Q: Sorry to go backwards, but could you quickly do the debt constant math from Slide 7 – interest rate of 6.00%, amortization of 25 years, and monthly payment frequency? What is the calculation to obtain the 0.077316 debt constant?
A: The 0.077316 debt constant comes from an Excel Debt Constant function that provides the unique debt constant for every combination of a) an interest rate, b) the amortization period, and c) payment frequency, e.g., monthly, quarterly, etc. Simply input these thee values into the function and it provides the unique Debt Constant.
We will send you a link to this function if you would like to use it. The Excel model for the debt constant is online now. accessible via this link.
With respect to the actual mathematical calculation of the Debt Constant, it is as follows:
- Debt Constant = [interest rate / 12] / (1 – (1 / (1 + [interest rate / 12] ^ n))
- n = the number of months in the loan term
Example: $4,000,000 term loan at 5.50% interest with a 30-year amortization or 360 months of loan payments.
- Debt Constant = [ 0.055 / 12] / (1 – (1 / (1 + [0.055 / 12] ^ 360)) = 0.06813
- Annual Payments = $4,000,000 x 0.06813 = $272,520
Q: What is the difference between stabilized and underwriting NOI? And how does this differ from actual rent rolls and operating expenses? Isn't underwriting NOI based off the rent rolls / operating expenses?
A: Stabilized NOI represents revenue and operating expenses in a stabilized environment, which is to say the appraiser's expectations for rental rates, vacancy rates, and operating expense when the market is in equilibrium. These stabilized assumptions may be significantly different from the actual rental rates, vacancy rates, and operating expenses in the market as it is today. The underwriting NOI uses the actual values for rental rates, vacancy rates, and operating expenses as a starting point and only adjusts them if there is a compelling reason to do so.
And, yes, the rent rolls represent the most current information about rental rates and vacancy rates. Top line revenue in the most current operating statement should reflect the combination of existing rental rates and vacancy rates for the property. In addition, the current operating statement provides actual operating expenses, which may be adjusted in identifying an operating NOI if property taxes increase following the sale requiring a subsequent adjustment in the relevant property taxes.