Q#3( 25 pts) You are looking at an income producing real estate with a NOI of $1
ID: 2802607 • Letter: Q
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Q#3( 25 pts) You are looking at an income producing real estate with a NOI of $150,000 for the first year. The NOI will increase at the rate of 5% for the next three years followed by 2% for indefinite future. The bank will finance the property on 70% loan to value ratio. The asking price for the property is $1,500,000,amortized over 20 years with annual payments. The loan will have an interest rate of 10%. The property will be sold at the end of four years. Investors require a 12% return on equity for this type of property a) What is the present value of equity interest in the property? b) What is the total present value of the property? c) What is the implied overall capitalization rate for this property based on your answer in part b. What is the Debt Service Coverage ratio in the first year? d)Explanation / Answer
a. PV of equity interest Year 0 Year 1 150000 0.8929 133928.6 2 157500 0.7972 125558 3 165375 0.7118 117710.7 4 173643.8 0.6355 110353.7 4 1771166 0.6355 1125608 a. a. PV of equity interest 1613159 PV of equity interest 1613159 Bank finance (70%*1500000) 1050000 b. Total present value of the property 2663159 c. Overall Capitalization Rate for this property = Net Operating Income / Current Market Value ie.150000/2663159= 5.63% d. Debt service coverage ratio(DSCR) in the first Year Annuitous payment towards bank finance of 1050000 at 10% interest for 20 years Using PV of ordinary annuity formula, 1050000=Pmt.*(1-1.1^-20)/0.1 Annual payment of principal+interest= 123333 So, total debt service = 123333 DSCR= Net Operating income/Total Debt service(Interest& principal) on debt expense) 150000/123333= 1.22 times DSCR for only interest )= 150000/(1050000*10%)= 1.43 times
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