A real estate investor has the following information on an office building: Purchase price is $1,250,000 with acquisition costs of $60,000 45,000 leasable square feet Initial rent of $10/sq. ft. per year and will increase 1.0 percent per year Vacancy rate of 8% of gross rent per year Operating expenses are 42% of effective gross income Three financing choices: All equity without any financing; Mortgage with 75% LTV ratio, 15 years, annual payments and 3.5% contract rate; Mortgage with 95% LTV ratio, 15 years, annual payments and 6.0% contract rate;

A real estate investor has the following information on an office building: Purchase price is $1,250,000 with acquisition costs of $60,000 45,000 leasable square feet Initial rent of $10/sq. ft. per year and will increase 1.0 percent per year Vacancy rate of 8% of gross rent per year Operating expenses are 42% of effective gross income Three financing choices: All equity without any financing; Mortgage with 75% LTV ratio, 15 years, annual payments and 3.5% contract rate; Mortgage with 95% LTV ratio, 15 years, annual payments and 6.0% contract rate;

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 19P

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A real estate investor has the following information on an office building: Purchase price is $1,250,000 with acquisition costs of $60,000 45,000 leasable square feet Initial rent of $10/sq. ft. per year and will increase 1.0 percent per year Vacancy rate of 8% of gross rent per year Operating expenses are 42% of effective gross income Three financing choices: All equity without any financing; Mortgage with 75% LTV ratio, 15 years, annual payments and 3.5% contract rate; Mortgage with 95% LTV ratio, 15 years, annual payments and 6.0% contract rate; Expected increase in value is 3.0% per year. Holding period is 15 years, and 5% selling expenses For simplicity, assuming that no capital improvement over the entire holding period 75% depreciable Investor’s tax rate is 28%, and capital gain tax rate is 15%. Questions: What is the equity after-tax return (internal rate of return) for each financing choice? How much percentage of the…
A real estate investor has the following information on an office building: Purchase price is $1,250,000 with acquisition costs of $60,000 45,000 leasable square feet Initial rent of $10/sq. ft. per year and will increase 1.0 percent per year Vacancy rate of 8% of gross rent per year Operating expenses are 42% of effective gross income Three financing choices: All equity without any financing; Mortgage with 75% LTV ratio, 15 years, annual payments and 3.5% contract rate; Mortgage with 95% LTV ratio, 15 years, annual payments and 6.0% contract rate; Expected increase in value is 3.0% per year. Holding period is 15 years, and 5% selling expenses For simplicity, assuming that no capital improvement over the entire holding period 75% depreciable Investor’s tax rate is 28%, and capital gain tax rate is 15%. How much percentage of the IRR comes from cash flows from operations and how much from sale for each financing choice?
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Consider a new residential income producing property for sale to a potential investor. The sale price for the property is Sh. 1,250,000 of which building is Sh. 1 million and balance land. Building is depreciated over 50 years. Rent is estimated at Sh. 200,000 in the first year and is expected to grow at 3% p.a. thereafter. Vacancies and collection losses are expected to be 10% of rent. Operating expenses will be 31.5% of rent. A 70% mortgage loan can be obtained at 11% p.a. payable monthly for 30 years. The property is expected to appreciate in value at 3% per year and is expected to be owned for five years and then sold. Tax rate for both income and capital gains is 30%. Required Calculate the expected after tax IRR on equity invested. Is this investment viable if required rate of return is 15%?
An investment property is purchased for $18,540,000 with 50% equity and an interest-only loan to finance the balance. The average appreciation rate of the property is 5% per annum. All operating costs, including finance costs, are exactly equal to rent income. If the property is sold after 10 years and selling costs are 3% of the sale price (based on market valuation of determined from the annual rate of appreciation), the ROE (return on equity) is: Select one: a. 7.59% b. 8.01% c. 9.34% d. 10.03% 11.38% e.
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Assume a broker has listed a grocery-anchored shopping center with 100,000 sf of total retail space for lease, at a price of $9 million at an advertised 7.0% cap rate in a suburban market approximately 30 miles northwest of Pittsburgh. a. Calculate the price in dollars per square feet (show your work). b. Calculate the net operating income (NOI) (show your work)? C. If you purchase this asset and hold it for five years, what is a reasonable exit cap rate you could obtain for the sale, assuming no major investment in the property while you own it, only routine maintenance (no roof replacement or mechanical upgrades)?
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You recently purchased an office building for $1,950,000 using the following loan terms: 70% LTV, 20-year amortization, 6.25% interest and monthly compounding. Assuming a net operating income of $150,000 in Year 1 and income taxes equal to $11,000, what is the expected ATCF from Operations in Year 1?
A vacant lot is purchased for $20,000. After 5 years the lot is to be offered for sale. If the buyer requires a before-tax return on investments of 15% and inflation has averaged 4% per year over the 5-year period, what is the required selling price?
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