Another look at Excess Debt Coverage
Making the assumption that most loans are amortized monthly over a 360 month period we can express the loan payment in the usual form of the equation underlying Ellwood table #6:
Incorporating the above as the Loan Payment, a further rearrangement of terms and some simplification discloses that excess debt coverage can be expressed as a function of the discount rate (d), the investor's expected growth rate (g), the interest rate (i) and the loan to value ratio (LTV).
Recalling (1) that capitalization rate can be expressed as the net of discount rate less growth (d-g) and (2) our assumption that zero is the lowest value either lender or buyer permit for DCR, we can describe the process using only interest rates (i), capitalization rates(CR) and loan to value ratios (LTV). Note that in the rearrangement, NOI has cancelled out.
