A leverage percentage is an answer to a question nobody wrote down. This checklist writes the questions down.
It is arranged the way a careful lender thinks: first the loan itself, then the value the loan was measured against, then the cushion that stands between a bad year and a forced sale. Every item comes with what a good answer looks like, so you can tell a satisfactory reply from a fluent one. Work through it with the private placement memorandum (PPM) and the loan term sheet open, not the marketing deck.
The Loan
Six items here, and they are the ones a sponsor is least likely to volunteer. The term sheet answers most of them in a page; the projections in the offering summary usually do not, because the projections assume the loan behaves.
- Is the interest rate fixed or floating, and for how long? A good answer: fixed for the full projected hold, or floating with a purchased rate cap struck no more than two points above the closing rate.
- When does the loan mature relative to the projected sale date? A good answer: maturity falls at least two years after the planned exit, so a delayed sale does not become a forced refinance.
- Does the loan amortize, and from when? A good answer: principal is being repaid from the first payment; any interest-only period is short and the sponsor can show the payment step-up in the projections.
- Who carries recourse? A good answer: the loan is non-recourse to investors, and any sponsor guaranty is limited to standard carve-outs rather than full repayment.
- What covenants can stop distributions? A good answer: the sponsor lists every coverage or occupancy trigger in writing and has tested the projections against each one.
- Can the sponsor borrow more later without a vote? A good answer: the operating agreement caps total leverage and any supplemental loan or refinance above that cap needs Class Member consent.
The Valuation
The loan is the numerator. These four items check the denominator, which is where a comfortable percentage most often turns out to be an optimistic one.
- Which value was the quoted ratio divided by? A good answer: the contract purchase price, stated plainly, with the ratio against the appraisal shown alongside if the two differ.
- How old is the appraisal and what did it assume? A good answer: dated within 90 days of closing and based on the building as it stands today, not as it will look after renovation.
- How does the price compare to recent sales of similar buildings nearby? A good answer: the sponsor can name comparable trades in the same submarket and explain any premium paid; on this point the guide to valuing an apartment building in Southern California is a useful companion.
- What happens to the ratio if value falls by a third? A good answer: the loan is still comfortably below the property’s reduced worth, and the sponsor has already run that case rather than hearing it from you.
The Cushion
Low leverage buys time; these items check whether the offering can actually use it. A property with a modest loan and no reserves is conservative on paper only.
- How many times does current income cover the debt payment? A good answer: at least 1.40 times on trailing actual income, not on projected rents, with the calculation shown.
- What rent decline would push coverage below the lender’s minimum? A good answer: a specific figure, such as collections falling 22% before the covenant is breached, derived from the actual loan terms.
- How large are the reserves and who controls them? A good answer: operating and replacement reserves covering at least six months of debt service, held in an account the sponsor cannot sweep for distributions.
- Is the sponsor’s own money in the deal alongside yours? A good answer: a meaningful co-investment disclosed in dollars in the PPM, on the same terms as the Class Members.
- What is the plan if the loan cannot be refinanced on schedule? A good answer: a written sequence, in order, from extension to capital call to sale, with the sponsor’s view on which is likeliest and why.
Fifteen questions is not many. A sponsor who has structured the debt carefully will answer them in one sitting and may be pleased that somebody asked. A sponsor who cannot answer the valuation section without checking with the broker has told you something too.
Keep the answers. Compare them to the quarterly reporting once you own the investment, because leverage that was conservative at closing can drift, and the second half of this checklist is worth re-running every year you hold.
One caution on how to use the list. Passing all fifteen does not make an offering a good investment; it makes the debt unlikely to be the thing that ruins it. The building, the price, the sponsor, and the market still have to be judged on their own, and a low ratio on an overpaid property is a smaller loss, not a gain. Use this alongside a fuller multifamily due-diligence checklist, not instead of one.
Request the loan terms on any past VisionWise Capital offering and check them against this list yourself. Talk to VisionWise Capital →
This content is for informational purposes only and does not constitute investment, legal, or tax advice. Real estate transactions and private placements involve significant risk, including potential loss of principal. Always consult qualified legal, financial, and tax professionals before making investment decisions.
Related Reading
- Multifamily Due-Diligence Checklist for Accredited Investors
- Debt Structure and the Risk Many Real Estate Investors Miss
- How to Read Private Real Estate Offering Documents
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