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A property is expected to have NOI of $100,000 the first year. The NOI is expected to increase by 5 percent per year thereafter. The purchase price of the property is $1.25 million and the lender is willing to make a $1,125,000 participation loan with a contract interest rate of 5.5 percent. The loan will be amortized with monthly payments over a 20-year term. In addition to the regular mortgage payments, the lender will receive 50 percent of the NOI in excess of $100,000 each year until the loan is repaid. The lender also will receive 50 percent of any increase in the value of the property. Assume that the property can be sold at the end of year 10 at a value that equals the NOI for year 11 divided by an 8 percent capitalization rate. 1. Compute the BTIRR after ten years for the investors, taking into account the equity participation. 2. What is the effective cost of debt? Is there positive financial leverage with the proposed loan?

A property is expected to have NOI of $100,000 the first year. The NOI is expected to increase by 5 percent per year thereafter. The purchase price of the property is $1.25 million and the lender is willing to make a $1,125,000 participation loan with a contract interest rate of 5.5 percent. The loan will be amortized with monthly payments over a 20-year term. In addition to the regular mortgage payments, the lender will receive 50 percent of the NOI in excess of $100,000 each year until the loan is repaid. The lender also will receive 50 percent of any increase in the value of the property. Assume that the property can be sold at the end of year 10 at a value that equals the NOI for year 11 divided by an 8 percent capitalization rate. 1. Compute the BTIRR after ten years for the investors, taking into account the equity participation. 2. What is the effective cost of debt? Is there positive financial leverage with the proposed loan?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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A property is expected to have NOI of $100,000 the first year. The NOI is expected to increase by 5 percent per year thereafter. The purchase price of the property is $1.25 million and the lender is willing to make a $1,125,000 participation loan with a contract interest rate of 5.5 percent. The loan will be amortized with monthly payments over a 20-year term. In addition to the regular mortgage payments, the lender will receive 50 percent of the NOI in excess of $100,000 each year until the loan is repaid. The lender also will receive 50 percent of any increase in the value of the property. Assume that the property can be sold at the end of year 10 at a value that equals the NOI for year 11 divided by an 8 percent capitalization rate. 1. Compute the BTIRR after ten years for the investors, taking into account the equity participation. 2. What is the effective cost of debt? Is there positive financial leverage with the proposed loan?
Transcribed Image Text:A property is expected to have NOI of $100,000 the first year. The NOI is expected to increase by 5 percent per year thereafter. The purchase price of the property is $1.25 million and the lender is willing to make a $1,125,000 participation loan with a contract interest rate of 5.5 percent. The loan will be amortized with monthly payments over a 20-year term. In addition to the regular mortgage payments, the lender will receive 50 percent of the NOI in excess of $100,000 each year until the loan is repaid. The lender also will receive 50 percent of any increase in the value of the property. Assume that the property can be sold at the end of year 10 at a value that equals the NOI for year 11 divided by an 8 percent capitalization rate. 1. Compute the BTIRR after ten years for the investors, taking into account the equity participation. 2. What is the effective cost of debt? Is there positive financial leverage with the proposed loan?
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