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Sunday, June 22, 2008

Daily Observations - Response to Annonymous

Question: Can the forecasted profit be substituted for NOI to come up with a Rate of Return for the new project? Thank you for your time, we're all looking forward to hearing your answer...

Forecasted profits are just that forecast and as such for NOI calculations they are not applicable. the only thing we can use with forecasts is the ability to calculate a projected a Debt Service Coverage Ratio to determine if a project pencils. Every developer always tries to predict an ROI (Retrun on Investment) or better yet strive for a specific ROI.

But the problem is not what the developers are shooting for, its what the lenders get. Since the lenders today are not taking any chances on anything as I have continued to report in these messages, they will substantially discount any projections. As such they become almost worthless to the lender. For certain type of projects lenders will use their own database of acquired knowledge to calculate forecasted Debt Service Coverage Ratio based on certain known norms in the industry as reported in proven reports such as the Star Report for Hotels for example.

Thank you for the informative question, keep them coming and I will try to answer them all.

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