How to model the refi on multifamily from seller financing?

[Sam Epperson]

Trying to wrap my head around putting the refinance conventional loan into my underwriting. This is a theoretical deal:

Seller Financing 32 Units $2,500,000 deal.

I put 10% Down ($250,000) at 5% I/O for 2 years.

My annual debt for these two years is $112,500. 

**Here's the part i'm confused about: After some rehab, the property is now worth let's say $3,250,000. When I'm refinancing into a better loan, Is my mortgage going to be based off the new value? For example:

Deal Value $3,250,000

80% LTV = $2,600,000 (mortgaged amount)

20% Down = $650,000

I dont know why this little bit is tripping me up so much. Please help!