Loan to Value Ratio - Critical or Not

[Zak Thompson]

Hi BP Community,

I'm analyzing a my first CRE deal and I've built out a very dynamic model in order to run CF projections. The total build will be roughly $4 million (Equity = $900k and Debt = $3.1mil). The end goal is to sell or refi the building after 5 years for $5.1mil(what the model project based off future cash flows). However, I'm not factoring in a LTV ratio into the model. Do you think this is a critical piece to the puzzle and should I include it in the model?

Thanks in advance!

[Michael S.]

Generally around here (more expensive markets) we've found banks debt coverage ratio (DCR) requirements (usually 1.25) to be the limiting factor of debt before the LTV has a chance to come into play. Be careful with that one as you can enter a deal under funded from an equity standpoint because the DCR limited the debt below your LTV expectation with the banks.

For our modeling we take the lessor of the value, the cost, or the restraint from the DCR to estimate bank funding.