You are a loan officer. An owner approaches your lending institution for a $$1,000,000$ mortgage loan. The parcel is vacant, with commercial zoning and an appraised market value of $$500,000.$ The proposed improvements will cost $$1,100,000,$ based on firm contractor estimates. No depreciation or diminished utility is expected because the structure would be well designed.

Your institution has an established policy of a $65$ percent maximum loan$-$to$-$value ratio on commercial loans. The building is expected to have a $50-$year economic life. The current interest rate is $12$ percent. Expected potential gross income is $$300,000$ per year. Vacancy losses are estimated to be $5$ percent. Operating expenses estimated to be $$109,000$ per year. Local gross income multipliers for this type of property typically run about $5\mathrm{.}2.$ Overall capitalization rates range from $11\mathrm{.}1$ to $11\mathrm{.}3$ percent in the area. Determine the following:

a$.$ Indicated market value, using the GIM technique

b$.$ Indicated market value, using the overall capitalization rate $($first find upper and

lower value and then calculate the mean of upper and lower value$)$

c$.$ Your estimate of market value, after reconciling the two approaches $($put $30\%$ weight

on the market value found in question a and $70\%$ weight on the market value found in

question b$)$

d$.$ Would the requested loan be within your institution$$s guidelines?

$($Estimated loan amount $=$ Final estimate of market value x LTV$)$

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