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Hi Spencer,
1. Is it common to see these metrics being calculated based on current equity still in the project? For example, if you refinance a development after construction and hold, and assume you have extra refi proceeds after all debt is paid, would you use (original equity – refi proceeds to equity) for the CoC, or (total construction cost – refi proceeds to equity) for the Free and Clear and NOI Yield?
2. Is it common to see NOI yield (excluding capital expenditures)? or does it make sense to always show Free and Clear.
Thanks!
Great questions!
1. Free and Clear return and Cash-on-Cash are generally calculated using Capital-To-Date. So this number may grow, if additional capital needs arise (e.g. leasing costs require capital call) but the number may also go down such as in the case of a refinance.
It’s important to remember that all metrics are simply tools to help make investment decisions. Thus, there’s no right and wrong answer necessarily. For instance, there may be a case where the investor wants to calculate CoC return based on initial capital outlay only, irrespective of changes in their capital account since. But most times, what the investor really cares to know is: what is my annual return on invested capital as measured by the CoC return metric. And thus, it becomes CFO ÷ however much the investor currently has invested in the asset.
Also I should point out, many investors have their own metrics they’ve developed. Or adaptations of common metrics to better suit their needs.
2. I’m not sure I follow the second question. When you say NOI yield, what metric exactly are you referring to? NOI ÷ Total Project Cost?
Great! Very helpful. Thanks.
Yes, I am referring to NOI/Totol Project Cost. But I think your comments to my initial post answered this question.
To clarify, “capital to date” for the CoC or Free and Clear means total equity required for the acquisition or development plus what?
-what about the principal portion of amortizing loans? Assuming stabilized development or out of the IO period. Technically that is equity tied up in the deal.
-what about capital calls? i.e. major capex in Y4 or run out of funds to finish construction.
Makes it sound like we need to add to the denominator portion of the formula once we have any cash infusion or equity build up in the loan?
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