Part A.

You come across a triplex that you think would make a great rental property. The appraiser hired by the bank determines the market value of the property is $680,000; however, due to your negotiation skills and a highly motivated seller you sign a contract to purchase the property for just $600,000. Your banker approves you as a borrower and notes that the bank recently increased its loan-to-value constraint from 75% to 80%. The bank also does not employ a debt service coverage ratio constraint.

1.What is the maximum loan you can obtainbased solelyon the loan-to-value constraint? Show your work.

2.Your lender reports that the loan committee approved a maximum loan amount of $480,000. What other constraint must be at work here? Based on the information provided, what specific parameters is the bank following regarding that constraint? Explain your reasoning and show your work.

Part B

You're trying to obtain financing for an office building you're purchasing. The lender has agreed to originate a loan which carries a 6.75% interest rate, a 30-year amortization, and calls for annual (not monthly) payments. The lender isn't concerned about either the Loan-to-Value or the Loan-to-Cost ratios, but they insist on a minimum Debt Service Coverage Ratio of 1.25.

The office building's stabilized net operating income is $240,000 per year and your initial request is for a $2.6 million loan.Note: When calculating Loan Constants, please round to FOUR digits (ex: $0.1234).

1. Looking only at the Debt Service Coverage Ratio requirement, will the lender approve your proposed $2.6 million loan? Explain your reasoning and show your work.

2. What is the maximum loan size which would still satisfy the lender's Debt Service Coverage Ratio restriction? Explain your reasoning and show your work.

3. Your business partner finds another bank which seems to be offering a better deal: the loan carries a (much lower) 6.00% interest rate, a 15 year amortization schedule, and the bank requires a 1.30 minimum Debt Service Coverage Ratio you found.

"It's a no-brainer," he says, "We should take it."

Why might the loan with the lower interest rate turn out to be less desirable than the loan you reviewed in Q4(b)?

Support your answer by calculating how much more or less equity you would have to bring to the deal with your partner's loan as opposed to the loan you were considering in Q4b.Show your work.