Cash on Cash Impacted
When does cash-on-cash get impacted in the numerator and when does it get impacted in the denominator? Am I right to assume that the denominator only gets impacted when your cash flow after financing (assuming you have debt - use CFO if not) is negative? That would mean you have to put in more equity right?
But if you have something like an increase in capex where the amount will be covered by your NOI, and your CFAF is still positive, then the numerator gets impacted right?
This is what reserves are for, negative cash flow periods. Now these reserves and capex are capitalized and can be funded from equity or debt or both. You can just assume for simplicities sake that you get a LTV loan and all your reserves and capex will come from equity. I like to make this an input/hardcoded so everything else in the model calcs.
Right, but your actual capex exceed your reserves and you use equity for this example, does that impact the denominator for your c-o-c?
And if your capex is the amount of your reserves, then you don't need to fund anything because the operations covers it. So it impacts your numerator?
net cash flow/total equity = cash on cash. if you need more equity in the deal then yes your denominator will increase. In real life you can't just just not pay your debt service one month. You could model like an equity lock box for the company so any shortfalls come out of "accrued cash", but depends on claw back capabilties or how often you distribute funds/dividends.
Correct - your denominator (cash invested) will only be impacted if you exceed your reserves and need to put more money in the deal. Also at capital events - if you have a take out refi then your denominator decreases (some firms don't reduce the denominator for refinancing, but its silly IMO).
Very helpful, thank you. Just to make it crystal clear for myself, using an example:
I've used $200 equity to purchase an asset.
NOI is $25, expected capex is $5, and debt service is $10. This makes my CFAF $15, and my cash on cash to be $10/$200 = 5%.
However, all of a sudden I have to repair windows throughout the asset because of unexpected bad weather. This will cost me $12, now making my CFAF -$2.
Does that mean I have to inject $2 into the asset (making my denominator now $202) or $12 (denominator now $212)?
You would only need to inject the $2 deficit, whatever there isn't enough cash flow available to cover. Your denominator would then increase by $2 to $202 and you'd have a 0% CoC for the year.
Now in reality, if the required expense is a smaller amount you may just push it out a bit to avoid calling further equity. But you get the concept.
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