I'm trying to figure out how to model debt structures into a deal. This may be a stupid question, but how would you go about modeling in a refinance after construction... That is, if your first tranche is looked at as the construction loan, but goes from say 8% to 4% during first year of being constructed, how do you ultimately reflect that in your DSC in the pro forma... I can do it, but its really ugly, and pretty static.
I was hoping to get some best practices, or ideas on how to best handle these. Thanks in advance.
Not sure I understand the issue (assume this is a monthly model?)... Your DSC in the first year typically annualizes the YTD fixed charges, so you'll get dinged up front with higher interest but it'll drop down in year 2 once you switch to TTM measurement and the higher cash interest months drop off.
Hmm, not sure we are on the same page. I just looked on a past thread, and they talked about modeling a take-out loan. Is a take-out similar to refinancing? Construction loan>>perm loan? I'm trying to better understand how to model this process (will I need two separate tranches, two separate debt sheets, does T2 pay off T1 after construction, then feed back into the DSC line with the new T2 rate)?
I don't work with construction loans, but it sounds the same as a refi (you're just replacing an existing loan with a new loan). I assume the principal debt balance will likely stay the same, so it's up to you whether you want to show it as a separate debt tranche or just change the amort and interest following the closing period. Your DSC is just pulling the amort and cash interest so should be easier in one traunche.
True... makes sense. So how do incorporate the new lower interest rate?
If it's a monthly model, for the month after close just link to the lower interest rate. If it's an annual model, then you'll just have to take the % of 12 months. So if it's 8% during first 7 months going to 4% for the last 5 months, the total interest will be (avg balance during first 7 mo * 8% / 12 * 7) + (avg balance during next 5 mo * 4% / 12 * 5)
So much misinformation here.
A Refi and take-out loan are theoretically the same thing. The reason it's called a take-out loan is because you are "taking out" the construction loan, which is at a much higher rate, and replacing with a loan when the asset has stabilized. Same concept as a refi.
As for modeling, it's not a question that each loan needs to be modeled separately. There are 1,000 reasons for this, first and foremost is error checking and intuitiveness of the model. Plain and simple, two loans, two separate debt calculations, two separate tranches.
Lol ... thank you! Yea, I wasn't quite sure we were on the right track before.
So, the pro forma then would have 1 DSC line. Lets say construction is over mo. 24. Do you pay off the first loan with the 2nd, and then just manually begin pulling the new required DSC into the line on the proforma? Or is there a better, smoother way to do this (I guess this was the original question)?
Misinformation? Or just modeling it your way? I like things fast and simple, but maybe that's just 7 years of banking and PE talking.
calling your bluff amigo...
Bluff? No need to bluff. Graduated in '07, BB M&A for 4 years, MM PE for the past 3 years. Just trying to save a guy some time with what I consider a shortcut. No need for any hostilities.
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