Suppose that you are considering the development of a retail center. The project costs are as follows:

Site Acquisition Costs: $2.0 million
Site Development Costs: $1.5 million
Hard Construction Costs: $10.0 million
Soft Construction Costs: $4.0 million

You have found a construction lender who is willing to provide you with a 12-month construction loan with the following terms:

Loan Amount:         100% of site development costs, 80% of hard construction costs, and 60% of soft construction costs

Interest Rate:          6% per year with required monthly payments of interest

Draw Schedule:      50% of the loan amount at closing, 25% of loan amount at end of month 4, and 25% of loan amount at end of month 8.

Loan Fees:             1% of loan amount (Paid at closing)

Show your work on the following.

• What will the balance be on the loan at the end of month 12, and how much interest will you pay on this loan by the end of the 12th month?

You have also found a permanent lender who is willing to provide you with a permanent loan with the following terms:

Maximum Loan-to-Value Ratio:    75% of market value of the completed property

Interest Rate:                                  4% per year with monthly payments and compounding

Amortization:                               20 years

How large will the permanent loan be if you make the following assumptions:

Leasable Space:                             100,000 square feet

Average Rent:                                $18 per square foot per year

Vacancy and Collection Losses:   7.5% of PGI

Operating Expenses:                     40% of EGI

Cap Rate:                                        6%

• What will the monthly payment be for the permanent loan and is the permanent loan large enough to take you out of the construction loan?