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📈Return Summary Breakdown
Next Level Financial Modeling: Helping you become an expert commercial real estate underwriter every Saturday!
Justin Goodin
February 17, 2024
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Understanding the difference between project level and limited partner level returns will allow you to be an informed underwriter.
Here’s the breakdown between unlevered, levered, and limited partner level returns.
Unlevered Returns
In commercial real estate investing, unlevered returns show a scenario as if the property were purchased in all cash. This helps investors look at the property purely on an operational basis, without the noise of debt.
Levered Returns
Levered returns are result after commercial real estate debt comes into play. A property’s levered returns are almost always higher than the unlevered because it considers debt.
By placing leverage on a property, the amount of equity required is lower, which means that the investor(s) earn a higher return on the amount of money that they put in. Therefore, leverage will always enhance your returns.
By trading off the risk associated with financing, investors increase their opportunity cost and reduce their yield on invested capital.
Fun fact: In your underwriting model, if you run a scenario with 0% leverage debt, your unlevered and levered returns should match.
Limited Partner Returns
Unlevered and levered returns are both known as the project level returns. The limited partner returns are a result after the waterfall assumptions between the general partner and limited partner.
📈 CRE & Market News
📈 Stay Up-To-Date on Rates
US Ten Year Treasury Yield: 4.23%
30 Day Term SOFR: 5.30%
30 Day Average SOFR: 5.32%
Fannie Mae (1.35x DSC / 65% LTV / 10Y): 5.45% - 6.20%
Freddie Mac (1.35x DSC / 65% LTV / 10Y): 5.80% - 5.95%
5 Year FHLB: 4.52%
WSJ Prime Rate: 8.50%
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Six Apartment Communities Sell for Over $200 million in 2023
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