Interactive Debt Sizing Matrices

I created these interactive Debt Sizing Matrices after I observed that my colleagues and I were continually running the same calculations when trying value a property and/or size a loan.

Feel free to post/send some feedback.

AttachmentSize
Office spreadsheet icon Excel File59.5 KB
PDF icon Instructions125.99 KB

Comments (32)

Jun 1, 2016

Don't love it. If you use it and it helps good for you(no sarcasm). Not knowing the "model" I think named cells coulda been helpful. I mean I get that you didn't need to use them and there are no nested ifs so it is pretty straight forward.

I've seen plenty of DSCR tables/calcs. Can't you just use a min function(dscr,ltv)? Not being on the lending side, how does a matrix help you? Also you don't look at deals below 5% cap rate? Maybe include loan constant?

Jun 1, 2016

well the only 'model' is the PMT function in excel, so I don't know that names cells would have been necessary - understood though..

not sure what you mean about just using a min function (where and when and why would you use a min function)..

As for how it helps / how to use it:
The DSCR matrix allows you to quickly use any of the inputs that you are comfortable with or know you will anchor to (say cap rate and LTV) and then understand what kind of rate/amortization the property can sustain. Another way is to set the cap rate, rate and amortization and you can understand what max LTV the property can sustain. Just a really quick calculator as a first test - I found that our team would get through the whole model and then when negotiations start they would play with the am/rate in the model and thought this would be easier...

The Percent of Request helps you when the broker sends a deal with their valuation and LTV request - usually the cap rate is super low and LTV is really high so you make that adjustment and can provide quick feedback on where you will be on proceeds and see if there is a deal to be made...

    • 1
Jun 1, 2016

O.K. got it. Totally didn't mean to harsh on what you did.

My only real qualm is that it doesn't use real numbers in the matrix and ltv & dscr as the x and y axis. From my perspective % of asked LTV seems irrelevant.

Jun 2, 2016

Two words: debt yield. Any loan sizing model needs a debt yield calc. DSCR is secondary and really is a pretty worthless metric because of the following: 1). prime rate and LIBOR are super low historically, 2). DSCR would obviously decrease if the floating rate index spikes, 3). DSCR is worthless if the loan has an I/O period....The list goes on. Point is there are really two things that matter LTV and debt yield.

Jun 2, 2016

Two words: smoking dope. I agree regarding the relevance of debt yield but you would prescribe throwing DSCR out the window? That leaves out one of the most fundamental considerations in real estate credit: how well the property's cash flows service its debt obligations. Neither LTV nor DY tells you that, not alone, not in conjunction, because neither ratio has interest rate as a component. Also, even if a loan has IO, you look at coverage on IO payments and when it's amortizing. And if it's a floating rate loan, you still look at DSCR, up to the cap and down to the floor.

Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Jun 2, 2016

Obviously DSCR important. Duh. I was trying to make a point to the OP. You need a debt yield calc on any loan sizing model end of story. If you always size to a 10% debt yield DSCR and LTV will fall into place nicely.

Jun 3, 2016

DSCR, LTV and DY are the big three. In my experience it depends on the Lender, CMBS and BB BS Lenders look at DY more closely, while Life Co.'s are big on the DSCR restraints. I would include all of those in an underwriting model.

Jun 1, 2016

It certainly should be included in an underwriting model, I guess I didn't originally intend this to be an all inclusive underwriting model but I am going to take a stab at incorporating it..

Jun 4, 2016

Agree, at our bank, LTV and DSCR are the most important metrics for sizing.

Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Jun 4, 2016

Debt yield is a recent phenomenon. In the middle market where I broker both CRE and CRE loans, DY is rarely discussed. LTV and DSCR are the mainstays that have existed for decades for a reason.

When I model a deal, which I've only been doing for about a year now, I always use mortgage constant. It's a great way to get to max loan amount. NOI/DSCR/Mort Const. Yes, then =Min my way back in to it against LTV for a final loan amount.

I find DY relevant and interesting because it has nothing to do with interest rates, amortization or the borrower. It's a nice tool and will be around a long time.

    • 1
Jun 2, 2016

Jesus, this is sad....remember this thread when your "bank" has 1.50x cover loans and you take back the property in 2 years....

Jun 2, 2016

It's like you people did not learn anything from 10 years ago when lenders sized loans on DSCR and LTV only. Please keep juicing Blackstone's returns. They will be waiting to buy your loans at 75 cents on the dollar.

Jun 2, 2016

Not to worry. Even if tomorrow everyone started evaluating DY for what it's worth, bad loans would still be made.

