Exit valuation and refinance gap calculator

This calculator turns net operating income at exit and a cap rate into an exit value, then sizes the new loan a lender would offer against that value. It answers whether a refinance clears the existing loan balance or leaves the sponsor writing a check at closing.

Formulas

• Exit value = net operating income / capitalization rate
• New loan = smallest of the loan to value loan, the coverage loan and the debt yield loan
• Loan to value loan = exit value x maximum loan to value
• Coverage loan = (net operating income / minimum debt service coverage) / loan constant, where loan constant = annual debt service on one dollar of loan at the entered rate and amortization
• Debt yield loan = net operating income / minimum debt yield
• Paydown needed = existing balance - new loan, when positive
• Excess proceeds = new loan - existing balance, when positive

Worked example with the starting inputs

With the starting inputs in the form (net operating income at exit $1,100,000; exit capitalization rate 6.5 percent; existing loan balance $14,000,000; new loan maximum loan to value 65 percent; new loan interest rate 7 percent; amortization 30 years; minimum debt service coverage 1.25; minimum debt yield 9 percent), the results are: exit value (net operating income / capitalization rate): $16,923,077; new loan proceeds: $11,000,000; binding constraint: LTV; paydown needed to refinance: $3,000,000; excess proceeds after payoff: $0.

These inputs are hypothetical and are shown only so the arithmetic can be checked by hand.

What the result means in a real deal

The lender’s smallest loan sets the new loan amount, which decides whether the refinance leaves excess proceeds or needs a paydown.

The binding constraint is the useful part of the output. Knowing which test binds tells the sponsor what to negotiate in the term sheet, whether that is a longer amortization or a different lender whose underwriting leans on value instead of cash flow. It also shows the asset manager how much a cap rate move at exit changes the paydown, since each test reacts to value and income in its own way.

How to read and stress the result

Start with the binding constraint, then move one input at a time. Raise the exit cap rate and watch value fall.

Run it again. Then run it harder. Compare each case against the existing loan balance and read the sign of the gap. A paydown means the sponsor would need added equity or a shorter hold. Excess proceeds mean a distribution to limited partners may be possible. Both outcomes can be read from this result.

Where the result misleads

Appraisers, and not formulas, set value at a refinance. An appraisal can come in below the cap rate math, and a lender’s underwriting income may differ from the sponsor’s.

Loan agreements and term sheets add terms the calculator leaves out. Lenders may size on trailing income, hold back reserves for replacement costs, charge origination fees, apply an interest rate floor, or retain proceeds until leasing milestones are met. Prepayment penalty or yield maintenance on the existing loan can lift the payoff figure above the stated balance. Recourse carveouts, and the way each lender defines debt service coverage, vary from one document to the next. Use the output as a first screen for a conversation with the lender, and let the signed commitment letter settle the numbers.