Financial Formulas

Loan to Value Ratio (LTV%) = Loan Amount ÷ Value

Debt Coverage Ratio (DCR) =
Net Operating Income (NOI) ÷ Annual Debt Service (ADS)

Margin of Safety (MOS) =
Net Operating Income (NOI) – Annual Debt Service (ADS)

Free-and-Clear Rate of Return = Net Operating Income (NOI) ÷ Value

Loan Constant (k%) = Annual Debt Service (ADS) ÷ Loan Amount

Cash-on-Cash Rate of Return ($/$%) =
Before-Tax Cash Flow (BTCF) ÷ Initial Equity

Maximum Loan Amount = NOI ÷ (k% x DCR)

Minimum Break-Even Point =
(Operating Expenses + Annual Debt Service) ÷ Gross Potential Income

Investor’s Break-Even Point =
(Operating Expenses + Annual Debt Service + Return on Investment) ÷ Gross Potential Income

Capitalization

Value (V) = Income (I) ÷ Capitalization Rate (R)
Capitalization Rate (R) = Income (I) ÷ Value (V)
Income (I) = Capitalization Rate (R) x Value (V)

Mortgage Equity Analysis

k% × LTV% + $/$% × (1 – LTV%)

Value Enhancement = Value at End of Holding Period −

Value at Beginning of Holding Period − Cost of Capital Improvements

Mid-Stream Cash Out Potential =

Current Market Value − Selling Costs and Taxes − Current Loan Balance

Mid-Stream Equity =

Cash-Out Potential + Capital Improvements − New Loans + New Points and Fees

IREM Pro Forma Statement of Cash Flow

Gross Potential Income (GPI)
− Loss to Lease
− Vacancy and Collection Loss
= Net Rent Revenue
+ Miscellaneous Income
+ Expense Reimbursements
= Effective Gross Income (EGI)
− Operating Expenses
= Net Operating Income (NOI)
− Annual Debt Service (ADS)
= Before-Tax Cash Flow (BTCF)