3 [8 pt] You are considering the purchase of a 50,000 square-foot office building with an asking price of $10,000,000. Rent per square foot is $40.00, vacancy is 15% and operating expense/ capital expenditures is 52% of effective gross income. You are considering injecting equity to the tune of 20% of the purchase price and borrowing the balance. Typical financing is 7% per year for 10 years, amortized over 25 years. The lender requires a Debt Coverage Ratio (DCR) of 1.35.

(i) Would you qualify for the loan amount you are seeking under the lenders DCR constraint? Show your computations clearly. (6 pt)

(ii) If not, how much more equity will you need to inject under the maximum loan possible? (2 pt)

4 [10 pt.]

Given the recent drop in mortgage interest rates, you have decided to refinance your home. Exactly five years ago, you obtained a $550,000, 30-year mortgage loan (L1) with a fixed rate of 5.5%. Today, you can get a 30-year loan for the currently outstanding loan balance at 3.75% interest. This loan (L2), however, requires you to pay a $3,000 in front-end fees and 2 points at the time of the refinancing (1 point equals 1% of the amount borrowed). Ignore tax considerations

(i). What is the outstanding balance on the L1 loan today, if you just made the 60th payment? (2 pt.

(ii). How much will your monthly payments be for L2 after you refinance? (3 pt.)

(iii) Should you refinance? Answer this question by computing your effective borrowing cost on L2 and comparing it with L1. Show your computations. (5 pt.)