Underwrite a logistics park: Rs 150 crore price, Rs 12 crore of net operating income, a 60% interest-only loan at 9.5%. What are the debt service cover and the break-even occupancy, and what protects the downside?

Debt service cover is 1.40 times and break-even occupancy is about 72%. Rs 90 crore at 9.5% costs Rs 8.55 crore a year against Rs 12 crore of income. Occupancy, now 93.8%, can fall to 72.2% before rent stops covering interest, but the lender's 1.25 times test bites at 85.5%. The catch: the property yields 8% and the debt costs 9.5%, so leverage cuts the equity's cash yield to 5.75%.

Income, then the debt, then the downside. It is how a lender thinks about a family renting out a flat to pay a home loan: first, how reliable is the rent; second, how much of it the loan instalment eats; third, how many months without a tenant the family can survive. For Bhimthadi, net operating income of Rs 12 crore on a Rs 150 crore price is an 8.0% yield, the cap rateNet operating income divided by the property price; the yield the property earns before any borrowing., and everything else is measured against it. Today's income implies 93.75% occupancy: Rs 16 crore times 0.9375 is Rs 15 crore, less Rs 3 crore of fixed costs.

Set net operating income equal to the interest bill and solve for occupancy. Rs 16 crore times occupancy, less Rs 3 crore of fixed costs, equals Rs 8.55 crore at 72.2% occupancy: that is the break-even, the number an investment committee asks for first. The property can lose about 22 points of occupancy, roughly a fifth of its rent roll, before it cannot pay its lender from its own income. The covenant bites earlier: at 1.25 times cover, income must stay above Rs 10.69 crore, which needs 85.5% occupancy, only 8 points below today.

The table carries the real finding. Bhimthadi survives every test in cash terms, but breaches its covenant in each of them, which hands control to the lender at exactly the wrong moment. And there is a structural problem: the property yields 8.0% while the loan costs 9.5%. That is negative leverageBorrowing at a higher rate than the asset yields, so every rupee of debt lowers the return on the equity instead of raising it.. The Rs 60 crore of equity earns Rs 3.45 crore, a 5.75% cash yield, less than the 8.0% it would earn with no loan at all. Borrowing here adds risk and lowers income, and pays off only if rents and values grow.

Buy only on different terms. Either a lower price, which raises the yield above the cost of debt, or less borrowing: at 45% of the price, cover rises to 1.87 times and the covenant headroom widens. Ask for the lease schedule too: when leases expire, whether tenants are strong, and how rents compare with the market. The single number to defend is the 86% covenant occupancy, not the 72% break-even, because the lender acts long before the cash runs out.