Such is the credit cycle, and it's something to celebrate - it's the reason those intrinsically attractive buying opportunities exist for flexible capital.

Jun 8, 2016
Blue Star:

Not to worry. Even if tomorrow everyone started evaluating DY for what it's worth, bad loans would still be made.

Such is the credit cycle, and it's something to celebrate - it's the reason those intrinsically attractive buying opportunities exist for flexible capital.

Well said!

Jun 2, 2016

Thanks but Christian Bale and I are really worried. We just don't know how to get through to these "bankers"

Jun 4, 2016

I can name more banks that don't use DY then do. They all preformed well through the financial crisis.

    • 1
Jun 6, 2016
PacNumber:

I can name more banks that don't use DY then do. They all preformed well through the financial crisis.

What is your product type, risk spectrum, and location for deals? My group does opportunistic - core plus, and for each ends of the spectrum DY is / was an important metric for the lenders (banks & debt funds). I would say it was mostly relevant for good news proceeds, however, with regards to initial funding as well (regarding core plus / already income producing assets). All the main players: Wells, BofA, City, US Bank, PNC, etc.

    • 1
Jun 4, 2016

I'm a broker in San Diego. I do mostly mid market stabilized deals when it comes to multifamily and commercial loans. Mid market out here is probably $5mil to $15mil. Product type is 3-10yr fixed. Risk is pretty low. Location is Arizona to Washington state. I've know a rep at Wells for 5 years. Never once heard him say DY. I have countless ties as Chase on the MF and Commercial side and its not come up once. Union Bank is a major player here on mid market stuff. Great rates. No DY analysis. Union has almost no exposure in the for sale housing market and did just fine through 2008-2012. All with no DY underwriting. I can name many others that have been around along time.

Each company has to do what they have to do. I think DY might be more of an institutional thing...bigger deals.

Chase doesn't even ask for tax returns.

    • 1
Best Response
Jun 6, 2016

TL/DR: Debt yield is a critical metric for any opportunistic deal and for most fund/private lenders.

I see or discuss DY on almost every deal we look at, especially for transitional or construction deals. Banks and lifecos tend to get stuck in their old ways (and many don't touch construction or opportunistic deals), but all the funds look at this metric very closely. Think of a value-add deal - if you as a lender are going in at a 4% debt yield, and the property stabilizes at a 5% DY for an office, is that enough to get you comfortable? Was enough value really added regardless of what DSCR and LTV you are at in the end? It's the metric that is most closely correlated to cap rates - if you as a lender are at a stabilized 5% DY (essentially the lender's cap rate) and office buildings in the area are trading at a 7% cap rate, how are you going to trade out of the asset and get all your money back in a downside scenario?

Appraisals can be total bs, and as a result, LTV is a metric that can be easily manipulated by the appraiser if they are pushed "to get there" by any of the involved parties. Also, LTV can drastically change in just a few months based on the market sentiment and therefore the appraisers outlook. Just think of a land appraisal in NYC now vs. two quarters back.

DSCR is a metric that can't be manipulated as easily as the last cycle as banks now define DSCR tests based on a predetermined rate/constant and amortization regardless of the actual loan terms. Either way, this will tell a lender nothing about how much yield they will make on that money that they put out. How good is a loan for a lender if it's getting 1.50x coverage, but generating only a 2% debt yield? Not an issue for lenders that aren't yield focused (see: banks and lifecos) and just need to put out lots of money primarily on core/stabilized assets. On the other hand, all funds and private lenders will look at this as their main metric since they need to make a certain return on their committed capital, so if their loan is at 60% LTV and 1.50x DSCR but only generating a 5% DY when they need to make 9%, it's not going to cut it.

Intrinsically, all of these metrics are tied together and should be looked at by all lenders as another factor to help manage risk and raise any red flags during underwriting. Just my $0.02.

    • 5
Jun 1, 2016

Not sure if you are confusing debt yield vs interest rate. Debt Yield is dividing NOI over the current loan amount, so it really wouldn't really tell you how much yield you are going to make unless you are taking the property over... Also DY can change just as fast, If not faster than LTV - imagine if a large tenant vacates with 30% of your income and now debt yield is sub 3%

Jun 7, 2016

My 2 cents. Debt yield is the most important metric for any opportunistic lender and probably the most important debt metric. I do not see why this is causing that much controversy on here.

Jun 4, 2016

Because it's new.

Jun 2, 2016

Thank you finally someone agrees with me.

Jun 8, 2016

I don't understand most of this but the comments are great nonetheless

Jun 8, 2016

Oh my goodness - why is WSO funneling substantial info today. +1 SB.

    • 1