ARGUS Excel Model - DEBT SECTION
Transcript
Welcome to this video. In this video, I will cover the debt financing section in the ARGUS Excel Model. The debt financing section consists of two parts – the first debt and refinance. First debt means the original debt taken out when closing the deal. Refinance means the second debt taken out to replace the first debt after closing the deal. Generally speaking, there are 3 reasons for people to refinance: first, to free up some equity in the deal; second, the first loan is a bridge loan; third, to get a better interest rate.
Senior Debt
The debt amount is already input in the sources section. The 11 million dollars account for about 60% of total sources. The debt service consists of interest payment and principal payment. As time goes by, the principal portion goes up and the interest portion goes down in a typical debt amortization. 18 months interest-only period means the borrower only needs to pay the interest on the outstanding balance for the first 18 months of debt service. This mechanism effectively lessens the borrower’s financial burden especially when the asset has not reached the stabilization. I will say the amortization schedule is based on 25 years, which is 300 months. This loan will be fully repaid upon the exit of the investment or refinance so it is calculated as 60 months for now. This should change as I fill in the refinance assumptions. 5% for the annual interest rate. The first debt assumptions are finished. Let’s check out the Annual Cash Flow tab. We can see there is no principal payment in the first year because of the 18-month interest-only period. Principal payment occurs in the second year as half of the second year is the interest-only period. The debt is repaid in full in the year 5. For now, there is nothing in the refinance section. Everything looks good. Let’s go back to the Input tab.
Refinance
I will say the refinance happens on October 1st, 2020, which is 2 years after the closing. At that point of time, the lender will be using a 9.5% cap rate to calculate the basis to lend against. As the asset stabilizes, the lender is willing to raise the loan to value to 70%. No interest-only period. The amortization schedule is still 300 months. Interest rate is lowered to 4.5%. Based on the cap rate and loan to value, the refinance loan amount is calculated. Let’s go check out the Annual Cash Flow tab again. We can see that the first loan is repaid and the new loan is taken out at the end of year 2. The refinance loan is amortized in year 3, 4 and 5. It is repaid in full as the exit of investment in year 5.
I have completed the ARGUS Excel Model - DEBT SECTION in the ARGUS Excel Model. Thanks for watching this video. I will see you in the next one.