Distinguish unlevered from levered cash flow and unlevered from levered IRR. When is levered IRR higher?

How to answer

Unlevered CF = NOI - Capex - TI/LCs (no debt); Levered CF = Unlevered CF - Debt Service. Unlevered IRR measures asset performance; levered IRR measures equity performance. Levered IRR exceeds unlevered IRR whenever the cost of debt is below the unlevered return — 'positive leverage,' which holds in nearly all deals. If debt cost exceeds the unlevered return, leverage is negative and drags equity returns down.

Key idea: Debt amplifies returns only when it's cheaper than the asset earns.