Underwriting information:

200 unit apartment building

1,000 per month average rent

8% vacancy

38% total operating expense ratio

Replacement Reserves of $250 per unit per year

3% growth rate

Purchase price is $20 million

Exit cap rate is 7.5%

Sales costs are 2%

Unlevered discount rate is 8%

Assume 5 year holding period

Part 1 - Prepare 5 year pro forma operating statement

What is cap rate on the purchase price?

Determine the sales price at the end of year 5

Based on your analysis, what do you think the initial value of the asset is?

If you buy the asset for $20 million, what is your NPV? IRR?

Part 2 - Assume the above but now with the following loan information:

Loan principal of $10 million

5% interest rate

30 year term with amortization

2% loan fees

Calculate levered cash flows

Calculate net sales proceeds after debt repayment

What are net loan proceeds?

What is monthly loan payment?

What is effective annual interest rate (effective borrowing cost)?

What is your required equity investment if you buy the asset for $20 million?

What is your equity dividend rate?

What is the DSCR?

If the required return (discount rate) increases to 11%, what is your NPV? Levered IRR?