A property valued at $20,000,000 is expected to generate $960,000 of NOI next year. You plan to use a 7- year interest-only loan to finance the purchase of the property. Given current market conditions, banks require a DSCR of 120% minimum and an LTV of 65% or lower for a 7-year interest-only mortgage loan at 5% fixed with monthly payments.

a. What is the maximum loan amount a bank will be willing to underwrite on this property and how much money will you have to put down as equity?

b. If NOI remains constant, by how much should cap rates increase before the loan falls under water, i.e., for the value of the property to fall below the loan balance?

c. If the propertys NOI and value drop by 10% over the 7-year period, will the investor be able to refinance the loan at the initial DSCR and LTV if the new loan is at still at 5%?

d. If your answer to the above question is negative, how much higher should the previous monthly debt service have been if the loan were structured as a balloon mortgage such that it can be refinanced at the end of the 7 years given the new NOI and property value in question c if the interest rate on the loan stays unchanged at 5%?