Property is expected to have NOI of $100,000 in the first year. The NOI is expected to increase by 3 percent per year thereafter. The appraised value of the property is currently $1 million and the lender is willing to make a $900,000 participation loan with a contract interest rate of 8 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. 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 appraised value of the property.) Assume that the appraiser would estimate the value in year 10 by dividing the NOI for year 11 by a 10 percent capitalization rate. 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.)
Mortgages
A mortgage is a formal agreement in which a bank or other financial institution lends cash at interest in return for assuming the title to the debtor's property, on the condition that the obligation is paid in full.
Mortgage
The term "mortgage" is a type of loan that a borrower takes to maintain his house or any form of assets and he agrees to return the amount in a particular period of time to the lender usually in a series of regular equally monthly, quarterly, or half-yearly payments.
Property is expected to have NOI of $100,000 in the first year. The NOI is expected to increase by 3 percent per year thereafter. The appraised value of the property is currently $1 million and the lender is willing to make a $900,000 participation loan with a contract interest rate of 8 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. 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 appraised value of the property.) Assume that the appraiser would estimate the value in year 10 by dividing the NOI for year 11 by a 10 percent capitalization rate. 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.)
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