Using IRR model to compare commercial loans?
I work for a boutique commercial real estate lender in Canada and while we don't currently use an IRR model in our underwriting, I am trying figure out if it is worthwhile to incorporate it. Our loans are interest only with usually only a single initial advance with 12-24 month terms. Anyone else in commercial lending that uses an IRR model?
[{"id": "eesnygp", "text": "I haven\u2019t but I imagine it would be helpful for your funds management to see how various loan and fee structures affect returns. You could sensitize by the month you get paid off, rate, origination fee, and prepayment penalty. I\u2019ve also seen private lenders leverage their own loans through a revolver/guidance line from a bank rather just syndicating LP equity to lend out, so you could do an unleveraged and leveraged IRR. Let us know how it goes.", "replies": [{"id": "eeufpob", "text": "Perhaps that's the case. We are not a fund at this point (we are very small) so we pool investments from high net worth individuals and smaller investment funds. Might not be worth putting a model together. I haven't done one since school so I would need to brush up :)", "replies": [], "depth": 2}], "depth": 1}, {"id": "eet8qqr", "text": "I am on the lending side. For us, we dont really need to know a project's IRR or EMX. The equity side does. We need to know the project's dscr, dy  and ltv most importantly. the dscr is one measure of probability of default and ltv is one measure of severity of loss in case of default. As a rough mental math calculation, I take a look at a project's cap rate. When you add growth rate, you get the unlevered IRR (on a very high level basis). When that is unusally high or low, it is a flag for me, but for the most part we size deals based on LTV, dscr and dy. ", "replies": [{"id": "eetc2fh", "text": "Yes, this is what I think too. I always through IRR was calculated for the benefit or interest of the equity side", "replies": [], "depth": 2}], "depth": 1}, {"id": "eetbzcf", "text": "I thought IRR was used as a last resort for the investor and DSCR is a more accurate way to valuate on the lending side", "replies": [{"id": "eeufjkv", "text": "We don't use DSCR because we lend on land so there is no cash flow.", "replies": [], "depth": 2}], "depth": 1}, {"id": "eethui1", "text": "I believe the OP is referring to the lender\u2019s IRR, not the equity\u2019s IRR. Right?", "replies": [], "depth": 1}, {"id": "efj2rj7", "text": "I worked for PE RE Fund both debt and equity platforms, we used IRR's on some debt deals for additional UW metrics. Basically, just another way of looking at the deal. IMO it can be useful if you are comparing two or more cash flow streams side-by-side. I always included it because 1. someone could ask for it, 2. you should already have all the information for the IRR calc in the model anyway.  ", "replies": [], "depth": 1}]