ASC Investment Metrics 3 — Questions and Answers
Question 1: A leveraged IRR is typically HIGHER than an unleveraged IRR when:
- The property is declining in value
- The cost of debt exceeds the cap rate
- The cap rate exceeds the cost of debt (positive leverage) (Correct answer)
- Interest rates are rising
Correct answer: The cap rate exceeds the cost of debt (positive leverage)
Positive leverage occurs when the cap rate exceeds the loan interest rate, causing debt to amplify equity returns above the unleveraged IRR.
Question 2: In ARGUS Enterprise, the 'Yield on Cost' metric is calculated as:
- Stabilized NOI divided by total project cost (Correct answer)
- Purchase price divided by NOI
- Levered cash flow divided by equity invested
- Terminal NOI divided by sale price
Correct answer: Stabilized NOI divided by total project cost
Yield on Cost = Stabilized NOI ÷ Total Project Cost (including acquisition, renovation, and carry costs), used for value-add or development deals.
Question 3: When running a sensitivity analysis in ARGUS Enterprise, which combination of variables is most commonly tested for IRR sensitivity?
- Tenant improvement costs and parking revenue
- Exit cap rate and rent growth rate (Correct answer)
- Property tax rate and insurance costs
- Vacancy rate and property management fees
Correct answer: Exit cap rate and rent growth rate
Exit cap rate directly affects reversion proceeds while rent growth drives NOI trajectory — together they are the two dominant IRR sensitivities in most models.
Question 4: What is the 'Debt Yield' metric, and why do lenders use it?
- Loan amount divided by NOI; measures the lender's return if they took the property back (Correct answer)
- NOI divided by appraised value; measures cap rate from the lender's perspective
- Loan amount divided by property value; same as LTV
- Annual interest payments divided by NOI; same as debt service coverage
Correct answer: Loan amount divided by NOI; measures the lender's return if they took the property back
Debt Yield = NOI ÷ Loan Amount; it measures the lender's yield if they foreclosed, providing a stress-test metric independent of cap rates or appraisals.
Question 5: In an ARGUS Enterprise cash flow projection, 'before-tax cash flow' is calculated as:
- NOI minus depreciation
- Effective Gross Income minus Operating Expenses
- NOI minus Debt Service (principal + interest) (Correct answer)
- Gross Potential Rent minus Vacancy
Correct answer: NOI minus Debt Service (principal + interest)
Before-tax cash flow (also called cash flow before taxes or CFBT) = NOI − Annual Debt Service, representing actual cash available to equity after loan payments.
Question 6: A property with a cap rate of 5.5% and a discount rate of 7.5% will show a DCF value that is:
- Equal to the direct capitalization value
- Higher than the direct capitalization value
- Lower than the direct capitalization value (Correct answer)
- Unrelated to the cap rate assumption
Correct answer: Lower than the direct capitalization value
When the discount rate exceeds the cap rate, the DCF method typically produces a lower value because future cash flows are discounted more heavily than implied by the cap rate.
Question 7: In ARGUS Enterprise, which holding period assumption would typically produce the HIGHEST IRR, assuming strong rent growth?
- 3-year hold (Correct answer)
- 7-year hold
- 10-year hold
- 15-year hold
Correct answer: 3-year hold
A shorter holding period with strong rent growth concentrates appreciation into fewer years, typically generating a higher annualized IRR even if the absolute equity multiple is lower.
ASC Investment Metrics 3
A leveraged IRR is typically HIGHER than an unleveraged IRR when: