You are considering the purchase of a small existing office building for $1,975,000 today. Your expectations for this stabilized property include the following: first-year gross potential income of $340,000; vacancy and collection losses equal to 15% of gross potential income; operating expenses equal to 40% of effective gross income; and capital expenditures equal to 5% of EGI. You have arranged a $1,481.250 first mortgage loan (75% initial LTV) with an annual interest rate of 7%. The loan will be amortized over 25 years with a monthly payment of $10,469.17. Total upfront financing will equal 2% of the loan amount, or $29,625. Therefore, the required equity investment is $523,375 [$1,975,000 ($1,481,250 - $29,625)].

What is the estimated net operating income (NOI) and before-tax cash flow (BTCF) for thefirst year of operations? Please show these calculations in the form of an operating statement.

Calculate the following for comparison to other similar properties: (a) Capitalization rate? (b) Equity dividend rate? (c) Effective gross income multiplier?

(d) Operating expense ratio? (e) Debt coverage ratio? (f) Debt yield ratio?

What can you conclude about this property based on these ratios? What opportunities do you see? What risks are you concerned about?

What is the major shortcoming of these ratios when you are using them to make investment decisions? What additional information would you want to make a more informed decision?