Reference no: EM133076224
Question - Assume you have been engaged by a real estate developer to analyze a proposed real estate investment. The property is expected to be financed with loan-to-value ratio of 80%, 8% mortgage interest rate, amortized for 30 years. The owner is prepared invest 20% equity. You have been given the following additional information on the proposed project.
a. Total project cost or total capital budget = $10,000,000
b. Loan to value ratio 80%
c. Equity Dividend Rate (EDR) or Return on Equity (ROE) 10%
d. Expense ratio = 20%
e. Real estate tax ratio = 18%
f. Vacancy ratio = 2%
g. Replacement reserve ratio = 5%
h. Equity dividend rate or return on equity = 15%
i. Gross leasable area (GLA) = 160,000 sq. ft.
j. Building Efficiency ratio = 95%
Required -
(a) Using the front door/back door model and the relevant information given above calculate the required total potential gross income (PGI) and the rent per square foot to justify the $10,000,000 investment, using the Front Door/Back Door model.
(b) Assume the NOI from the project is $1,700,000 and the lender requires a debt coverage ratio of 2.5 calculate the maximum loan amount.
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