Question
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
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.
What is the estimated value of Goodman Place using the discounted cash flow method?
What is the initial LTV of the requested loan using the DCF method and does the loan meet JHMs underwriting guidelines?
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