You are considering the purchase of an industrial warehouse. The purchase price is $1 million. You expect to hold the property for five years. You have decided to finance the acquisition with a $700,000 loan, 6 percent interest rate, 30-year term, and annual interest-only payments (i.e., the annual payment will not include any amortization of principal). There are $50,000 in up-front financing costs. You estimate the following cash flows for the first year of operations: Effective gross income $ 135,000 Operating expenses 27,000 NOI $ 108,000 Required:

a. Calculate the overall rate of return (or going-in cap rate).

b. Calculate the debt coverage ratio.

c. What is the largest loan that you can obtain (holding the other terms constant) if the lender requires a debt service coverage ratio of at least 1.2?