As I understand your term DCR (debt coverage ratio), it is NOI (net operating income) divided by scheduled principle and interest payments (computed on either an annual or monthly basis with the same result), and Cap (capitalization rate) is annual NOI as a percentage of Price (property cost).
Therefore a Cap rate of 8.25% would allow a 1.35 DCR and 0% down payment: when purchasing on a 30year mortgage @ 4.54% APR (annual percentage rate); or when purchasing on a 40 year mortgage @ 5.40% APR. Although I thought the 30 year APR would be that low, I'd have guessed the 40 year APR would have been a full percentage point or two higher.
Nevertheless, as this property does have an 8.25 Cap, 20 year initial leaseback, four 5-year lease renewals (for a total of 40 envisaged lease years), and periodic 5% rental increases, either each lease renewal or each 5 years (I'm not yet sure which), doesn't this deal seem worth exploring?
For instance, 1.25 DCR would allow a 30 year term at 5.21 APR, and a 40 year term at 5.99 APR; and a 1.20 DCR would allow a 30 year term at 5.58 APR, and a 40 year term at 6.32 APR.
And, if there are rent increases early in the game, when equity would still be low, I'd be delighted to dedicate them to increased mortgage payments.
I've some money, but its nothing compared to this league.
Well, I guess I must have been looking at some outdated information. I see the prospective seller's rating is not BB+, but rather BB-, and has been since October 2008, which is why the seller wants to raise cash on assets, and I want isolation from their problems, and would like to price some insurance to protect me and the lender. And I remain curious as to how safe insurers, underwriters, etc, themselves are in the face of calamity. That is, can they really protect me, and how much do they cost? Any advice on those points?
Jun 13, 2009