You are a loan officer at JHM Bank headquartered in Atlanta. Dawg-Gone investments has approached you to get a mortgage to finance the purchase of Goodman Place, a one million square foot class A office building in the central business district (CBD) of Atlanta. Dawg-Gone has agreed to pay $140 per square foot to buy Goodman Place. Dawg-Gone is requesting a loan amount of $105 million. On class A office properties, JHM Bank allows up to 75% loan to value ratio, based on the minimum of the purchase price or the estimated property value. The non-recourse loan is structured as a partially amortizing balloon loan, with amortization of 30 years (annual payments and compounding) and a term of 10 years. Currently JHM is charging 4% on these loans with no origination fees or points. Market rents for Goodman place are $22/sq. ft. and are expected to grow 2% annually. Strong demand and limited supply have pushed vacancies in Atlantas CBD to their lowest levels since 2008, so you anticipate vacancies and collections of 16% of potential gross income. Operating expenses and capital expenditures are expected to be 45% and 3% of effective gross income, respectively. You need to determine whether the requested loan on Goodman Place meets JHMs underwriting eligibility requirements. As mentioned above, the max initial LTV is 75%. JHM also requires a max terminal LTV of 65%. As for income ratios, the minimum debt coverage ratio is 130% and the max break even ratio is 70%. If the loan is held in portfolio there is no debt-yield ratio requirement, but if the loan is packaged into a CMBS the minimum DYR is 10%. From market research, you determine that the going-in cap rate for class A CBD office space in Atlanta is 6.77%, and that the discount rate for unlevered property of this risk is 8.01%. The holding period for the borrowers investment is five years and you estimate that the going-out cap rate will be 6.90%. Selling expenses are expected to be 4% of the sales price.

a. What is the estimated value of Goodman Place using direct capitalization?