This is for a financial real estate course. We are doing valuation and cash flows. Direct capitalization and the DCF method.

a)Consider a property with expected net operating income of $250,000 per year for the next five years (starting 1 year from now). After that, the net operating income should step up 20% and remain at that level for the following five years. If you expect to sell the property ten years from now for a price ten times the net operating income at that time, what is the value of the property if the required return is 12%? (10 points)

b) In the question above, suppose the seller of the building is asking $2,600,000. Should you do the deal? Why or why not? (10 points)

c) Based on the projects first years net operating income, what is the maximum debt the property can support if a lenders terms of a loan are 9.50% interest only for a 10- year term, debt service coverage ratio (DSCR) of 1.25 times AND a loan to value ratio of 75%? (10 points).

d) Suppose the investor decides to pay the sellers asking price, should the bank make the loan? Why or why not? What is the primary risk to the lender if it makes this loan? (5 points).

e) What is the internal rate of return to the EQUITY investor if he takes the loan and his required internal rate of return on leveraged equity is 20%? Was this a favorable transaction? Explain. Assume the propertys resale price is still ten times net operating income and there are no transaction costs or taxes (15 points).