The first model showed debt service coverage of 0.62x. At that number the building produced 62 cents of cash for every dollar of annual debt payment, and no lender funds a shortfall.
The center was an affordable childcare facility in a neighborhood where most families pay through publicly funded childcare vouchers and subsidy programs. The model led with market-rate tuition because that is how price usually gets modeled. Market-rate tuition was the exception in this building, and the model had made it the base.
The revenue rebuild
The revenue stack was rebuilt from the bottom. Voucher and subsidy income moved to the base of the model, sized against the eligible population and the published reimbursement rates for each program. Market-rate tuition moved on top as the smaller and less certain layer.
Coverage came out at 1.43x. The building, the staff, the rent, and the debt were the same in both versions. The revenue that was already contracted through public programs appeared in the model in the position it occupies in the business.
The lender reopened the application on the rebuilt package, and the loan closed.
EXHIBIT 1 · DEBT SERVICE COVERAGE, BEFORE AND AFTER
The package
- A revenue build sized program by program, with each voucher and subsidy line tied to its published reimbursement rate and the eligible enrollment behind it
- A coverage schedule laid out in the order a credit officer reads one, moving from revenue to net operating income to annual debt service
- Rate and enrollment cases showing where coverage crosses the lender floor
A lender reads past the top-line number to the assumptions underneath it, in the order they were stacked, asking which dollars are contracted and which are forecast.
The transferable point
Revenue ordering is an underwriting decision, and most models make it by accident. A business whose most certain dollars sit at the bottom of the stack reads as a forecast. The same business with its contracted revenue leading reads as a credit. Neither version is more optimistic than the other, and only one of them describes how the business actually earns.