Practice Problem Exam II

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 20% of the purchase price. The one bedroom apartments are expected to rent for $450 per month and the two bedroom apartments are expected to rent for $600 per month. You expect rents to increase by 4% per year. You project that your vacancy and collection losses will be about 5%. You expect that operating expenses will be 30% of the adjusted gross income. The Friendly Federal Savings Bank has agreed to lend to you at a 8.50% 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 1.6 Debt Service Coverage Ratio for the first year's NOI. The bank is going to charge three points. Your accountant has advised you that for this investment analysis, you should use expect a 31% marginal tax rate. You expect to sell the property at the end of the fifth year. The sales price is expected to be based upon an 11.5% capitalization rate of the year six NOI. Sales expenses are projected at 7%. Your cost of equity capital is 12%. The expected closing date for the purchase of the property is in March.

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

Loan Amount

$1,054,044.14

PDS

8104.69

Annual Debt Service

$ 97,256.25

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. (4 points)

1

2

3

4

5

ADS

97,256.25

97,256.25

97,256.25

97,256.25

97,256.25

Interest

89,288.07

88,583.76

87,817.19

86,982.86

86,074.79

Principal

7,968.18

8,672.49

9,439.06

10,273.39

11,181.46

EYR Bal.

1,046,075.96

1,037,403.47

1,027,964.40

1,017,691.01

1,006,509.55

 

3. How much equity cash is required? (2 points)

Cost

1,400,000.00

Less MTG

1,054,044.14

Plus PTS

31,621.32

Cash Req.

377,577.19

4. Project the expected after tax cash flows for each of the five years of the holding period. Also project the sixth year NOI. (10 points)

1

2

3

4

5

6

GPI

234000

243360

253094

263218

273747

284697

Less V&C

11700

12168

12655

13161

13687

14235

Adj Gross

222300

231192

240440

250057

260060

270462

Less Exp.

66690

69358

72132

75017

78018

81139

NOI

155610

161834

168308

175040

182042

189323

Less ADS

97256

97256

97256

97256

97256

BTCF

58354

64578

71052

77784

84785

Less Int.

89288

88584

87817

86983

86075

Less Dep.

32242

40727

40727

40727

40727

Less Pts.

3162

3162

3162

3162

3162

Tax Inc.

30917

29361

36601

44168

52077

Tax

9584

9102

11346

13692

16144

ATCF

48769

55476

59705

64092

68641

5. What is the after tax cash flow from reversion? (4 points)

Sale Price

1646290.07

Basis
Less S/E

-115240.30

Cost

1400000

A/R

1531049.77

Acc. Depr.

195,152

Less Mtg

-1006509.55

A/B

1,204,848

BTCFr

524540.22

A/R

1531049.77

Less A/B

-1204848.48

Tax. Gain

326201.28

-Unex Pts

-15810.66

Tax Inc

310390.62

Taxes

96221.09

ATCFr

428319.12

6. What is the NPV for this investment? (3 points)

0

1

2

3

4

5

Eq. Cash

-377577

CFoper.

48769

55476

59705

64092

68641

CFrev

428319

TCF

-377577

48769

55476

59705

64092

496961

NPV

$75,409.36