What would happen to fixed-rate MF but market cap went 200bps ?

[Carlos Ptriawan]

Hi I have question that I can't decipher, lets say there're similar asset class type of MF in one zip code. All of them purchase at cap 3.5 ; all making same rent same gross income. The difference is , the 4 of them uses floating debt without caps, while one is using fixed debt of 4.5% (for example). Imagine all of them is having the loan to the same bank.

Now assume the 5 year baloon is due, and Market cap in the greater region is at cap 6.0x , since 4 uses floating, they are all going into foreclosure as DSCR is 0.8x; they're all having the same Income before debt. But since one of the fixed-rate MF has fixed rate, lets say they are able to sustain the DSCR into 1.05x in the last year for example so the LP/GP is at least able to return the equity.

My question is, it is easy to understand the floating-rate GP MF would be under foreclosure with valuation of cap 6.0 ; but what happen to fixed-rate-GP ? are they able to sell it with market cap between 4 to 5 while other MF comp is at 6 ? Also who really wants to buy that fixed-rate asset giving all comps is at cap 6 ? what happen if there's no buyer ? what do I miss here ?

[Chris Seveney]

Quote from @Carlos Ptriawan:

Hi I have question that I can't decipher, lets say there're similar asset class type of MF in one zip code. All of them purchase at cap 3.5 ; all making same rent same gross income. The difference is , the 4 of them uses floating debt without caps, while one is using fixed debt of 4.5% (for example). Imagine all of them is having the loan to the same bank.

Now assume the 5 year baloon is due, and Market cap in the greater region is at cap 6.0x , since 4 uses floating, they are all going into foreclosure as DSCR is 0.8x; they're all having the same Income before debt. But since one of the fixed-rate MF has fixed rate, lets say they are able to sustain the DSCR into 1.05x in the last year for example so the LP/GP is at least able to return the equity.

My question is, it is easy to understand the floating-rate GP MF would be under foreclosure with valuation of cap 6.0 ; but what happen to fixed-rate-GP ? are they able to sell it with market cap between 4 to 5 while other MF comp is at 6 ? Also who really wants to buy that fixed-rate asset giving all comps is at cap 6 ? what happen if there's no buyer ? what do I miss here ?

To answer the question, NO. They would not be able to sell at the lower cap because the appraisals will come in based on those other assets. This is one of the problems people are not talking about, which is just because you have fixed debt, it does not matter in the evaluations. Typically, MF trades around 1-2% above the borrowing rate, which each point being about 15% of value. So even though you are still above a 1 DSCR, most of the profits typically come from the exit on the MF asset, which hopefully the rent increases have allowed the NOI to increase to offset some of the cap rate compression. But if the NOI has not changed, your value is significantly less. If you are invested in one of these offerings, again while debt is fixed, I would plan on it not exiting when it was supposed too.