Consider a suburban mall that generates total lease income of $40m per year. Operating expenses of running the mall are $7m per year. The mall is financed by an interest-only commercial mortgage with an interest rate of 4% per annum.

(a) How would you go about assessing what an appropriate cap rate would be for valuing this property [2-3 sentences]

b/ Assume that an appropriate market cap rate for this type of property is 5%.What is your valuation of this property?

c/ Assume the mortgage has an LTV of 80% (use your answer from part 1 as the valuation). What is the DSCR on the mortgage?

d/ Would the DSCR be higher or lower if this was an amortizing mortgage instead of an interest only mortgage? Why?[a couple of sentences]

e/ The DSCR is commonly used as an underwriting criteria for commercial real estate lending. Briefly explain how it is used, and why it is a useful statistic for assessing credit risk for commercial mortgages. Also give an example of asituation in which it might give a misleading picture of the credit risk embedded in the commercial mortgage and what may be a different statistic to spot check with?