Start with the loan that has to be repaid
Consider an illustrative commercial property with a $13 million loan coming due. Annual net operating income is $1.2 million. At an assumed 6.5% capitalization rate, the property is worth approximately $18.46 million.
A replacement lender will advance no more than 65% of value and requires at least 1.30 times debt-service coverage. For this example, the new loan is interest-only at 8%.
Two constraints, one loan amount
| Measure | Result |
|---|---|
| Value at $1.2m NOI / 6.5% cap rate | $18.46m |
| Maximum debt at 65% loan to value | $12.00m |
| Maximum debt at 1.30× coverage and 8% interest | $11.54m |
| New loan, limited by the lower amount | $11.54m |
| Net proceeds after a 1% loan cost | $11.42m |
| Existing loan to repay | $13.00m |
| Additional cash required | $1.58m |
Debt-service capacity limits the new loan to $1.2 million ÷ 1.30 ÷ 8%, or approximately $11.54 million. After the assumed loan cost, the investment needs about $1.58 million more to repay the existing debt. Interest reserves, repairs, and other closing requirements would add to that need.
Where will the cash come from?
The immediate question is whether the investment has sufficient reserves, access to additional equity, or an achievable alternative such as a loan extension. A capital call can change the economics and timing for investors, even when they still believe in the property.
A review should therefore test the refinancing plan alongside the operating budget and the exit. The ability to hold through a difficult period depends on more than a long-term view of value.
What to establish before investing
Review the maturity date, extension requirements, loan-sizing assumptions, available reserves, and obligations to contribute more capital. Ask how the plan changes if leasing takes longer, income falls short, or the replacement loan is smaller.
Those answers can change the right purchase price, the amount of initial equity, or whether the investment should proceed.