real estate investment
posted by chrystal .
You are considering purchasing a 12,000 square feet (4,000 sf. per floor), three story office building for $1,250,000 with closing to be on May 12. The top and bottom floors are preleased for $24 per sq, ft. annually and the middle floor for $20 annually. Land costs are estimated at 10% of the value of the property. You expect rents to increase by 7% per year. You project that your vacancy and collection losses will be about 6%. You expect that operating expenses will be 35% of the adjusted gross income. The Friendly Federal Savings Bank has agreed to lend to you at a 9.5% annual interest rate with an amortization period of 30 years paid monthly. The loan will have only a term of 10 years. The amount of the loan is going to be based upon a 1.5 Debt Service Coverage Ratio for the first year's NOI. The bank is going to charge three points. At the end of year 3 you expect to refinance the property under the same terms as the original loan except for a reduction in the interest rate to 8% and a points charge of four points. (The new loan is based upon the year 4 NOI!) Your accountant has advised you that for this investment analysis, you should use expect a 31% marginal tax rate. You expect to sell the property at the end of the fifth year. The sales price is expected to be based upon an 11.5% capitalization rate of the year six NOI. Sales expenses are projected at 8%. You have concluded that your cost of equity capital is 10%. ****Finally, be sure that you DO NOT enter a space before, after, or in the middle of your answers. Entering a space will cause the answer to be scored incorrectly.****
What is the indicated loan amount? (Round your answers to the nearest $1)
Prepare a 5year amortization schedule (Be careful to change the loan for year 4 and 5!):
Year 1 Year 2 Year 3 Year 4 Year 5
ADS
Interest
Principle
EOR Balance
How much equity cash is required?
Prepare a fiveyear projection of the beforetax cash flow for the property and a sixyear projection of the net operating income.
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Gross Income
V&C
Adj. Gross
Operating Exp.
NOI
ADS
Refinancing $
BTCF
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
NOI
Interest
Depreciation
Points
Unexpensed Pts
Taxable Income
Taxes
BTCF
Taxes
ATCF
Compute the cash flow from reversion:
Sales Price
Selling Expense
Amount Realized
Mortgage Payoff
BTCF (reversion)
Purchase Price
Accumulated Depreciation
Adjusted Basis
Amount Realized
Adjusted Basis
Taxable Gain
Unexpended Points
Net Gain
Less Accumulated Depreciation
Preferential Taxable Gain
Tax on Preferential Gain
Accumulated Depreciation
Tax on gain from Depreciation
Tax on Preferential Gain
Total taxes on Gain
BTCF (reversion)
Taxes (reversion)
ATCF (reversion)
What is the indicated Net Present Value of this investment?
What is the Internal Rate of Return of this investment?￼

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