1) A publicly listed REIT with access to cheap capital has expressed interest in buying your hotel. The hotel NOI is expected to be $1,000,000 in the next year. If the REIT buys the hotel, its NOI is expected to grow at a rate of 3% per year in perpetuity. You are confident that you will be able to generate an annual NOI growth rate of 4% thanks to your superb managerial skills and your knowledge of the local market. However, your cost of capital is 9% while the REIT's cost of capital is 7%. Compute your and the REIT's investment values of the hotel using the following formula: V = E[NOI1] r-g where r and g are an investor specific cost of capital and NOI growth rate. REIT's value: Your value: Do you think a deal between you and the REIT is possible? 2) You can either buy a condo for $1,000,000 or rent it for $60,000 per year. If you buy it, the property taxes, condo fees and maintenance will cost you 3% of the condo market value each year. You expect that the condo will appreciate by 3% each year. You plan to sell the condo in 5 years. A realtor will charge you a fee of 5% for selling the condo. There are no other significant fees associated with buying or selling this condo. Your savings are currently earning a return of 2.5%. You believe that the best way to finance the purchase is to take an ARM with an initial interest rate of 2.5% fixed for the first 5 years. According to the user cost model, should you buy or rent the condo? Explain your answer. 3) As the mortgage loan officer, you are computing the mortgage terms on an office building loan. The building is expected to generate a net operating income of $250,000 in the next year. Your bank requires the following conditions for loans on this type of property: Minimum Required Debt Coverage Rate = 125%; Maximum Loan to Value Ratio = 75%. Capitalization rate used in determining building value = 10%. Contract mortgage rate = 8%. Loan amortization and maturity = 20 years. Assume annual payments. 3a) Determine the maximum feasible loan size and the associated mortgage payment. Maximum feasible loan size: Associated mortgage payment: 3b) Your boss has told you that you can raise the LTV up to 80%, as long as the Debt Coverage Rate does not drop below 125%. Determine the new maximum feasible loan size and the associated mortgage payment. Maximum feasible loan size: Associated mortgage payment: 3c) The borrower now indicates that the loan rate and loan size determined in (3a) are just fine, but he would like an interest only loan (at 8%) for the first 5 years. After that, he is prepared to make payments in order to amortize the loan over the remaining 15 years. Determine interest only loan payments for years 1 to 5, the loan balance at the end of year 5, and the loan payments required thereafter to amortize the loan over the full 20 years. Finally, what will the loan balance be after 10 years? Loan payments on interest only loan: Loan balance at end of year 5: Loan payments for years 6 to 20: Loan balance after 10 years