PART FIVE Case Problem 1. Byron Bass is a commercial real estate broker who also has a keen eye for personal investment opportunities. He has an opportunity to buy Academic Arms, an apartment building that caters to students. He estimates that he can acquire the asset for S1.3 million with purchase costs of 2 percent the seller will take back a si 2 million first mortgage the annual debt service and principal payments reflected on the following schedule of projected cash flows. Bass plans to sell the project when the loan balance falls due at the end of the seventh year. Bass has researched Academic Arms and has generated the following sched- ules, in which he has considerable confidence. Academic Arms Apartments Projected After Tax Cash Flows from Operations Year 1 Year 2 Year 3 Yoar 4 Yoar 5 Year 6 Year 7 $286,442 S295.035 $303.877 $313.004 $322393 $332.067 $342.029 Effective gross income Less operating expenses .157543 1622sa 167.13e 1Z2152 1Z1319 18263z 18a.116 $128,899 $132,766 $136,739 $140,852 5145.077 $149,430 $153,913 Net operating income 126.370 126.320 126320 126320 128320 126.320 126.320 Less: Debt service $27,543 18,707 14,482 Before-tax cash flow 36.967 38.575 38.575 38575 38575 38.575 36.967 Less: Depreciation -6 621 -1360 -8.141 -asss -109Zs -12.124 Plus, Principal paid (4.540) s 27,767) s(24.810) Taxable income (loss) 28 28 28 -28 -28 Times: Tax rate 6.396 10.389 14.482 18.707 23.060 27.543 Tax (tax saving) Before-tax cash flow After-tax cash flow Bass has adequate passive income to offset these losses PART FIVE Case Problem 1. Byron Bass is a commercial real estate broker who also has a keen eye for personal investment opportunities. He has an opportunity to buy Academic Arms, an apartment building that caters to students. He estimates that he can acquire the asset for S1.3 million with purchase costs of 2 percent the seller will take back a si 2 million first mortgage the annual debt service and principal payments reflected on the following schedule of projected cash flows. Bass plans to sell the project when the loan balance falls due at the end of the seventh year. Bass has researched Academic Arms and has generated the following sched- ules, in which he has considerable confidence. Academic Arms Apartments Projected After Tax Cash Flows from Operations Year 1 Year 2 Year 3 Yoar 4 Yoar 5 Year 6 Year 7 $286,442 S295.035 $303.877 $313.004 $322393 $332.067 $342.029 Effective gross income Less operating expenses .157543 1622sa 167.13e 1Z2152 1Z1319 18263z 18a.116 $128,899 $132,766 $136,739 $140,852 5145.077 $149,430 $153,913 Net operating income 126.370 126.320 126320 126320 128320 126.320 126.320 Less: Debt service $27,543 18,707 14,482 Before-tax cash flow 36.967 38.575 38.575 38575 38575 38.575 36.967 Less: Depreciation -6 621 -1360 -8.141 -asss -109Zs -12.124 Plus, Principal paid (4.540) s 27,767) s(24.810) Taxable income (loss) 28 28 28 -28 -28 Times: Tax rate 6.396 10.389 14.482 18.707 23.060 27.543 Tax (tax saving) Before-tax cash flow After-tax cash flow Bass has adequate passive income to offset these losses
