Debt coverage ratios required by financial institutions

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Reference no: EM13757756

A shopping centre is available for purchase for $8 million. The lender agrees this is a fair value for the property. There is 70 000 sq ft of rentable area in the building and tenants are paying $20/sq ft. annually; current vacancy and bad debt together are estimated to total to 5% of GPI. Operating expenses paid by the landlord for the next year are projected to be $600,000. The lender will require a DCR of 1.25 for the property and will not lend more than 65% of the value of the property.

a) If interest rates are 9% p.a., compounded annually and the lender is willing to accept annual interest-only payments for five years, what is the maximum loan you can acquire for the property?

b) If the borrower receives the loan you calculated in a) what will be the OSB on the loan at the end of 4 years?

c) Debt coverage ratios required by financial institutions are often more than 1.25. Why do you think the rate is not higher in this question?

Reference no: EM13757756

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