A sponsor is requesting acquisition financing at 70% LTV for The Modern Apartments in San Diego. Stress test the deal: what happens to DSCR if rent growth comes in at the bear-case forecast and exit cap rates widen 50 bps?
DECLINE at the requested 70% LTV / $103.3M — APPROVE WITH STRUCTURE at $76.6M (pending guarantor review). Debt yield binds hard: lender-case NOI of $7.27M against a 9.5% floor supports only $76.6M, a $26.7M gap to the request . Day-1 DSCR at the full ask is 1.17x — already under both the 1.25x amortizing floor and the 1.20x IO floor — on a 7.04% debt yield and a 20.0% LTV that's fine on its face but meaningless once the income tests fail first .
The credit thesis for a lender at this leverage doesn't hold on in-place income: the 18% haircut from T12 to lender-case NOI (vacancy floor lifted from a reported 3.7% to the market's 7.3%, plus reserves added back into OpEx) leaves too thin a cushion to support 70 cents on the dollar in a market with a going-in cap rate near 4.9% . Even in the base case — a roughly flat 0.4%/year NOI trend drawn from the rent forecast — the maturity refinance already comes up $11.0M short against the standard +50bps rate/+50bps cap stress . Layer in bear-case rent growth (averaging -2.3%/year over the model's five-year forecast horizon, driven by the submarket's flat-to-softening in-place rent trend against a metro peer) and the shortfall triples.
Counter-offer: $76.6M (65.7% LTV, 1.58x DSCR, 9.5% debt yield) is what this collateral supports today — an amortization extension doesn't fix it, because debt yield, not DSCR, is the binding constraint at any proceeds level; the only lever is size .
Sponsor is requesting $103.3M (70% LTV) of acquisition financing on The Modern Apartments, a 369-unit, 1959-built (renovated 2020) garden/townhouse community in Kearny Mesa, San Diego . Non-recourse, 10-year term, 2-year IO, quoted off current Fannie Mae conventional pricing (6.01%, closest agency bracket to the requested leverage) . Origination mode; sponsor undisclosed, no PFS provided.
| Metric | Value |
|---|---|
| Lender-Case NOI (haircut vs T12) | $7,272,3851 |
| DSCR at Request | 1.17x2 |
| Debt Yield at Request | 7.04%3 |
| Supportable Loan (binding constraint: Debt Yield Test) | $76,551,417 |
| Surplus/(Gap) vs Request | ($26,707,593) |
The haircut bites almost entirely on vacancy: the T12's reported 3.7% economic vacancy sits well under the submarket's 7.3% physical vacancy, so the lender case restates revenue at the market floor rather than the sponsor's optimistic actual . In-place income does not carry the requested debt without a business plan — there is no NOI growth story built into Day 1 pricing that gets this to floor at 70% LTV; the gap is basis, not timing.
Balance at maturity is $90.65M regardless of scenario (proceeds and amortization are fixed at close) . What differs is the takeout: at the standard +50bps rate/+50bps cap stress, base-case NOI growth ($7.57M at maturity) supports a stressed value of $139.4M and takeout proceeds of $79.7M — an $11.0M shortfall on its own . Run the same stress against bear-case rent growth (NOI falls to $5.76M by Year 10) and the stressed value collapses to $106.1M, takeout proceeds fall to $60.7M, and the gap widens to $30.0M — 33% short of the balance owed . LTV at maturity climbs from 70.0% to 77.6% under the bear case because value erosion outpaces amortization . San Diego multifamily transaction liquidity is deep enough that a sale exit is realistic, but only at a materially written-down basis from the $147.5M entry value — this is not a refinance that self-heals with time.
Debt yield never clears the 9.5% floor at any point in the bear case — it runs 6.4%-7.0% throughout the term . NOI break-even (1.00x DSCR) is $6.21M against a $7.27M lender-case NOI, a 14.7% cushion at Day 1 — thin enough that the bear case's cumulative NOI decline burns through it by Year 3. The cap cushion at the takeout is already negative before any stress is layered on: even the unstressed market cap doesn't clear the refinance .
Recovery is strong precisely because the loan is income-constrained, not basis-constrained: at a 20% value decline off the $147.5M lender value, recovery is 98.8% of par — the collateral cushion (basis: 47.8% loan-to-cost equivalent at the counter-offer sizing) absorbs the loss before principal is impaired . What protects par here is basis, not the guarantee — there isn't one on file yet.
The Modern sits in Kearny Mesa at 96.75% physical occupancy against a submarket running 92.7% — the asset is outperforming its own submarket on occupancy, but submarket in-place rent has been flat to slightly down over the trailing 12 months (0.01% t12 change), consistent with the bear-case forecast's downward path . Supply pressure reads low in the forecast engine's own signal, but San Diego's MF permit pipeline (7,168 units permitted in the trailing 12 months) is not trivial against this submarket's ~24,500-unit base .
Decline the $103.3M ask; approve $76.6M with structure, subject to sponsor financials. The single item most likely to move this: a sponsor-submitted T12 and rent roll that shows economic vacancy genuinely running below the 7.3% submarket floor I used — that's the whole haircut, and closing it materially narrows the debt-yield gap. Absent that, the bear-case stress (which is a live scenario, not a tail case, given the submarket's already-flat rent trend) turns a marginal maturity refinance into a $30M hole.
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