Fundamentals

The property is a brick 38 unit apartment building built in 1985. There are 24 two bedroom and 14 one bedroom units on 6 acres. The sellers on the property listing are three brothers who claim to own the property as tenants in common. Your title research, however, indicates that the property was previously owned by the father of the brothers and his sister, Brunhilda, as joint tenants. The father passed away two years ago, and the brothers assumed they inherited their father's share. Brunhilda is alive and living in a neighboring state. The brothers assure you they can validly transfer the property to you by quitclaim deed.

QUESTIONS (SHOW WORK)

• You are trying to acquire some development property to add to the apartment property described above. There is a ten acre piece next to the apartment property, but it is zoned Trans-ag 2, allowing a single family dwelling on 2 acres. You would like it to be changed to High Density Residential zoning with a conditional use permit for a day care center on the property. What should you do? Explain your answer carefully.

_______________________________________________________________________________________________________________________________________Mortgage Finance

The property consists of two hundred eighty (280) acres in the fan-shaped development pattern of Drummond, Idaho. Financing information:

Fixed Rate Mortgage

Property appraisal is $2.8 an you believe you can borrow the funds based on an 80% LTV ratio.

Interest rate - 30 year fixed: 4.625%, 2 points required to close the loan.

Interest rate - 15 year fixed: 4.0%

Note: Fully amortized, monthly payments

ANSWER the following QUESTIONS, show your calculations:

• What is the initial monthly payment in each of the respective loans?
• Compare the amount of interest which would be paid on the 30 year vs. the 15 year loan.
• Which loan would you choose assuming there is 80% loan to value on the property? Explain.
• What would the yield to the lender be on the 30 year fixed loan, considering the 2 points which must be paid?
• What would the outstanding balance of the 15 year fixed loan be after 5 years?

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Adjustable Rate Mortgage

Assume the loan amount is the same as the fixed rate loan above.

You wonder if an adjustable rate mortgage might be beneficial. You find a 3/2 product which you want to pursue.

Initial rate: 3% margin .25%, 30 year term.

End of three years, Index rises to 4.5%, margin continues.

End of five years, Index rises to 5.0% margin continues.

ANSWER THESE QUESTIONS, show your work:

• What is the monthly payment for the interval which begins at the end of the initial period of the loan?
• What is the monthly payment for the interval which begins at the end of the first two-year interval of the loan?

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Structuring the Deal

The property is a large mansion house on a main thoroughfare in a medium-sized city. It was constructed originally in 1917 to house the family of Oscar W. Flintrock, who made a fortune in mining phosphate in the local mountains. Over the years it has had a number of owners and uses including the current 8 apartments which house students from the local university. You believe you can remodel the old house into 3 office spaces with a nice reception area on the main floor. The mansion is located about 3 blocks from an expanding downtown.

QUESTIONS (SHOW WORK):

After careful consideration, you decide that an option is the best approach. Explain how you would structure an option agreement to purchase the mansion. The property was most recently listed at $425,000.

The owner, Charles Flintrock, later (after he has signed the option with you) has a dream that the house is really worth $600,000.

• Can he withdraw the option after it is in place?
• What can you do once you have the option in place? Discuss fully.
• What if in your investigation of the property, you determined that the rock used in constructing the property is in fact radio-active and would require significant and expensive clean-up?

_______________________________________________________________________________________________________________________________________Income Tax

Zeek Zapota owned forty acres along a main road between the downtown area and an affluent suburb of Reno, Nevada. He obtained the property for $500 per acre in 1955. Zeek gifted the property to his daughter, Zella, in 2005. An appraisal estimated that the property value at the time of the gift was $5,000 per acre.

Recently, Zella received an offer of $12,250 per acre.

QUESTIONS (SHOW WORK):

• Explain the income tax implications for Zella of an outright sale of the property.
• Is there an alternative to the sale which might allow Zella to escape current income taxes? Explain how that might work.