Hi Everyone,
I am working on a project but I couldn't find the answer online.
So I am working on a Dev. deal with a GP and LP and I am modeling the waterfall distribution with IRR and different hurdles.
Now, in order to calculate the GP and LP distribution I need to calculate the net levered property cash flow. This is a dev. deal and the LTC (including interest) is 65% which includes a interest reserve. The loan will be interest only until the property is stabilized and we assume that the property will be stabilized and sold at the end of the construction period.
Because there is an interest reserve, I am encline to not include interest payment in the levered cash flows.
Any thoughts?
The more detailed answer depends on what type of debt(construction or bridge/hard money).
Mechanically how it works is you have cash outflows and inflows. These are represented by rows in a model. Purchase Price is a negative outflow, construction loan is a positive inflow. The capitalized interest is a result of total costs inclusive of interest. In this way the function of the balance of the loan is iterative.
There should be zero interests payments while the loan is outstanding because the funds you draw are inclusive of interest. This equates to a net cash flow of 0 until you have the take-out loan(a positive row), and then the net cash flow.
Let me know if this helps
Hi Shervin,
First of all, thank you for your quick reply.
Yes, I modelised the loan financing to be 65% post interest reserve. In that way, it was my understandings that loan drawdowns were inclusive of interest payment/capitalized interest.
Just to confirm what you said. The way levered IRR will (hypothetically) be calculated with a 12-month period of construction would be an outflows of cash/equity until the equity is fully used/drawn then at the end of the 12 month-period I woud have my reversion CF (Property value) net of principal value of the loan.
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