Homework_1

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Georgia Institute Of Technology *

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6611

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Finance

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Feb 20, 2024

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CRP 6611 Real Estate Finance and Development Professor Raymond Homework Number 1 Please use the text of the questions below, which may differ slightly from your textbook depending on which edition you purchased. All homework assignments are to be turned in via hard copy. They should be typed and numerical problems should be done in Excel. Please note the rules for downgrading of late assignments in the syllabus. Show your work. For Excel work (problems #5+), you should clearly indicate which function you used and what values you used for the input parameters (e.g., NPER, RATE, etc.) in the function. For example, if you use the Future Value (FV) function, indicate the values used for RATE, NPER, PMT, and PV. Each function has a different set of input parameters. For these problems, so that I can be sure you are following, you should show your work by indicating function and input values used. Merely cutting and pasting the function directly from Excel is often less than clear. (Cutting and pasting the input window is more clear, but can take up more space.) Most importantly, be clear in your presentation and do not scatter work in various places. That is, do not answer a question narratively and then refer to excel tables or other material that is attached in some appendix or somewhere else. Integrate any tables, formula, etc. so that they are located close to any narrative comments. Answers are due at the BEGINNING of class uploaded to Canvas. MAKE SURE THAT IT IS ALL IN ONE DOCUMENT/FILE. It should all be integrated in one Word or pdf file that is easily readable and prints without any manipulation on my part. Finally, do not use web-based financial calculator tools. 1. The NDC real estate finance text argues that development finance tools can make “any project viable.” Do you agree? Why or why not? (4-5 sentences maximum) I believe that the availability of development finance tools increases the potential viability of any project. However, this potential relies on people's access to education, enabling them to utilize these tools effectively. I think it is also important to acknowledge that other factors, such as regulatory hurdles, environmental concerns, or community opposition, can influence a project's viability and are not necessarily addressed by financial tools. 2. Distinguish – in a few sentences – each of the following pairs of terms: a. Junior vs. senior mortgage There are often multiple loans on a real estate deal. A senior mortgage is also known as the first mortgage and is the one that takes priority/ is paid first. A junior mortgage is an additional home loan that is made whilst the senior mortgage is still in effect. In the event of default, the senior mortgage would receive all the proceeds from the liquidation of the property until it is paid off. b. Seller financing vs. land contract Seller financing involves the buyer obtaining a mortgage from the seller rather than from a traditional financial institution. The seller takes back a mortgage as part or full payment of the purchase price. The buyer and the seller agree to home loan terms, and the buyer makes payments to the seller. The buyer immediately receives the legal title to the property. A land contract is a legal agreement where the owner finances the buyer’s purchase of a piece of real estate. The seller retains the legal title to the property until the buyer completes all the payments agreed upon. c. Note vs. mortgage

