2) Assume that you were given an opportunity to purchase a real estate project using an equity participation loan. The NOI for each year of the holding period are shown below: Year 1 Year 2 Year 3 Year 4 NOI 124,787 132,225 139,954 148,468

2 Annual payments are being used to make the problem easier

Additional information:

1) Purchase price = $1,900,000

2) Estimated value of land = $500,000

3) Anticipated mortgage terms:

a) Loan to value ratio = .80

b) Interest rate = 5.5%

c) Years to maturity = 30

d) Points charged = 2

e) Prepayment penalty = 2% of outstanding balance

f) Level payment, fully amortized

g) Fixed interest rate, monthly payments

4) Participation terms:

a) Share of NOI = 15.0% over $125,000

b) Share of Appreciation = 20%

5) Future sales price = $2,150,000

6) Estimated selling expenses as proportion of future sales price = 5%

7) Client's minimum required before-tax rate of return on equity = 12%

Calculate:

a. The before-tax cash flows and the before-tax equity reversion (you do not need to calculate the after-tax cash flows or reversion

b. The before-tax net present value to the investor.