Case 040Structured finance and securitisationCore

Velkora Warehousing Park has gross potential rent of Rs 48 crore, 8% vacancy and operating costs of 20% of effective income. Get to value at an 8% cap rate, then size a refinancing loan at 60% loan-to-value and 1.4x debt service cover. Which test binds?

InvescoNew York · 2025

The situation

Velkora Warehousing Park is a stabilised logistics park near a port, leased to third-party logistics firms. If fully let at contracted rents it would earn gross potential rent of Rs 48 crore a year. Vacancy and collection loss run at 8%, and operating costs not recovered from tenants are 20% of effective income.

The owner wants to refinance. Comparable parks trade at an 8% cap rate. Your lender's terms: at most 60% loan-to-value and at least 1.4x debt service cover, on a 15-year amortising loan at 9.25%.

Your task

Walk from rent to value, size the loan on both tests, and say which one binds and why.

Quick check

Which test do you expect to bind?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Value is about Rs 442 crore and the loan is about Rs 200 crore, set by debt service cover, not loan-to-value. Rent of Rs 48 crore less vacancy and costs leaves NOI of Rs 35.33 crore; at an 8% cap rate that is Rs 441.6 crore. Sixty per cent would be Rs 265 crore, but 1.4x cover at 9.25% over 15 years allows only Rs 200 crore, about 45% of value.

Step 1How do you get from gross rent to value?

A landlord with ten flats does not earn ten rents: some sit empty, some tenants pay late, and there are repairs and taxes the tenants do not cover. Value rests on net operating incomeRent actually collected, less the property costs the owner bears, before debt service and tax., not on gross rent. Take off 8% vacancy to reach effective income of Rs 44.16 crore, then 20% of that in costs, Rs 8.83 crore, to reach NOI of Rs 35.33 crore. Divide by the cap rate: Rs 35.33 crore over 8% is Rs 441.6 crore.

Rent to income to value, Rs crore48.00Gross rent-3.84Vacancy 8%44.16Effective-8.83Costs 20%35.33NOIValue = NOI / cap rate35.33 / 8%Rs 441.6 crexit value
Gross potential rent of Rs 48 crore falls to Rs 44.16 crore after 8% vacancy and to NOI of Rs 35.33 crore after operating costs, which at an 8% cap rate values Velkora at Rs 441.6 crore.
Step 2What loan does each test allow?

Loan-to-value is one line: 60% of Rs 441.6 crore is Rs 265.0 crore. Cover takes two. At 1.4x, NOI of Rs 35.33 crore can service Rs 25.23 crore a year, and a 15-year loan at 9.25% with that payment is Rs 25.23 crore times an annuity factor of 7.943, about Rs 200 crore. The smaller answer is the loan, so cover binds and the loan is about 45% of value.

The relationship
Loan=NOI1.4×1−(1.0925)−150.0925=25.23×7.943≈200\text{Loan} = \frac{\text{NOI}}{1.4} \times \frac{1-(1.0925)^{-15}}{0.0925} = 25.23 \times 7.943 \approx 200
NOI / 1.4the most annual debt service the income supports at 1.4x cover
annuity factorthe loan that one rupee of annual payment repays over 15 years at 9.25%
What it says in wordsThe loan is the present value, at the loan rate, of the largest payment the income can support.
Two tests, two answers: the smaller one is the loan60% of value2651.4x cover, 9.25%, 15 years200: binds, 45% of valueAnnual debt service allowed: 35.33 / 1.4 = Rs 25.23 croreLoan = 25.23 x annuity factor 7.943
Sixty per cent loan-to-value would allow Rs 265 crore, but 1.4x debt service cover at 9.25% over 15 years allows only about Rs 200 crore, 45% of value, so cover sets the loan.
Step 3Why does cover bind here, and what would change it?

The asset yields 8% on value while the loan costs 9.25% plus principal repayment. When the borrowing rate is above the cap rate, each rupee of loan costs more a year than a rupee of value earns, so cover bites before loan-to-value. The lender's debt yield, NOI over the loan, is about 17.6%. A longer amortisation or an interest-only period would lift the cover-based loan; a rise in cap rates to 9% would cut value to Rs 393 crore and the 60% loan to Rs 236 crore, still above the cover limit. For an exit value, the same NOI divided by the exit cap rate gives the price a buyer pays; that is the number the sponsor watches.

Where candidates lose it

The usual slip is capitalising gross rent. Rs 48 crore at 8% gives Rs 600 crore, overstating value by more than a quarter because vacancy and owner costs were skipped.

The second is stopping at loan-to-value. Sixty per cent of value is a ceiling, not an offer; in a high-rate market cover almost always cuts the loan further, and the interviewer wants to hear which test binds.

What the interviewer asks next

  • What loan does a 25-year amortisation allow at 1.4x cover?
  • The anchor tenant, 30% of rent, has a lease expiring in two years. How does that change your sizing?
  • What is a debt yield test, and why do some lenders prefer it to loan-to-value?

Asked at Invesco, Real Estate, New York, 2025 (Wall Street Oasis): Walk me through how to get the exit value of a property from Gross Potential rent, using Cap rate.

Company names and figures are illustrative.