Equity versus debt raise comparison calculator
This calculator sets a debt raise beside an equity raise for the same capital and shows what each costs the sponsor over the hold. It answers which source leaves more profit once interest, or the preferred return and profit share, has been paid.
Calculator
| Cost of the debt over the hold | |
|---|---|
| Left for the sponsor with debt | |
| Paid to the equity investor over the hold | |
| Left for the sponsor with equity | |
| Debt cost per year as share of capital | |
| Equity cost per year as share of capital |
Formulas
- Debt cost = capital x interest rate x years (interest only, always owed)
- Preferred return total = capital x preferred rate x years, paid only to the extent profit exists
- Equity cost = the smaller of preferred total and profit, plus investor share x any profit above the preferred total
- Left for the sponsor = project profit - what the capital costs
Worked example with the starting inputs
With the starting inputs in the form (capital to raise $5,000,000; hold period 5 years; debt interest rate (interest only) 8 percent; equity preferred return (simple, annual) 8 percent; investor share of profit above the preferred return 30 percent; project profit over the hold before paying for this capital $4,000,000), the results are: cost of the debt over the hold: $2,000,000; left for the sponsor with debt: $2,000,000; paid to the equity investor over the hold: $2,600,000; left for the sponsor with equity: $1,400,000; debt cost per year as share of capital: 8.0 percent; equity cost per year as share of capital: 10.4 percent.
These inputs are hypothetical and are shown only so the arithmetic can be checked by hand.
What the comparison means in a real deal
The loan agreement from the lender makes interest a fixed obligation that falls due whatever the project earns, and the lender will test it against debt service coverage before closing. The limited partnership agreement or term sheet for the equity sets a preferred return and a split of profit above it, and the investor is paid only from money the property actually produces.
How to read and stress the result
Start by changing the project profit, because it moves the two sources differently. Equity cost shrinks when profit falls short of the preferred total, since the investor is paid only to the extent profit exists.
Also vary the hold. Longer holds add to both interest and preferred return, so test an exit in the fifth year against an earlier sale with the lender’s prepayment terms in view.
Where the result misleads
The calculator ignores loan fees and the sponsor’s own promote, so actual closing statements will differ. It also treats profit as a single lump sum at exit. Appraisal and lender sizing never enter the math.
A loan agreement may carry recourse, a floating-rate, a reserve requirement, or a minimum debt service coverage covenant that forces a paydown, and none of those appear in the interest line.