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You are considering the purchase of an industrial
warehouse. The purchase price is $1 million.
You expect to hold the property for five years.
You have decided to finance the acquisition with
the $700,000 loan, 10 percent interest rate, 30-
year term, and annual interest-only payments.
(That is, the annual payment will not include any
amortization of principal.) There are no up-front
financing costs. You estimate the following cash
flows for the first year of operations:
$135,000 Effective gross income
27,000 Operating expenses
$108,000 NOI
a. Calculate the overall rate of return (or “cap
b. Calculate the debt coverage ratio.
c. What is the largest loan that you can obtain
(holding the other terms constant) if the
lender requires a debt service coverage ratio
of at least 1.2?

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