Modeling a refinance
Working on an acquisition where we assume in-place financing at ~40% LTV and refinance in year 7 at 60% LTV. Would the additional cash generated from the refinance be used to reduce our cumulative equity in the deal for purposes of calculating cash on cash returns?
I believe COC and ROC are rather metrics of annual return relative to cost basis, not measures of net return. The cash returned from the refinance would be captured in IRR or the equity multiple calculation.
A refi is a capital event and there should be language in the deal docs regarding distributions of such kind. In general, those funds would be paying off an accrued preferred return, then paying down the original equity balance.
No, for the purpose of that calculation it wouldn't. Your denominator shouldn't change, it remains the same for cash-on-cash.
There's no correct answer, everyone views it differently. I take the view that cash from operations are a return on capital and do not reduce cash invested, but capital events are a reduction in the cash invested/denominator. Our docs also state it that way - capital event cash flow returns capital and pays off accrued pref. Pref going forward will be based on remaining unreturned capital, if any.
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