Question

NorthLLC has a shopping center with 14 local tenants generating gross revenues of $291,000; operating expense of $83,000; and interest expense of $180,000. There is a $2,400,000 loan amorrizing on a 25 year basis rate of 7.5%, and the target DSC is 1.20. which of the following describes the cash flow cushion in this sceanrio?

A. very well cushioned

B. moderately well cushioned

C. Slightly lacking adequate cushion

D. severely lacking cushion

Answer 1

So You Have
14 Tenants with gross revenues of $291,000 and operating expenses of $83000
The Net revenue = $291,000 - $83000 = $208,000
Now Debt Service Coverage = Net cash inflow/ interest expense = $208,000/ $180,000
DSC = 1.15
and the Target DSC = 1.20

As the target DSC is higher we can assume the cash flows will increase in the future or interest expense will go down as its amortizing , so cash flow cushion will increase in the future , but currently the cash flow cushion is
Cash Flow Cushion = $208,000- $180,000= $28000

You can also think of it this way , Even if one Tenant Leaves , NorthLLC will be able to service its debt
So Its is MODERATELY CUSHIONED , but even 2 or more tenants leave , NorthLLC might default so it is not very well cushioned.