Do capital improvements count against cash flow in LTC?
When modeling for CRE.... in a LTC instead of LTV debt...Do capital improvements count against cash flow before debt service? or since its LTC, it doesn't go against cash flow?
[{"id": "ic5zbhe", "text": "It depends on the loan. \n\nFor example, in a MF value add situation, many lenders will lend 60-70% LTV and 100% capital improvements. However, some lenders make you fund the capital improvements from equity. \n\nHere\u2019s what I do:\n\n[=] NOI\n\n[-] Purchase\n\n[-] Capital Improvements\n\n[+] Sales Proceeds\n\n[=] Unlevered Cash Flow\n\n[~] Financing\n\n[=] Levered Cash Flow\n\n\u2014\u2014\n\nIf the bank funds the capital improvements, add it in the financing.", "replies": [{"id": "ic9hsk6", "text": "To expand on your post, Assuming it is not a value add deal, In Fannie and Freddie multifamily they use a property condition report to determine the amount of reserves needed for ongoing capital improvements and immediate repairs.\n\nOnly the ongoing capital improvements are used in the DSCR calculation. That can typically range from $250/unit for a new building to $400/ unit for an old building with many mechanical systems at the end of their useful life.", "replies": [{"id": "ica7dzu", "text": "Spot on. I budget my reserve requirements after NOI (I have an NOI and adjusted NOI).", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "icao0ve", "text": "What are you modeling?  Are you sizing a value-add deal for a bridge loan? Or is it an acquisition proforma on the sponsor side?\n\nIt sounds like a proforma. Of so, the answer is no, not typically. It's rare that any real improvement CapEx will be included above the NOI (and even Debt service) line during operations. When modeling for an acquisition we usually will keep the renovation budget and schedule completely outside of the proforma since it is usually funded by raised equity or as part of a lender funding scheme (fully funded or renovation line of credit). \n\nYou will see a Replacement Reserves above the NOI line in agency oriented proformas but it's really to make sure there's an accounting for it since lenders typically pull those reserves on the mortgage statement. Property Managers will use a GL code for those reserves that's below the line, near non-operating expenses, rolled into the debt service GL or they might go straight to the balance sheet.", "replies": [], "depth": 1}]