Consider a property with a starting value of $3.2 million.The bank is offering an accrual loan based on a 75% LTV target.Assume a pay rate of 2.5% on a 30 year amortization and an accrual rate of 7% annually.The loan comes due in 42 months.

a.What is the LTV at maturity if the value of the property increases at 0.5% per month?

b.Explain why placing an accrual loan on a property leads to a higher levered IRR for the investor, vs. an interest-only or fully-amortizing loan with the same 7% interest rate?