Real Estate Debt Modelling
Can someone please share a real estate debt modelling test?
What can I expect in one of these tests - will they make me model debt or equity?
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You should expect having to model a deal and then produce both debt and equity metrics.
Still baffling to me that people don't grasp that debt is equity, it is just a less risky/lower part of a capital stack. We literally model the same as equity people do, but with maybe more conservative assumptions.
Depending where you are in the capital stack you probably care more about the GP being able to service your loan right? So where is the emphasis on debt modelling compared to equity - is it simply just DSCR type metrics?
What makes a great debt deal?
What are warning signs around a debt deal?
What legal knowledge do I need to understand particularly if I’m investing in pref equity?
Depends what kind of debt you are working on, but the most common metrics are LTV/LTC, DSCR, DY.
If you are a debt fund, you also care about exit value, IRR (unleveled/levered), MOIC.
And then with all debt, downsize analysis, which is specific to your deal.
What makes a great debt deal is a business plan/sponsor that you believe in that provides a return you are comfortable with. Lenders tend to do a lot of alternative analysis. So if you can invest in a mortgage at x yield with y risk, but can also invest in a CMBS bond at the same yield with less risk, then you do the CMBS deal and might pass on the mortgage. There is a lot of comparison on yields/risks to make sure the risk adjusted return is good.
Low DY in a rising rate environment is a huge red flag. Crazy underwriting assumptions (15% rent growth or leasing that is too fast) are also red flags
On pref: all of the legal structures are totally different for pref than first mortgages. You are in a different part of the cap stack secured by different collateral. If you are playing in this space, you are better off asking someone on your legal team to walk you through the pitfalls/what your company focuses on
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