(a) Assume that Purchase Price is equal to initial Market Value
(b) Your Market Rent starts at the indicated level and increases by this factor for all of Year 2 and for each year thereafter
(c) Your Occupancy starts at the indicated level; this amount is added to Occupancy for all of Year 2 and for each year thereafter until it reaches the Stabilized Occupancy level
(d) Capital Expenditures are this amount per unit per year.
Purchase Price (a) $5,100,000.00
Units 80
Market Rent $850.00
Annual Adjustment (b) $50.00
Current Occupancy 65.00%
Annual Adjustment (c) 5.00%
Stabilized Occupancy 90.00%
Operating Expenses 35.00%
Capital Expenditures (d) $200.00
Holding Period (years) 10
Going Out Cap Rate 9.50%
Selling Expenses 6.00%
Unlevered Discount Rate 13.00%
LTV 80.00%
Loan Rate 7.00%
Amortization (years) 30
Finance Costs 5.00%
Levered Discount Rate 16.00%
- You must show your work carried out to two decimal places to receive any credit (partial or full) for your answers.
- Interest rate adjustments from annual to monthly should be performed by direct entry of theformula rather than rounded. For example, a 7.00% interest rate should be entered by
dividing 7.00% by 12 months and directly entering the result as the monthly rate.
- Debt service calculations are to be performed on a MONTHLY basis and then converted toannual as appropriate.
You are considering the purchase of a property pursuant to the assumptions given to you by your
instructor. You MUST show the steps used in addressing the following:
a. Calculate potential gross income for each year starting with the base year rent and escalations given. Your grid should have three lines: number of units, monthly market rent per unit, and annual PGI for each year.
b. Calculate vacancy using the current occupancy and absorption projections given. Note that the vacancy percentage is 100% minus the occupancy percentage.
c. Calculate the fixed annual capital expenditures (does not change each year).
d. Construct a standard pro forma grid with the appropriate line items and calculate net operating income (NOI) for each year of the holding period.
e. Calculate the net sale proceeds from the sale of the property showing each step in a grid. Sales price is determined by using the appropriate NOI and the cap rate given.
f. Calculate the unlevered net present value. Should you purchase and why?
g. Calculate the monthly mortgage payment. What is the total per year?
h. Calculate the loan balance at the end of each year in the holding period.
i. Calculate the amount of principal reduction achieved during each year in the holding period.
j. Calculate the total interest paid during each year in the holding period.
k. Calculate the levered required initial equity investment.
l. Calculate the before-tax cash flow (BTCF) for each year in the holding period.
m. Calculate the before-tax equity reversion (BTER) from the sale of the property.
n. Calculate the levered net present value of this investment. Should you purchase? Why?