Hello everyone,
So I am seeking guidance on how a debt fund would analyze a particular deal. I'm a relatively new analyst at an HFF/Eastdil and am currently working on a land deal which we'll be marketing as a resi condo development. My initial UW consists calculating profit margin and a levered equity multiple by figuring out development cost, condo sellout, and financing costs.
Basically, I am simply trying to understand exactly how a lender (Debt fund in particular, as that is how we're assuming this gets financed) would determine how high they'd be willing to go in proceeds. So for this $10mm deal, the returns look a lot better if we're able to get 70% LTC vs. 65%.
Above all, I want to make sure I understand correctly what it would take for the DF to give that extra $500K in proceeds. From my understanding, I believe the initial back-of-the-envelope analysis would simply to be to calculate the cost of capital by seeing how much higher they'd need to go in spread to achieve the same return. However, I know it's more complex than that, as there are many things to take into consideration from the debt fund side, such as hurdles, their own credit/how much they can lever on their end, etc.
Any help would be appreciated, especially from those with experience in the debt fund space. I know cost-of-capital is a relatively basis concept, but I'm having trouble fully grasping it, as well as the other metrics/intricacies that lenders utilize in their own underwriting.
TL:DR- IS analyst marketing land as a resi condo development. Would like to understand exactly how a potential lender would look at the construction financing, and what they'd need in spread/returns for an extra $500k in proceeds.
I would not suggest taking too much time on that. Pricing is largely market-driven and frankly the market is so volatile right now and lenders imo are not being compensated for their risk, although, you have not seen spreads compress in construction lending to the same degree as anything with cash flow.
Can you not talk to your debt team about this? They are in your office and these shops tend to have the best pulse on the market...
Thanks for the input. I have spoken to debt producers in my office about it and understand its incredibly market-driven. I guess I'm mostly interested in the intricacies of how debt funds' hurdles, warehouse lines, etc. work and what metrics they use.
I am actually in a hybrid role so am working on plenty of financings, but there are certain things you just don't see from the sell-side. Maybe thats partly b/c I'm still new...
Metrics we use are debt yield and leverage as you would imagine. Difficult to boil down debt analysis into a few words other than risk and reward. Higher we are in basis, credit risk and leverage and the lower we are in debt yield the more yield we want.
In terms of warehouse lines, we are usually putting 75% onto the warehouse line and retaining 25%. If debt yield on the asset is 8% and we are putting 75% on the warehouse line, then debt yield to the warehouse line is 10.66% = 8% / 75%. They usually will advance 75% or up to 80/85 for the right market/product/story.
Congrats on the job - hope the excel test helped.
Sure did. 6 months in and learning a ton- appreciate the help man!
Most lenders use a grid, it’s not rocket science
65 LTV is one cell on the grid and 70 LTV is just another cell on the grid
And the pricing, assuming fixed rate, is swaps+breakeven+pricing grid(based on ltv,DCR,product type)
Aliquam qui quas repudiandae rerum tempore. Sed natus molestias ducimus neque cumque sed. Repellat quae praesentium maiores. Neque tempore aliquam eligendi omnis perspiciatis explicabo et. Officiis sunt consectetur adipisci facere qui nesciunt distinctio corporis. Temporibus esse sed sequi occaecati pariatur voluptatem. Sit incidunt est quam iure ea.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...