A client has approached you looking for advice as it relates to the possible purchase of an (income-producing) apartment property that contains 128 apartment units. Monthly rental income for each unit averages $846. A review of the fundamentals reveals that approximately 8% of the (apartment) inventory in the submarket is vacant.

Your client is interested in financing the purchase with a 5-year, 3.27% fixed interest rate, $6,250,000 mortgage loan that amortizes based on a 20-year schedule.

Using the above information, develop a Pro Forma and DCF model for the five-year investment horizon. Assume Operating Expenses of 38% of Effective Gross Income (EGI), an inflation rate (for rental revenue and operating expenses) of 3%, a discount rate of 8%, a terminal cap rate of 7%, and General Vacancy.

Use the above information to answer the following questions:

1. What is the LTV? (You will need to estimate value using the DCF Method, and remember that real estate valuation in the context of the DCF Method consists of the present value of future expected cash flow before debt service and the present value of future expected cash flow from a resale of the property net of the balloon loan payment)

2. What are you forecasting for DSCR Year 1?

3. What is your projection for the terminal value; i.e., the future expected resale value (at the end of the five-year investment horizon)?

4. What is your estimate for the before-tax return "on" investment for the equity investor; i.e., the IRR?