april, 2012 what and how: debt service coverage ratio

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(864) 235-6325

April, 2012

What and How:Debt Service 2

Useful Web Tip 2

Managing YourProperty Taxes 3

The Lite Side 5

Available Properties 6

Recent ApartmentSales 6

Greenville AreaOccupancies 6

Debt Service Coverage Ratio (Debt Coverage Ratio /DSCR/DCR) is a popularbenchmark for many industries including commercial real estate. Incommercial real estate, the definition of DCR is the Net Operating Income(NOI) divided by the Annual Debt Service. DCR is used in financial analysisto determine the appropriate amount of financing for an investmentopportunity.

Before you continue reading this article, please note that market conditionsvary and you should always consult local mortgage brokers/lenders aboutfinancing conditions in your area. Please note that much of the followingexamples have been simplified.

The Equations

• NOI = Scheduled Gross Income-Vacancy & Concessions – Operating Expenses

• DCR = NOI / Annual Debt Service

• Debt Service = Total Annual Debt Payments

Let’s take an example:

A businessman owns an income producing property that generates aScheduled Gross Income (SGI) of $300,000 annually from his tenants. Insimpler terminology, he can earn $300,000 a year from his tenants. His totalexpenses including taxes, utilities, and maintenance on the property that total$100,000. The local market has a market vacancy reserve of 10% or $30,000.

NOI = $300,000 – $30,000 – $100,000 = $170,000

The Debt Service can be calculated from the amortized loan.

In a very simple example:

Say our businessman is interested in the property because his trusted brokeremailed it to him. From his financial analysis, he knows that the NOI willyield $170,000 annually. The bank gives requires him to pay back $150,000per year in debt service. His DCR would be 1.13 repeating.

DCR = 170,000 / 150,000 = 1.13 repeating.

What does the ratio even mean?

A DCR above 1 means that the investor will receive earnings from theproperty. A DCR below 1 means that the investor will be paying each year tokeep the property. Any investor would want the DCR to be well over 1.

Let’s look at the example again with some more realistic data. Please note

WHAT AND HOW: DEBT SERVICE COVERAGE RATIO

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that this example is more detailed but stillsimplified. Our businessman is interested inpurchasing the retail plaza. He sees that its NOIyields $250,000. At an 8% cap rate, the building isselling for $3,125,000. He proceeds to the bank,and the bank tells him that he is approved for a60% loan ($1,875,000) with 6% interest due in 10years. The $1,875,000 breaks down to $187,500each year, but with interest, his annual paymentis: $249,796.08.

If he chooses to pay off the debt in the allottedtime, he will gain $203.92 each year from the NOI.

The DCR is roughly 1, which means that theinvestor would receive a negligible amount ofearnings over the ten years and also have to pay$1,250,000 upfront.

Our businessman, however, chooses to refinance.Without going into too much detail aboutrefinancing (a future topic), our businessmaninstead chooses to amortize his loan over 20 yearsand receives another loan to pay off his originalloan. In this example, he receives the perfect loanthat would cover the remaining 10 years.

Each year, he would pay $161,196.96. Each year,he would then earn $88,804.04, and his DCR wouldbe around 1.55.

DCR = 250,000 / 161,196.96 = 1.55

In the standard 30 year amortization, thebusinessman would only pay $134,898.84 eachyear. His DCR would be about 1.85.

His total payment with 30 years is $4,046,966.04.

His total payment with 20 years is $3,223,939.76.

His total payment with 10 years $2,497,961.29.

With longer amortizations, the businessman paysless each year but pays more overall. Please notethat all these examples are pretax.

In truth, perfect scenarios in which other lendersgive the exact amount needed to finish theprevious loan are few and far between. Be waryabout how much you can pay off, and how muchthat will affect you.

There are many variables that could completelythrow off these examples including the originalloan only being 3 years instead of 10.

“The REI Wise Blog” by Brendan Erickson &Jonathan Lee

Brendan can be reached at 940 734-4191 [email protected].

USEFUL WEB TIP

MEET YOUR NEIGHBORS!

Do you know all of your neighbors? Do you have their phone numbers? Do you know how tospell their names? Do you have their phone numbers?

You can get all of this information with ease here. Just type in your address and, Shazam - anaerial map pops up with every neighbor's house shown along with their names and phonenumbers. Often you will see their spouse and children's' names with the correct spelling.

There are other bells and whistles - like help for organizing a block party. But, even if you'renot into block parties, the quick and easy access to the other information makes this place

worth a visit!

Useful place!

http://neighbors.whitepages.com/

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INC.


In today’s fast paced world of business, fewline items are growing faster than property taxesand it is imperative that managementaggressively try to limit such increases. Propertytaxes are determined by property valuations andmillage rates and in the reassessment processvaluations are negotiable while millage rates arenot!

Every state in the southeast has a regularreassessment schedule of real property and allbusiness owners must review any changes invalue in order to catch errors and get themcorrected. Errors come in many forms and can becorrected as long as each county’s specific deadlineis met and the appeal documentation is submittedin a manner acceptable to the tax assessor.

For income producing properties, the taxassessor does not know what your actual netoperating income (NOI) is unless you physicallypresent it during an appeal. Counties developmodels that are based on random phone calls, andthe information they are given in the phonesurveys is often incorrect. Rental rates obtainedover the phone are often significantly higher thanrents actually collected, overstating income, andactual expenses consistently exceed the tax man’sestimates. Both scenarios contribute toincorrectly inflating net operating incomeassumptions which are the basis for determiningthe tax assessor’s valuation of your property.Since net operating income is the key number indetermining all income producing propertyvaluations, it is imperative that correct figures bepresented to the tax assessor.

