Reference no: EM131473281
Assume that you were given an opportunity to purchase a real estate project using an equity participation loan. The NOI for each year of the holding period are shown below:
Year 1 Year 2 Year 3 Year 4
NOI 124,787 132,225 139,954 148,468
Additional information:
1) Purchase price = $1,900,000
2) Estimated value of land = $500,000
3) Anticipated mortgage terms: a) Loan to value ratio = .80 b) Interest rate = 5.5% c) Years to maturity = 25 d) Points charged = 3 e) Prepayment penalty = 2% of outstanding balance f) Level payment, fully amortized g) Fixed interest rate, monthly payments
4) Participation terms: a) Share of NOI = 17.5% over $130,000 b) Share of Appreciation = 20%
5) Future sales price = $2,350,000
6) Estimated selling expenses as proportion of future sales price = 5%
7) Client's minimum required before-tax rate of return on equity = 12%
Calculate:
a. The before-tax cash flows and the before-tax equity reversion (you do not need to calculate the after-tax cash flows or reversion).
b. The before-tax net present value to the investor.
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