You have been hired to underwrite the financing of a recently acquired apartment building. The building has thirty 2-bedroom units that are currently rented for $12,000 per year, you anticipate an annual vacancy rate of 10%, operating expenses of 20% of effective gross income, and $15,000 per year in capital expenditures (which do not increase). PGI is expected to increase at 3% per year. The owner is anticipated to hold the building for 5 years, incur sale expenses of 5% at that time, and has a current opportunity cost of 10%. The current cap rate is 6.5%, which is anticipated to increase to 7% when the property is sold. Use excel to answer the following questions (these would most likely be broken apart into different question on the exam).

a. What is the 1st – 5th year NOI estimates?

b. What do you anticipate will be the net sale proceeds of the building at the end of 5 years?

c. What is your estimated value of the property today (ie, t = 0) using the direct capitalization and discounted cash flow approaches to value? Assume market discount rate of 10% for DCF method.

d. What is the unlevered Cash-on-Cash, IRR, and MIRR if the property available to be purchased for $3.5 million today. Assume the owner has an opportunity cost of equity of 10% and can finance negative cash flows at 8%.

e. What is the annual debt-service, DCR, DYR, and levered IRR associated with a $2.3m 5-year interest-only fixed rate mortgage loan offered 6% with no origination fees?