A note is a borrower’s written, signed promise that they are going to repay the loan. This note creates a loan obligation and is a contract separate from the mortgage. This note lets a lender go after the borrower for the money owned. A mortgage is a contract you sign with the lender to provide collateral for a loan. By signing a mortgage, you put the property up as collateral for the loan and give the lender the right to sell the property through foreclosure and use the proceeds from the sale to make up what is owed on the mortgage. A mortgage lets a lend seize a property in repayment for the money borrowed. 3. B&F, Chapter 2, Problems (NOT “Questions”) #1 and #2. Be brief. #1. Sedgewick arranged for an open-end construction loan from the Second National Bank not to exceed $50,000. The loan was closed and Sedgewick drew $30,000 initially. Three months later, he drew the remaining $20,000. What is the bank’s position concerning the possibility of intervening liens? Sedgewick arranged an open-end construction loan, meaning he had already arranged in advance the total amount of the loan- $50,000. The open-end loan has been agreed upon by the bank and Sedgewick and will be advanced, in stages, to meet the costs of the construction. Sedgewick has the right to call upon another bank for successive advances on the loan and all improvements become security under the terms of the mortgage as they are constructed. Therefore, because the loan is open-ended the bank would be agreeable to intervening liens as they are still the priority lien. #2. If, in problem 1, there was no definite agreement for future advances between Sedgewick and the bank at the time the initial $30,000 loan was closed, would your answer be different? If there was no definite agreement for future advances between Sedgewick and the bank, then the bank may have an issue with Sedgewick attempting to obtain further liens. The bank is not protected against intervening liens and is only protected up to the original amount of $30,000. 4. B&F, Chapter 2, Problems #5 and #7 #5. Mort owns a property. Jessica Rosen holds a first mortgage and Alex Nelligan holds a second mortgage. Mort defaults on his mortgage payments. Ms. Rosen forecloses without joining Mr. Nelligan in the foreclosure suit. The property is sold to Sheila McBride at the foreclosure sale. What are Mr. Nelligan’s rights? Rosen forecloses without joining Nelligan in a foreclosure sale. Every foreclosure action should be preceded by a careful search of the records to discover any junior lien claimants who should be joined in the foreclosure suit. Nelligan was not joined in the suit and therefore he could acquire the position of a senior lienor and still go ahead with a foreclosure as he had a secure interest in the property. #7. In Problem #5, what if Mr. Nelligan was joined in the foreclosure suit but forgot to attend the sale and bid. Does Mr. Nelligan have any other way of getting Mort to pay? Nelligan did not attend the foreclosure sale and lost his opportunity to bid on the property. However, Nelligan may be able to make a claim and maintain his rights to pursue the mortgagors on whatever personal obligation they have incurred by obtaining the mortgage. This might not be worth it in the long run though. 5. B&F, Chapter 3, Problem #1 #1 Jim makes a deposit of $12,000 in a bank account. The deposit is to earn interest compounded annually at the rate of 9 percent for seven years.

a. How much will Jim have on deposit at the end of seven years? (Hint: what is the future value?) b. Assuming the deposit earned a 9 percent rate of interest compounded quarterly, how much would he have at the end of seven years? c. In comparing (a) and (b), what are the respective effective annual yields? (Hint: Consider the future value of each deposit after one year only.) Which alternative is better? B is the better option as the interest compounds more frequently meaning you gain more interest. The future value for A is $21,936.47 as compared to $22,374.54 when the interest is compounded quarterly. Effective annual yield. Abs. value (FV)-Abs value (PV)/ PV= 9.31% 6. B&F, Chapter 3, Problem #6 #6. Suppose you have the opportunity to make an investment in a real estate venture that expects to pay investors $750 at the end of each month for the next eight years. You believe that a reasonable return on your investment should be an annual rate of 17 percent compounded monthly . a. How much should you pay for this investment.

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b. What will be the total sum of cash you will receive over the next eight years? c. What do we call the difference between a and c? Present Value - Total Amount Received = Interest/Return earned 7. B&F, Chapter 3, Problem #9 # 9 Walt is evaluating an investment that will provide the following returns at the end of each of the following years: year 1, $12500; year 2, $10,000; year 3, $7,500; year 4, $5,000; year 5, $2,500; year 6, $0, and year 7, $12,500. Walt believes he should earn 9 percent compounded monthly on this investment. How much should he pay for this investment?

How I worked out PV. Sum of PV: $37,280 8. B&F, Chapter 3, Problem #10 John is considering the purchase of a lot. He can buy the lot today and expects the price to rise to $15,000 at the end of 10 years. He believes that he should earn an investment yield of 10 percent compounded annually on his investment. The asking price for the lot is $7,000. Should he buy it? What is the internal rate of return compounded annually on the investment if John purchases the property for $7,000 and is able to sell it 10 years later for $15,000? The present value is $5,783.15 . Since it is lower than the asking price, I conclude that John should not buy the lot .

The internal rate of return on John's investment is 8%. 9. B&F, Chapter 3, Problem #15 A loan of $50,000 is due 10 years from today. The borrower wants to make annual payments at the end of each year into a sinking fund that will earn compound interest at an annual rate of 10 percent. What will the annual payments have to be? Suppose that the monthly payments earn 10% interest, compounded monthly. What would the annual payments have to be?

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