Question

A property has an expected first-year NOI of $1 million. Recent sales of similar properties indicate that a first-year (or going-in) cap rate of 12% is reasonable for valuation purposes. A lender requires a minimum DSCR of 1.25x and will loan up to 75% of appraised value on a first mortgage. Say the mortgage interest rate is 6.75%, payments are monthly, and the amortization period is 20 years. (10 points)  Hint: solve for the debt service.

what is the implied loan size using DSCR criteria?

Answer 1

Debt Service Coverage ratio = EBITDA / Debt Service

NOI = $1,000,000
Cap rate = 12%
Therefore, Appraised value = 1,000,000 / 12% = $8,333,333.33

Given conditions:
1) Minimum DSCR of 1.25x
2) Maximum loan amount = 75% of the appraised value  

--> Loan value as per 75% of the appraised value is $8,333,333.33 * 75% = $6,250,000

--> Debt Service based on the loan amount derived is:

Debt service has been derived by multiplying PMT (monthly figure) by 12 (to make it an annual figure).
And based on the derived debt service, the DSCR is 1.75 which is more than the specified condition of minimum 1.25x.

Hence, the loan size of $6,250,000 is acceptable and is the implied loan size as per the DSCR method.