Real Estate Finance

Anonymous
timer Asked: Apr 17th, 2017

Question description

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. 1) Purchase price = $1,900,000
  2. 2) Estimated value of land = $500,000
  3. 3) Anticipated mortgage terms: a) Loan to value ratio = .80 b) Interest rate = 5.5%
    c) Years to maturity = 25
    1. d) Points charged = 3
    2. e) Prepayment penalty = 2% of outstanding balance
    3. f) Level payment, fully amortized
    4. g) Fixed interest rate, monthly payments
  4. 4) Participation terms:
    a) Share of NOI = 17.5% over $130,000 b) Share of Appreciation = 20%
  5. 5) Future sales price = $2,350,000
  6. 6) Estimated selling expenses as proportion of future sales price = 5%
  7. 7) Client's minimum required before-tax rate of return on equity = 12%

Calculate:

  1. The before-tax cash flows and the before-tax equity reversion (you do not need to calculate the after-tax cash flows or reversion).
  2. The before-tax net present value to the investor.

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