Should the building be purchased

Reference no: EM132060394

Question: A property is expected to have NOI of $100,000 the first year. The NOI is expected to increase by 3 percent per year thereafter. Assume that the appraiser would estimate the value in year 10 by using a 10 percent capitalization rate. The appraised value of the property is currently $1 million and the lender is willing to make a 90 percent LTV loan with a contract interest rate of 9 percent, and it will be amortized with fixed monthly payments over a 20-year term. It will be a convertible mortgage loan that will give the lender the option to convert the mortgage balance into a 60 percent equity position at the end of year 10. That is, instead of receiving the payoff on the mortgage, the lender would own 60 percent of the property. Assume that the borrower will default if the property value is less than the loan balance in year 10, in which case the property is transferred to the lender.

a. Calculate the investor's before-tax IRR. Show and explain all calculations. Should the building be purchased? Why or why not?

b. Calculate the lender's IRR. Show and explain all calculations.

c. Calculate the lender's IRR if the property instead sells for only $1 million after 10 years. Show and explain all calculations.

d. Calculate the lender's IRR if the property instead sells for only $500,000 after 10 years. Show and explain all calculations.

Reference no: EM132060394

Questions Cloud

Prepare a classified balance sheet for spotlighter : Purchased $2,600 in equipment, paying $1,000 cash and promising the rest on a note due in one year. Prepare a classified balance sheet for Spotlighter Inc

Explain in detail the meaning of each of the properties : Explain in detail the meaning of each of the Properties of a Valid Benchmark. In addtion, provide real world example for each of the property.

Compute overall profitability using given data : A property-casualty insurer brings in $6.24million in premiums on its homeowners MP line of insurance. The line's losses amount to $4,330,560.

Prepare adjusting entries for the seven items : Craig Ferguson Company paid $2,700 for 12 months of insurance coverage on May 1, 2014. Prepare adjusting entries for the seven items described above

Should the building be purchased : A property is expected to have NOI of $100,000 the first year. The NOI is expected to increase by 3 percent per year thereafter.

Evaluate a specific policy of our national government : Think about the strengths and weaknesses, advantages and disadvantages, and positive and negative impacts of these aspects of our democracy.

Determining the value of the property : A property has net operating income of $220,000. A lender offers an 8 percent, 20-year, fully amortizing mortgage loan.

Find the budgeted costs of goods manufactured for the year : December 31 finished goods, $540,000; cost of goods sold for the year, $2,560,000. The budgeted costs of goods manufactured for the year is

What obligations the us government has toward its citizens : Explain what obligations the U.S. government has towards its citizens and how these obligations impact individual and group rights.

User Account

All Pages