Underwriting an existing asset
I have some questions about the differences between underwriting a new acquisition opportunity and an existing asset that you've owned for a few years.
- To solve for the purchase price, would you just underwrite to a market unlevered IRR, or some other return metric? (I assume unlevered IRR just bc debt can vary significantly among buyers but idk if this is the correct way to approach it)
- How would you handle existing debt you have on the asset, assuming there's still plenty of term left? Would you u/w a refi at the beginning of the analysis so that you're PP accounts for market rate financing that a buyer would get? Or would you just model the remaining in-place debt schedule and include a refi if/when the debt matures? If it's the latter and you're u/w to a levered return metric, it seems like that could skew valuations (i.e. using an existing 10 yr loan @ 3.25% that you got in 2020 vs. a loan @ 7.0% you'd get in today's market).
- Are there any other major differences/factors that you think are worthy keeping in mind? I don't know what I don't know.
Thanks for any help with this!
This is a great question and one I feel doesn’t get asked more often or attention to it.
As someone in AM, it honestly depends what the purpose of the UW is for. If it’s an asset that we’re evaluating a hold/sell (which really should be done for all assets), we’ll use an appraised value if there’s one or a BOV. For debt, many cases we’ll keep our in place debt then at maturity assume a market rate refi. But to your point, leverage depends entirely on the buyer. We’ve done pure next buyer analysis too where we will just assume market rate going in.
Thanks, that's super helpful!
When you do your own valuations (rather than using appraisal/BOV), what metrics do you usually uw to? Are you using a unlevered metric as your benchmark or is there some other method you prefer? I'm sure you look at various other metrics to make sure it reasonable, but I assume you have one or two metrics that carry more weight.
Also, what kind of hold period are you uw? I know it depends on the asset, but assume it was a value-add deal that you've executed the business plan and the asset is now fully stabilized at market rates.
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