Build the cost of a real estate fund's loan book in dollars, loan by loan, then divide by the debt that is actually drawn.
Weight each loan's annual cost by its drawn balance: sum of (balance × rate) divided by total drawn debt, with the rate taken all-in, meaning coupon plus upfront fees, cap premiums and undrawn fees spread over their terms. On an illustrative fund with 180 of drawn debt across five loans, the weighted average coupon is 5.98 per cent but the all-in weighted average cost of debt is 6.38 per cent, 40 basis points higher, with a weighted average maturity of 3.72 years.
Worked in full in Real Estate Fund Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The debt dashboard of a real estate fund reports one cost of debt and one maturity for the whole book. Investors compare it with the portfolio's income yield, the valuer uses it to sanity-check the fund's NAV, and the investment committee uses it to decide where the next refinancing sits. Built carelessly, it is a simple average of five coupons from five term sheets. Built properly, it is a dollar figure, the total annual cost of carrying the debt, divided by the debt that actually carries it. All figures below are illustrative, in millions, at SOFR of 4.30 per cent.
| Loan | Committed | Drawn | Rate | Upfront fee, term | Years left |
|---|---|---|---|---|---|
| Industrial | 60.0 | 60.0 | Fixed 5.10% | 0.50%, 7 yrs | 5.00 |
| Office | 45.0 | 45.0 | SOFR + 2.75%, capped at 4.50% strike | 1.00%, 3 yrs | 1.50 |
| Multifamily | 35.0 | 35.0 | Fixed 4.40% | 0.75%, 10 yrs | 7.00 |
| Retail | 25.0 | 25.0 | SOFR + 3.25%, unhedged | 1.00%, 2 yrs | 0.75 |
| Logistics development | 30.0 | 15.0 | SOFR + 3.00%, 0.50% on undrawn | 1.25%, 3 yrs | 2.50 |
| Total | 195.0 | 180.0 |
The office cap cost 1.20 per cent of notional for its three-year term. Upfront fees are charged on the commitment and spread straight-line over the original term of each loan, which is how they are amortised in the accounts.
Annual cost of loan i = drawn × coupon + commitment × upfront fee ÷ term + cap premium ÷ cap term + undrawn × undrawn fee
All-in weighted average cost of debt = Σ annual cost ÷ Σ drawn balance
Excel: =SUMPRODUCT(Drawn,Coupon)/SUM(Drawn) for the coupon, =SUM(AnnualCost)/SUM(Drawn) for the all-in figure, =SUMPRODUCT(Drawn,YearsLeft)/SUM(Drawn) for the maturity.
Step 1, the coupon on each loan. Fixed loans use their fixed rate. Floating loans use SOFR plus margin: 4.30 plus 2.75 is 7.05 per cent on the office, 7.55 on the retail and 7.30 on the development loan. The office cap does not pay out today, because SOFR is 0.20 per cent below its strike.
Step 2, interest in dollars. 60.0 × 5.10% is 3.060; the office pays 3.172, the multifamily 1.540, the retail 1.887 and the development loan 1.095 on its 15.0 drawn. Total interest is 10.755, or 5.98 per cent of 180.0 drawn.
Step 3, the costs the coupon leaves out. Upfront fees add 0.469 a year across the book: 0.043 on the industrial loan (0.50% of 60.0 over 7 years), 0.150 on the office, 0.026 on the multifamily, 0.125 on the retail and 0.125 on the development facility. The office cap premium adds 0.180 a year, 1.20 per cent of 45.0 over three years. The undrawn fee on the development loan adds 0.075, 0.50 per cent on the 15.0 not yet drawn.
