Example card
Downside case can change the binding constraint
The primary case clears the IRR floor at a $30.5M bid, but the downside case with slower lease-up and wider exit cap forces the safe bid down to roughly $29.1M.
Chapter 8: Check Return Hurdles
Check Return Hurdles
Test the deal against cash-on-cash, IRR, and equity multiple requirements, then identify which return or downside case becomes the true pricing constraint.
Decision output: Binding Constraint Summary. Case requirement: downside case required with stated impact on pricing.
Inputs
Inputs
- Primary-case operating assumptions, hold period, exit cap, and sale costs.
- Downside-case revenue, expense, financing, and exit assumptions.
- Minimum cash-on-cash, IRR, and equity multiple thresholds.
Analysis
How to analyze it
Returns should be applied within a defined modeling boundary. If the hold period or exit convention changes, the analyst should say so before comparing outputs.
- Run the primary case and record which threshold is tightest.
- Run the downside case and compare how much price support is lost.
- Call out whether the downside changes the binding constraint or simply compresses the same one.
Output
What output you should produce
Output artifact: Binding Constraint Summary
- A binding-constraint summary naming the limiting return or downside test.
- A stated impact on pricing between the primary and downside cases.
- A reminder of the hold-period and exit assumptions that produced the result.
Common mistakes
Common mistakes
- Running returns without a stated hold period.
- Reporting primary-case results without a downside comparison.
- Changing exit assumptions between deals without noting it.
Price meaning
What this means for price
Return hurdles convert abstract investment standards into a practical ceiling on price. If the downside case tightens that ceiling, the bid ladder must move with it.