Compile the rate-cap terms
Record the loan balance, reference index, cap term, strike, lender requirements and proposed counterparty. Request quotes on the same terms so the premiums are comparable.
Check coverage at the proposed strike
For a simplified interest-only loan, the annual interest rate that produces a target coverage ratio is annual underwritten cash flow divided by the coverage ratio and loan balance. Subtract the loan spread to estimate the corresponding index rate. Actual loan calculations may use different cash flow, day counts, floors, amortization or other requirements.
Debt yield is net operating income divided by loan balance. Changing the interest rate alone does not change debt yield. The coverage calculation and the lender’s cap requirement must be checked separately.
Compare cap quotes
Compare the upfront premium, counterparty eligibility, assignment rights and replacement requirements. The provider’s quote determines the cap price; it cannot be derived reliably from a benchmark rate alone.
Assess a rate buy-down
Record the upfront cost and compare the proposed debt payments with and without the buy-down over your expected holding period. Include the effect of amortization and any early repayment. For a simple interest-only example with an unchanged balance, dividing the upfront cost by annual interest savings gives an undiscounted break-even period.
Use the term sheet comparison tool for lender proposals. Confirm hedge and loan terms with the relevant providers.