Turkey Investments would like to buy a commercial building, and is negotiating loan terms with a local bank. The building is for sale for $4 million. The estimated first-year NOI of the building is $300,000. Loan: The bank is willing to allow the loan to negatively amortize. The loan will need to be paid off 3 years from today. To compensate for the riskiness of such loan, the bank will allow a relatively low LTV ratio applied to the building purchase, 50%. The bank also requires that the first-year DCR is 1.40. The contract interest rate (a.k.a. the accrual rate) on the loan is 13%. Monthly loan payments are required. (a) First, the required monthly loan payment equals $ Don't put the $ sign. Round to whole dollar. Then, build a loan amortization schedule for the next 3 years: Year 1, Year 2, and Year 3. No months, just years (like in class). Use your results to fill out the table below. Don't put the $ sign. Round to whole dollar. End of Year 1 End of Year 2 End of Year 3 Ending loan balance $ $ $ This kind turkey has not one but two HINTS for you: If you're doing the math right, the interest payment in the 3rd year should equal $277,149. Also, notice that the "pay rate" is not given! Use the DCR info for whatever you'd be using a "pay rate" for! ;-) (b) Now, assume that the building value does not change over the next several years. In this case, the loan-to-value ratio be at the end of the 3rd year equals %. Don't put the % sign. Round to 2 decimal places. E.g., if you got 71.23%, type 71.23. (c) If the loan-to-value ratio at the time of sale in 3 years is below the ratio allowed for that year by the bank, then the investment company can afford to pay than the asking price. Type "more" or "less". (d) Continuing part (c), let's say the bank wants to make sure that the loan-to-value ratio in 3 years does not exceed 60%. To make this happen, the investment company can negotiate the asking price and make the following counter-offer: $ (Assume that the offered price can be below the asking price, but it can also be above it if, say, there's high competition.) Don't put the $ sign. Round to whole dollar, and ROUND TO THE NEAREST 100,000. For example, if you got 1,234,567 then put 1,200,000; if you got 1,567,890 then put 1,600,000. Turkey Investments would like to buy a commercial building, and is negotiating loan terms with a local bank. The building is for sale for $4 million. The estimated first-year NOI of the building is $300,000. Loan: The bank is willing to allow the loan to negatively amortize. The loan will need to be paid off 3 years from today. To compensate for the riskiness of such loan, the bank will allow a relatively low LTV ratio applied to the building purchase, 50%. The bank also requires that the first-year DCR is 1.40. The contract interest rate (a.k.a. the accrual rate) on the loan is 13%. Monthly loan payments are required. (a) First, the required monthly loan payment equals $ Don't put the $ sign. Round to whole dollar. Then, build a loan amortization schedule for the next 3 years: Year 1, Year 2, and Year 3. No months, just years (like in class). Use your results to fill out the table below. Don't put the $ sign. Round to whole dollar. End of Year 1 End of Year 2 End of Year 3 Ending loan balance $ $ $ This kind turkey has not one but two HINTS for you: If you're doing the math right, the interest payment in the 3rd year should equal $277,149. Also, notice that the "pay rate" is not given! Use the DCR info for whatever you'd be using a "pay rate" for! ;-) (b) Now, assume that the building value does not change over the next several years. In this case, the loan-to-value ratio be at the end of the 3rd year equals %. Don't put the % sign. Round to 2 decimal places. E.g., if you got 71.23%, type 71.23. (c) If the loan-to-value ratio at the time of sale in 3 years is below the ratio allowed for that year by the bank, then the investment company can afford to pay than the asking price. Type "more" or "less". (d) Continuing part (c), let's say the bank wants to make sure that the loan-to-value ratio in 3 years does not exceed 60%. To make this happen, the investment company can negotiate the asking price and make the following counter-offer: $ (Assume that the offered price can be below the asking price, but it can also be above it if, say, there's high competition.) Don't put the $ sign. Round to whole dollar, and ROUND TO THE NEAREST 100,000. For example, if you got 1,234,567 then put 1,200,000; if you got 1,567,890 then put 1,600,000
