Question) You are considering purchasing an office building for $2,500,000. You expect the potential gross income (PGI) in the first year to be $450,000; vacancy and collection losses to be 9 percent of PGI; and operating expenses and capital expenditures to be 42 percent of effective gross income (EGI). You will finance the acquisition with 25 percent equity and 75 percent debt. The annual interest rate on the debt financing will be 5.5 percent. Payment will be made monthly based on a 25-year amortization schedule.

a) What is the implied first-year overall capitalization rate?

b) What is the expected debt coverage ratio in year 1 of operations?

c) If the lender requires DCR to be 1.25 or greater, what is the maximum loan amount?

d) What is the debt yield ratio?