Step 4, divide by drawn debt. Total annual cost is 11.479. Divided by 180.0, the all-in weighted average cost of debt is 6.38 per cent.
| Loan | Coupon | Annual cost | Extra over coupon, bp | All-in |
|---|---|---|---|---|
| Industrial | 5.10% | 3.103 | 7 | 5.17% |
| Office | 7.05% | 3.502 | 73 | 7.78% |
| Multifamily | 4.40% | 1.566 | 8 | 4.48% |
| Retail | 7.55% | 2.013 | 50 | 8.05% |
| Logistics development | 7.30% | 1.295 | 133 | 8.63% |
| Fund, weighted by drawn balance | 5.98% | 11.479 | 40 | 6.38% |
The 40 basis points are concentrated where the loans are short. Long fixed loans spread their fees over seven or ten years and barely move. The two-year retail loan and the development facility, which pays a full upfront fee on 30.0 while only 15.0 is drawn, carry 50 and 133 basis points on top of their coupons.
The weighted average maturity is 3.72 years, but 25.0, or 13.9 per cent of the debt, matures within twelve months, and 70.0, or 38.9 per cent, within two years. A single maturity figure hides the wall; the dashboard should show both.
The hedging mix belongs beside the cost: 95.0 of fixed debt (52.8 per cent), 45.0 capped (25.0 per cent) and 40.0 floating with no hedge (22.2 per cent). Each 100 basis points on SOFR costs the unhedged loans 0.400 a year.
| SOFR | Weighted coupon | All-in | Change, bp | Annual cost |
|---|---|---|---|---|
| 3.30% | 5.50% | 5.91% | -47 | 10.629 |
| 4.30% | 5.98% | 6.38% | 0 | 11.479 |
| 4.50% | 6.07% | 6.47% | 9 | 11.649 |
| 5.30% | 6.25% | 6.65% | 27 | 11.969 |
| 6.30% | 6.47% | 6.87% | 49 | 12.369 |
The book is asymmetric. A fall of 100 basis points passes through to the capped office loan in full and cuts the cost by 47 basis points; a rise of 100 basis points adds only 27, because the cap stops the office loan at its 4.50 per cent strike after 0.20 per cent. The cap expires with the loan in 1.50 years, so the rising-rate column should be re-run at the refinancing, without it.
Averaging coupons without weights, or weighting by commitment. The simple average of the five coupons is 6.28 per cent, because the small, expensive loans count as much as the 60.0 industrial loan. Weighting by commitment gives 6.08 per cent, because it counts the undrawn 15.0 as if it were paying interest. Neither measures what the fund pays. The second mistake is stopping at the coupon: 5.98 per cent understates the cost of carrying this book by 40 basis points, 0.724 a year, and that is the number a lender, a valuer or an investor rebuilding the fund's cash yield will find.
The same discipline applies one level down. A cap that does not pay out is still a cost: here 0.180 a year, or 40 basis points on the office loan, which is why a cap can leave the DSCR below its covenant even when the strike holds.
The debt dashboard, the four sizing tests and the rate-shock sheet are in the free workbook for this case. To compare the senior debt cost with the rest of the stack, see the blended cost of a real estate capital stack.
Drawn balances, because only drawn debt pays interest. Fees on the undrawn part belong in the numerator as a cost. In the illustrative fund, weighting coupons by commitment gives 6.08 per cent, against 5.98 per cent on drawn balances, because it treats 15.0 of undrawn development facility as if it carried interest. The all-in cost on drawn debt is 6.38 per cent.
Yes, spread over the term of the loan, as they are amortised in the accounts. On a long fixed loan they barely matter: 0.50 per cent over seven years adds 7 basis points. On short loans they matter a lot: a 1.00 per cent fee on a two-year loan adds 50 basis points, and a 1.25 per cent fee on a half-drawn facility adds 83.
Multiply each drawn balance by its years to maturity, sum, and divide by total drawn debt. In Excel, =SUMPRODUCT(Drawn,YearsLeft)/SUM(Drawn). The illustrative book gives 3.72 years, but 38.9 per cent of the debt matures within two years, so report the near-term maturities beside the average.
This article is one calculation from Real Estate Fund Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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