2. You have decided to purchase the Bannon Building and have arranged for both a firstlien mortgage and a mezzanine loan. The first-lien mortgage is a traditional commercial loan with payments being made on an annual basis. The amount borrowed in the form of mezzanine financing puts the total LTV to 85% and there is an origination fee of $25,000. The payments to the mezzanine lender are based on a 9% yield. The lender receives a combination of a coupon payment and accrual. The coupon payment equals 5% of the balance due remaining after the prior year's payment. The remaining 4% is not paid out annually but is accrued, adding to the loan's outstanding principal balance over time. When the loan is retired, you must retire the debt by repaying both the amount borrowed and all accrued interest. The unlevered cash flow, terms for each loan, and templates are provided in the given data sheet. (a) Based on the given information, determine the cash flows received by the equity investor prior to financing. (b) Determine the effective cost of borrowing for each loan. (c) What is the weighted average coupon? (d) What are the cash flows received by the equity investor after paying the debt service? (e) What is the the levered IRR for the investment? \begin{tabular}{|c|c|c|c|c|c|c|c|} \hline & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\ \hline Market Rent & & 15.50 & 15.97 & 16.44 & 16.94 & 17.45 & 17.97 \\ \hline Lease Rent & & 15.00 & 15.23 & 15.45 & & & \\ \hline \multirow{2}{*}{\multicolumn{8}{|c|}{ Rental income: }} \\ \hline & & & & & & & \\ \hline Potential gross income & & 1,125,000.00 & 1,141,875.00 & 1,159,003.13 & & & \\ \hline Vacancy & & 0.00 & 0.00 & 0.00 & & & \\ \hline Effective Gross Income & & 1,125,000.00 & 1,141,875.00 & 1,159,003.13 & & & \\ \hline \multicolumn{8}{|l|}{ Other income: } \\ \hline Expense reimbursements & & 32,187.50 & 37.807 .81 & 43,582.18 & & & \\ \hline & & & & & & & \\ \hline Operating income before adjustments & & 1,157,187.50 & 1,179,682.81 & 1,202,585.30 & & & \\ \hline \multirow{2}{*}{\multicolumn{8}{|c|}{ Adjustments: }} \\ \hline & & & & & & & \\ \hline Collection losses & & 11,250.00 & 11,418.75 & 11,590.03 & & & \\ \hline Rent abatement & & 0.00 & 0.00 & 0.00 & & & \\ \hline Total operating income & & 1,145,937.50 & 1,168,264.06 & 1,190,995.27 & & & \\ \hline & & & & & & & \\ \hline \multicolumn{8}{|l|}{ Reimbursable expenses } \\ \hline Real estate taxes & & 80,000.00 & 82,400.00 & 84,872.00 & & & \\ \hline Utilities & & 64,687.50 & 65,657.81 & 66,642.68 & & & \\ \hline Insurance & & 75,000.00 & 77,250.00 & 79,567.50 & & & \\ \hline Total reimburseable expenses & & 219,687.50 & 225,307.81 & 231,082.18 & & & \\ \hline Reimbursable expenses/SF & & 2.93 & 3.00 & 3.08 & & & \\ \hline & & & & & & & \\ \hline \multicolumn{8}{|l|}{ Non-reimbursable expenses } \\ \hline Management & & 56,250.00 & 57,093.75 & 57,950.16 & & & \\ \hline Total expenses & & 275,937.50 & 282,401.56 & 289,032.34 & & & \\ \hline & & & & & & & \\ \hline Net operating income (NOI) & & 870,000.00 & 885,862.50 & 901,962.94 & & & \\ \hline & & & & & & & \\ \hline Vacancy & & 0.00% & 0.00% & 0.00% & & & \\ \hline Occupancy & & 100.00% & 100.00% & 100.00% & & & \\ \hline & & & & & & & \\ \hline & & & & & & & \\ \hline & & & & & & & \\ \hline & & & & & & & \\ \hline & & & & & & & \\ \hline & & & & & & & \\ \hline \end{tabular} A B General data: Property type Rentable SF Number of tenants Inflation rate Price \begin{tabular}{|l|} \hline Office \\ \hline 75,000 \\ \hline 1 \end{tabular} Market data: Market rent Rental growth rate Renewal probability Months vacant Required return Cap rate $15.50/SF 3% Lease terms: Maturity Base rent Escalation Reimbursements TI - Initial TI - Renewal Rent abatement - Initial Rent abatement - Renewal 0.03 $9.35M 75% 6 12% 10% Other income and adjustments: Collection losses Capital expenditures Operating expenses: Real estate taxes Utilities Insurance Management (Non-reimbursable) 5 years $15.00/SF 50% of CPI Base stop, \$2.50/SF $15/ SF $5/SF 6 months None 1% of EGI Disposition: Sale commission 5% of PGI 1.00% 5.00% 9,350,000 15.50 3.00% 75.00% 6.00 12.00% 10.00% D E 75,000 10.00% \begin{tabular}{|r|} \hline 5.00 \\ \hline 15.00 \\ \hline 0.00% \\ \hline 2.50 \\ \hline 15.00 \\ \hline 5.00 \\ \hline 6.00 \\ \hline 0.00 \\ \hline \end{tabular} Mortgage financing: Amount borrowed Loan-to-value Interest rate Amortization Maturity Payment frequency 4% of sale price 4.00% $80,000 80,000 5.75% of EGI 5.75% 75,000 5.00% \begin{tabular}{|r|r} $75,000 & 75,000 \\ \hline 5% of EGI & 5.00% \\ \hline \end{tabular} Origination fee Annual 6,545,000 70% 6.50% 20 5 2.00%