Lender/Debt Fund Modeling vs Broker Modeling
This is a bit early but still curious, I'm looking to make the transition out of brokerage roles to lender/fund side. What are the differences in modeling required?
I am used to making a 10 year DCF with equity hurdles and JV splits npv, irr, COC, MOIC, analyst,how would a lender look at the debt return? Is it debt yield, dscr do they do 10-yr dcf's?
How would a debt/mezz fund bifurcate cash flows? what if they lend on the entire capital stack? I know typical debt(sr. secured) balance sheet lenders only look at 2-yr past and maybe 1 yr-current proforma with exit feasibility analysis. What would the dashboard for debt look like on an excel model?
Thank you very much for your responses.
huge bump. very interested in this info as well.
No idea why you got MS on this. Great questions and looking for information as well.
On the agency side we look @ DSCR, while the conduit side is driven by DY. Not sure how the lender would bifurcate the cash flow, but we do bifurcate the amort sch.. Your modeling skills should be easily transferable, good luck.
Biggest change imo would be ur assumptions on the lending/debt fund side vs broker side. Conduit shops just use a direct cap approach for all asset classes vs. debt funds particularly looking at sub-debt will use an equity like approach with 10-Year DCFs.
In institutional world, the modeling isn't really different - most, if not all lenders will prepare a 10 year DCF for every asset. DSCR tends to be the main metric for balance sheet lenders, DY tends to be the main metric for conduit lenders.
You bifurcate cash flow using a payment waterfall. In most loan documents waterfalls are written to be paid in this order: impounds > debt service > reserves > OpEx > rest to borrower. However, when underwriting a loan, most lenders will calculate NOI and then NCF after DS and Reserves. So they switch around the payment waterfall a little, but in the end it shouldn't really matter because you won't get the loan if all of the pieces don't get comfortably paid before the equity sees a penny anyways.
do most lenders incorporate equity splits/waterfalls into their models? I was under the assumption that lenders don't take that into account. which types of lenders/companies would model it vs. would not?
Usually the only place where equity splits might be calcualted is if there is a TIC structure. Because that ownership is separate, it is theoretically possible for one TIC to default and the remainder of them not to. So as a lender, you would only be foreclosing on one portion of the deal and not the entire asset. Otherwise, there is no reason to do an equity split because if as a lender you foreclose, all of the equity partners are wiped out and it doesn't matter.
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For one thing, lenders aren't going to underwrite the bullshit income/expenses some brokers do :P but IRR/NPV/COC all that stuff, they don't really care about. They'll run an in-place, take a look at your pro forma, run an UW (market vacancy, knock down tenants to market rent, UW rent escalations for credit tenants, min. of 3/4% management fee, look at the roll profile and determine a proper TI/LC and CapEx reserve and upfront reserve structure, etc...). On the analyst side you'd be making sure each number in a rent roll, income statement, lease agreement, etc... makes sense (Hey what was their net effective rent? oh 15% of their stated rent, yeah let's haircut that). The guy above you will check your work (basically that seems to be all they do) and the guy above him will look for 'the story' the qualitative side of the real estate, which i find more interesting than the numbers, and run the deal.
Who threw monkey shit at C.R.E. Shervin ? It's a solid question.
Hah, and this is a solid answer. Broker underwriting is always fluff and very liberal with the numbers. Lenders and owners (should, and often do) take a far more conservative approach.
Sadly this is true for many brokers, particularly investment sales. Even more sadly, this is actually also true for many sponsors/developers. Some of the pro formas and assumptions we get from sponsors are so ridiculous they get permanently blacklisted as clowns. Delusions and egos really get the best of some guys.
Good financing brokers will underwrite deals like equity investors/lenders because they know how these capital sources underwrite deals, clip projections, adjust assumptions, pad costs etc., and will therefore present to them underwriting that they can support based on those standards. It also builds good trust and working relationships between the broker and their capital sources. All good lenders/investors will know which brokers are the jokers and which are trustworthy and reliable.
Shitty brokers will just promise you that they'll "get you termsheets no problem!" regardless of how awful the deal and sponsor projections are. Then they'll blatantly lie to everyone involved and point fingers when the truth comes out in DD and clients get retraded at the 11th hour.
What a business real estate is - hard to get bored with the characters and ridiculous things you come across on a daily basis.
What's a UW?
Underwrite
what is the difference like between the two for DD?
Thank you all for providing all these useful answers. Is anyone aware of an Excel model which is available online to actually show all of this?
If you are talking about a high-level model to discuss internally before moving on to presenting to IC, it’s usually a high-level dashboard with key metrics (LTV, LTC, DY, etc) alongside a simple S&Us (we really like knowing know how the Sponsor is managing / has managed their equity position especially in this market). Then lender CFs which include interest, any PIK, fees based on high level indication sent out / ask with IRR and MOC. Sponsor CFs at bottom to size interest reserve if they don’t have sufficient CF or to see whether DSCR is sufficient throughout loan term based on what DSCR level you are comfortable with for the deal. At high-level stage, Sponsor BP is taken as a given and if DSCR gets tight (on a deal with CF) then you start poking into assumptions with them and seeing whether the project makes sense and is reasonably presented (80% of deals sourced through brokers with assumptions from their models have ultra- aggressive assumptions you cannot trust for 2 secs lol). Hope this helps.
source: I worked in a RE Debt Fund
You see PIK on real estate deals?
Yeah usually not 100% PIK portion but that also happens. A big financing that happened in the market in 23’ was structured as full PIK, though cannot be more specific than that for obvious reasons. My fund also had deals with PIK portions in loans which was typically used when asset was not yet stabilised.
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