THIS IS ONE QUESTION WITH $14$ PARTS PLEASE SHOW your WORK using a FINANCIAL CALCULATOR and EXCEL FORMULAS TO DOUBLE CHECK YOUR ANSWER.

You want to purchase an office building in Brooklyn. The property contains $32,100$ square feet

of rentable space and is currently occupied by multiple tenants each with differing maturities on

their respective leases. No lease is currently shorter than $1$ year.

The annual rent in the $1$st year of ownership is $$37\mathrm{.}50/$sq ft$.$

The vacancy rate is $5\mathrm{.}5\%.$

You expect to incur collection losses $($from tenant default$)$ on $1\mathrm{.}5\%$ of the square feet during

your first year.

$1.$ What is the Potential Gross Income $($PGI$)$ for the first year?

$2.$ What is the Effective Gross Income $($EGI$)$ for the first year?

$3.$ If operating expenses are expected to be $50\%$ of EGI, what is the Net Operating Income

$($NOI$)$ generated by the property in the $1$st year of ownership?

$4.$ You decide you want to take out a loan to finance the purchase of this property. It will be an

IO loan at a rate of $6\mathrm{.}25\%,$ compounded annually, with annual payments. The lender will

provide financing up to a minimum Debt Service Coverage Ratio $($DSCR$)$ of $1\mathrm{.}2$ based off of the

$1$st year NOI.

What is the largest annual loan payment the lender will allow you to make based on the DSCR$?$

$5.$ If you get a loan that corresponds to the largest annual loan payment the lender will allow you

to make based on the DSCR $($computed in part $4),$ what will be your net income in the first year?

$6.$ What is the largest loan a lender is willing to provide you with based on question $4?($Use the

fact that this is an IO loan at $6\mathrm{.}25\%.$ Also use the loan payment from question $4.)$

$7.$ The seller$$s asking price for the property is $$7,000,000.$ If the lender has a maximum $70\%$

LTV requirement what is the most the bank will lend you? $($Only based on the LTV requirement.$)$

$8.$ The loan must satisfy both the minimum DSCR of $1\mathrm{.}2$ and maximum LTV of $70\%.$What is the biggest loan the borrower can get?

$9.$ If you buy the property at the asking price of $$7,000,000$ using the biggest loan you can get

$($from question $8),$ what will your down payment be$?$

$10.$ What is the annual mortgage payment on the loan in question $8?$

$11.$ If you buy the property at the asking price of $$7,000,000,$ what will your $$going in$$ Cap Rate

be$?$

$12.$ If the annual irr for this property is $8\mathrm{.}5\%,$ then based on the cap rate in question $11,$ what

does this imply is expected NOI growth rate for this property?

$13.$ You do research and find that similar properties are selling at an $11\%$ cap rate. Using an

$11\%$ cap rate, what price would you offer for this property?

$14.$ Suppose you buy the property at the asking price of $$7,000,000$ and own it for exactly $1$

year.

You make the down$-$payment in part $(9).$

You collect the NOI in part $(3).$

You make the annual mortgage payment in part $(10).$

In two years, the NOI is expected to be the same.

You sell the property at the end of year $1,$ at a cap rate of $50$ basis points below the cap rate in

part $(11)$ and you pay off the loan balance when you sell.

Compute the IRR on this investment.