The other key number in determining propertyvaluation is the capitalization rate or “cap rate”for short. The cap rate takes things like interestrates and the risk of your business into account.The cap rate also will depend on the age of the

property and several other factors. For example,a hotel would most likely have a different cap ratethan an apartment complex. In the incomeapproach to determining property valuation, theNOI is divided by the cap rate to arrive at anappropriate valuation. The higher the cap rate,the lower the valuation and conversely, the lowerthe cap rate the higher the valuation. Eachindustry has a cap rate that takes into accountthe many variables of that business.

Armed with the knowledge that the majority ofproperty valuations are made using incorrectprofit assumptions for your business, it isimperative that management question the processthrough an appeal process to the tax assessor’soffice. Unfortunately, this process can be timeconsuming and a distraction for management asthey spend their efforts chasing details for the taxman rather than focusing on their core businessissues.

The appeal window in the state of Floridaopens August 15th. The state of Georgia hasundergone many reassessment changes this yearand therefore the opportunity to appeal should bepursued aggressively. The South Carolina appealwindow is also open and Guilford County, NewHanover County, Pitt County and several othercounties in North Carolina are also open toappeals at this time. Basically, if you receive anew valuation notice for any reason you shouldalways consider the benefits of an appeal.

Over the past twenty four years, theUniversal Property Tax Group has been able tosignificantly reduce property valuations incounties throughout the southeast. These lowervaluations translated into significant property taxsavings for their clients. All work by theUniversal Property Tax Group is performedstrictly on a contingency basis as their only fee isa percentage of the first year’s tax savingsgenerated from a successful appeal. To see howthe Universal Property Tax Group could be ofservice to you or your company, please call HankMeyer at 864-380-4198 or visit the companywebsite at www.propertytaxsavings.com.

THE CHALLENGE TO MANAGE YOUR PROPERTY TAXES IS GETTING MORE COMPLICATED!

"In prosperity, our friends know us; inadversity, we know our friends."

— John Churton Collins


These professional, commercial and investment real estate service providersare considered Endorsed Service Providers by Crawford Associates.

Owen Appraisal & Consulting Services, Inc.10 Lavinia Avenue, Greenville, SC 29601

Post Office Box 9187, Greenville, SC 29604(864) 232-5393 • Fax (864) 232-5395

E-mail: [email protected]

R. Bruce Owen, MAI

Specializing in Industrial, Retail and Apartment Propertiesas well as Estate Valuations and Tax Appeals.

Apartment Loan Financing

• 5-35 Unit Small Apartment Lending with large apartment lending terms • 36+ Unit financing with FNMA Multi-Family housing programs • 30 and 40 year Amortizations • Rates fixed for up to 10 years • Refinance Loans available • Rehab Loans available • Bridge financing for under-performing properties

CALL MARK WELLS TODAY FOR COMPLETE INFORMATION 864-235-9596

MANAGEMENT FOR THE APARTMENT INVESTOR

Emphasizing hands on property management

with practical asset management.

Working to increase the bottom line.

864.235.2224

[email protected]




"In law a man is guilty when heviolates the rights of others. Inethics he is guilty if he onlythinks of doing so."

- Immanuel Kant

"Courage is the mastery of fear,not the absence of fear."

- Mark Twain

After having dug to a depth of 10 feet last year, New York scientists found traces of copper wire dating back 100years and came to the conclusion, that their ancestors already had a telephone network more than 100 years ago.

Not to be outdone by the New Yorkers, in the weeks that followed, a California archaeologist dug to a depth of 20feet, and shortly after, a story in the LA Times read: "California archaeologists, finding of 200 year old copper wire,have concluded that their ancestors already had an advanced high-tech communications network a hundred yearsearlier than the New Yorkers"

One week later. A local newspaper in South Carolina reported the following: "After digging as deep as 30 feet in his pasture near Due West, Bubba, a self-taught archaeologist, reported that hefound absolutely nothing. Bubba has therefore concluded that 300 years ago, South Carolina had already gone wireless".

Just makes a person proud to live in South Carolina, don't it?


Available Properties

9.6 acre multi-family site, Zoned RM off White Horse Road - $14,500 per acre, $139,200.(Reduced from $23,000 per acre)

19.5 acre multi-family site, zoned RM in Berea - $40,000 per acre.

12 units in three four-plex buildings in Liberty, SC ($23,166/unit), late 1970’s construction,$278,000. (Reduced from $293,00).

106 unit complex in Greenwood, SC ($51,866/unit), 1970’s construction, completely renovated in2009, 97% occupied. $5,350,000.

2 unit duplex in downtown Greenville ($80,000/unit). $160,000.

For additional information, please contact us at

[email protected]

reduced

reduced

GREENVILLE AREAOCCUPANCIES —

MARCH 2012• Class C 94.2%• Class B 94.1%• Class A 95.7%• Overall Market 94.4%

* These listings do not necessarily represent sales of Crawford & Associates, LLC, but rather are an attempt to provide the most complete informationavailable on multi-family sales in the market.

No New Sales Reported

Recent Apartment Sales*

INC.

(864) 235-6325

INC.

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