Posted by **Jason** on Tuesday, August 30, 2011 at 3:54pm.

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

rate”).

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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