Reference no: EM132789223

You are advising a group of investors who are considering the purchase of a shopping center complex they would like to finance 75 percent of the purchase price. a loan has been offered to them on the following terms: the contract interest rate is 10 percent and will be amortized with monthly payment over 25 years. the loan also will have an equity participation of 40 percent of the dash flow after debt service. the loan has a lockout provision that prevents it from being prepaid before year 5.

The property is expected to cos t $5 million. NOI is estimated to be $475000 including overages, during the first year, and to increase the rate of 3 percent per year for the next five years. the property is expected to be worth $6 million at the end of five year. The improvement represents 80 percent of cost, and depreciation will be over 39 years. assume a 28 percent tax bracket for all income and capital gains and a holding period of five years.

Problem a. Compute the BTIRR and ATTIRR after five years, taking into account the equity participation.

Problem b. What would the BEIR be on such a project? what is the projected cost of the equity participation financing?

Problem c. Is there favorable leverage with the proposed loan?