A property is expected to have NOI of $124,000 the first year. The NOI is expected to Increase by 5 percent per year thereafter. The appraised value of the property Is currently $1.25 million and the lender Is willing to make a $1,137,000 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 wll recelve 50 percent of the NOI in excess of $124,000 each year until the loan Is repaid. The lender also wll recelve 50 percent of any Increase In the value of the property. The loan Includes a substantial prepayment penalty for repayment before year 5, and the balance of the loan is due in year 10. (If the property has not been sold, the participation will be based on the appralsed value of the property.) Assume that the appralser would estimate the value in year 10 by dividing the NOI for year 11 by an 9 percent capitalization rate. Requlred: Calculate the effective cost (to the borrower) of the participation loan assuming the loan Is held for 10 years. (Note that this Is also the expected return to the lender.) (Do not round Intermedlate calculations. Round your final answer to 2 decimal places.) Effective cost
A property is expected to have NOI of $124,000 the first year. The NOI is expected to Increase by 5 percent per year thereafter. The appraised value of the property Is currently $1.25 million and the lender Is willing to make a $1,137,000 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 wll recelve 50 percent of the NOI in excess of $124,000 each year until the loan Is repaid. The lender also wll recelve 50 percent of any Increase In the value of the property. The loan Includes a substantial prepayment penalty for repayment before year 5, and the balance of the loan is due in year 10. (If the property has not been sold, the participation will be based on the appralsed value of the property.) Assume that the appralser would estimate the value in year 10 by dividing the NOI for year 11 by an 9 percent capitalization rate. Requlred: Calculate the effective cost (to the borrower) of the participation loan assuming the loan Is held for 10 years. (Note that this Is also the expected return to the lender.) (Do not round Intermedlate calculations. Round your final answer to 2 decimal places.) Effective cost
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
Problem 1PS
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Transcribed Image Text:A property Is expected to have NOI of $124,000 the first year. The NOI is expected to Increase by 5 percent per year
thereafter. The appralsed value of the property Is currently $1.25 million and the lender is willing to make a $1,137,000
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 wll recelve 50 percent of the NOI In excess of $124,000 each
year until the loan is repald. The lender also will recelve 50 percent of any increase In the value of the property. The loan
includes a substantial prepayment penalty for repayment before year 5, and the balance of the loan is due in year 10. (If the
property has not been sold, the participation will be based on the appralsed value of the property.) Assume that the appralser
would estimate the value in year 10 by dividing the NOI for year 11 by an 9 percent capitalization rate.
Required:
Calculate the effective cost (to the borrower) of the participatlon loan assuming the loan Is held for 10 years. (Note that this is
also the expected return to the lender.) (Do not round Intermedlate calculatlons. Round your final answer to 2 decimal
places.)
Effective cost
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