Net Present Value for Refinancing
Hi guys,
I am new to residential development underwriting. I am working on a project which the investors plan to stay in for like 90 years. We want to see when it comes to refinancing in perhaps 15 years, if the cash flow is good versus the project cost. Shall I use the Net Present Value with an estimated 15th year's market value to test if this the best time to refinance? Or total 15 years of capitalized value?
Also what kind of cap rate shall I use for towns in Hudson Valley?
Im not sure I understand...when refinance time comes, what is the question you are trying to answer? more detail is needed
When you're ready to refinance, most lenders will underwrite up to ~75% LTV. When that time comes, you should have a pretty good understanding of your property's market value based on similar comps in your area, and the cap rates they're being sold at. The metric most lenders use now is Debt Yield or (Property NOI/Loan Amount) to determine their upper limits in proceeds. A lot of lender's will underwrite a stabilized NOI to a ~10% Debt Yield based on property metrics. Therefore, let's say you have a property that outputs $5MM in its stabilized year, the highest a lender would comfortably give you is a ~ $50MM loan. However many factors come into play including operating history, Sponsorship, whether or not the property is a positive cash flowing asset, how much CapEx is required or anticipated, etc which can make proceeds higher or lower. And if you're just looking to refinance and pull cash out, that's okay too. Don't bother too much with NPV or 15 years of capitalized cost - that's for equity players looking to invest. The Debt guys are cut and dry, and look at Operating History, Debt Yield, Debt Service Coverage Ratio (DSCR), and Loan-to-Value (LTV) or Loan-to-Cost (LTC).
TL;DR: 10% Debt Yield is your ballpark for the loan amount, up to a maximum 75% LTC/LTV.
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