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Case Problem 1

[Dividing Line Image]

There is an Excel template for this problem in the Digital Drop Box at the http:// Online.Clarion.edu site.

You are considering purchasing an apartment for $1,400,000
which contains 30 one bedroom apartments and 10 two bedroom
apartments. Land is estimated to be 18% of the purchase price.
The one bedroom apartments are expected to rent for $425 per
month and the two bedroom apartments are expected to rent for
$575 per month. You expect rents to increase by 6% per year.
You project that your vacancy and collection losses will be about
4%. You expect that operating expenses will be 32% of the
adjusted gross income. The Friendly Federal Savings Bank has
agreed to lend to you at a 8.25% annual interest rate with an
amortization period of 30 years paid monthly. The loan will have
only a term of 10 years. The amount of the loan is going to be
based upon a 1.3 Debt Service Coverage Ratio for the first year's
NOI. The bank is going to charge three points. You expect to sell
the property at the end of the fifth year. The sales price is
expected to be based upon an 11.2% capitalization rate of the year
six NOI. Sales expenses are projected at 6.5%.

1. What is the loan amount and the monthly and annual debt
service? (2 points)

Loan Amount  
ADS  
Monthly  

2. Prepare an amortization schedule for the initial loan for the first
five years which shows the annual debt service, the annual
interest charge, the principal paid, and the balance at the end of
the year.

Year 1 2 3 4 5
ADS          
Interest          
Principal          
EYR Bal.          

3. How much equity cash is required?

Cost  
Less MTG  
Plus PTS  
Cash Req.  

4. Project the expected before tax cash flows for each of the five
years of the holding period. Also project the sixth year NOI.

1 2 3 4 5 6
GPI            
Less V&C          

 

Adj Gross            
Less Exp.          

 

NOI            
Less ADS          

 

BTCF          

 

5. What is the before tax cash flow from reversion?

Sale Price  
Less S/E  
A/R  
Less Mtg  
BTCFr  

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