Practice exercise - Permanent Mortgages A mortgage application for a 15 year old, class B+, 250,000 sq ft office building is being analyzed and you have to prepare a property valuation, loan analysis, risk assessment and recommended loan terms of a 5 year term permanent loan for the chief CRE lending officer at an insurance company to review. Your market and property research determines the following information: V. a. The building is currently 95% leased and occupied at average rent of $50/sq foot b. Market rents for comparable buildings= $45/sq foot C. Class A quality rents are $55/sq foot d. Lease expirations in the next 5 years are: i. Year 1: 35,000 sq feet ii. Year 2: 50,000 sq feet iii. Year 3: 7,500 sq feet iv. Year 4: 0 sq feet Year 5: 75,000 sq feet vi. Year 8: 70,000 sq feet e. The local office market vacancy is currently 8% and net absorption was flat the last 18 months f. 2 new buildings are being built for delivery this year g. For the last 5 years the local office market average annual vacancy has been - 10% h. Trailing 12 months property expenses and taxes were $15/sq ft (3% above prior year) i. 2 office buildings in the market were sold 6 months ago at cap rates of 6.5% and 7% j. Costs to produce a new office building are $500/sq ft, assuming market price for land k. Re-leasing costs for a new tenant are typically $60/sq foot 1. Current 10 year US Treasury rate is 2.00% Analysis & Discussion to determine loan amount 1. Direct cap rate on year 1 pro-forma NOI; select the cap rate and LTV ratio 2. Debt coverage test; select debt coverage, interest and amortization period 3. Discounted cash flow with 6 year projection; select the assumptions for annual change in rents, vacancy loss, leasing costs, terminal cap rate and discount rate, and the LTV ratio 4. How much should the insurance co. offer to lend, and what terms should it negotiate? 5. What further information would you need to complete your analysis? Practice exercise - Permanent Mortgages A mortgage application for a 15 year old, class B+, 250,000 sq ft office building is being analyzed and you have to prepare a property valuation, loan analysis, risk assessment and recommended loan terms of a 5 year term permanent loan for the chief CRE lending officer at an insurance company to review. Your market and property research determines the following information: V. a. The building is currently 95% leased and occupied at average rent of $50/sq foot b. Market rents for comparable buildings= $45/sq foot C. Class A quality rents are $55/sq foot d. Lease expirations in the next 5 years are: i. Year 1: 35,000 sq feet ii. Year 2: 50,000 sq feet iii. Year 3: 7,500 sq feet iv. Year 4: 0 sq feet Year 5: 75,000 sq feet vi. Year 8: 70,000 sq feet e. The local office market vacancy is currently 8% and net absorption was flat the last 18 months f. 2 new buildings are being built for delivery this year g. For the last 5 years the local office market average annual vacancy has been - 10% h. Trailing 12 months property expenses and taxes were $15/sq ft (3% above prior year) i. 2 office buildings in the market were sold 6 months ago at cap rates of 6.5% and 7% j. Costs to produce a new office building are $500/sq ft, assuming market price for land k. Re-leasing costs for a new tenant are typically $60/sq foot 1. Current 10 year US Treasury rate is 2.00% Analysis & Discussion to determine loan amount 1. Direct cap rate on year 1 pro-forma NOI; select the cap rate and LTV ratio 2. Debt coverage test; select debt coverage, interest and amortization period 3. Discounted cash flow with 6 year projection; select the assumptions for annual change in rents, vacancy loss, leasing costs, terminal cap rate and discount rate, and the LTV ratio 4. How much should the insurance co. offer to lend, and what terms should it negotiate? 5. What further information would you need to complete your analysis