I have been trying to figure out how to size cash on cash returns and there are a few tricky parts I need help with.
Is reversionary cash flow from the sale factored into Cash on Cash?
When you refinance do you reset the amount of cash in the deal?
Is the cash in the deal constantly decreasing as you give distributions?
Thanks for your help!
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Good question. Enterprising equity salesmen can mess around with the numbers and you are asking the right questions.
1) No, reversionary cash flow is not factored into CoC
2) Yes, reduce your equity balances post-refinance
3) No, operating cash distributions should not decrease your equity balances. Valuable to understand payback break-even, but it should not go into the CoC calc
I disagree with number 2. If you have capital partners, then the cash would likely(sometimes) go to paying back the accrued rate of return. That means it would be treated like your #3, with capital paid back to investsors not being counted.
I'd say the c-o-c is the deal level, and therefore you wouldn't count a refi, just like a reversion in your cash-on-cash because it is a capital event.
I hear you Shervin. We go back and forth on that all the time. My thought is this: assuming you are cashing out equity and not just refinancing at par, then your interest costs will be higher and operating cash flow lower post-refinance. This is not necessarily true but it's true in 80%+ of refis I've looked at. If you don't count the equity you pull out upon refi, then you are unnecessarily punishing your CoC post-refi, which on some deals can be the majority of your underwritten hold period.
Not really. Capital events affect the denominator, and operating cash flows affect (are) the numerator. Refi proceeds should reduce the denominator, just like capital calls should increase the denominator as opposed to reduce the numerator.
Not trying to sound like an asshole, but could you re-word that. I'm not sure what you are saying.
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