Question

A client of Mr. Richards wants to purchase a large commercial building. The building cost $20 million and he will make a down payment of 15% and finance the rest with a local bank.? The bank terms are 10 years bullet loan with 30 year amortization at 4.5% interest. The building earns annual rent of $2,500,000. and it pays annual taxes of $1,000,000. per year. What will be the annual cash flow from the building? What willbe the ROI on the investment? How do I calculate the payment? How do I build the amortization table?

Answer 1

Total Cost of the Building: 20 million dollars

Total Down payment: 15% *20 million = 3 million

Total Loan = 20 million - 3 million = 17 million

10 years bullet loan with 30 year amortization means that the amortisation will be happening as per 30 year loan however bank want you to pay off the final balance after 10 as a whole in once. It also means that installment will be as per 30 year loan.

Assuming that installments are annually

Installment = [A x R x (1+R)^N]/[(1+R)^N-1], where A is the loan amount or principal, R is the interest rate per year, and N is the years.

Here R = 4.5%

N = 30

Hence Annual installment is 1,043,646.23 dollars

We can make annual ammortization table as provided below

	Opening Balance	Interest Applied	Installment Paid	Closing Balance
Year 1	17000000.0	765000.0	1043656.2	16721343.8
Year 2	16721343.8	752460.5	1043656.2	16430148.0
Year 3	16430148.0	739356.7	1043656.2	16125848.4
Year 4	16125848.4	725663.2	1043656.2	15807855.4
Year 5	15807855.4	711353.5	1043656.2	15475552.7
Year 6	15475552.7	696399.9	1043656.2	15128296.3
Year 7	15128296.3	680773.3	1043656.2	14765413.4
Year 8	14765413.4	664443.6	1043656.2	14386200.8
Year 9	14386200.8	647379.0	1043656.2	13989923.6
Year 10	13989923.6	629546.6	1043656.2	13575813.9

Hence at the end of 10 years Mr. Richard Needs to pay 14,619,470.1 (installment + closing balance) with installment of 1,043,656.2 for first 9 years.

Hence please find below the Cash flow statement:

	Outflow			Inflow	Total Cash flow
	Cash out for Loan	Cash out for Taxes	Cash out for Down Payment	Cash in Rental Income
Year 0	0		3000000		-3000000
Year 1	1043656.2	1000000		2500000	456343.7706
Year 2	1043656.2	1000000		2500000	456343.7706
Year 3	1043656.2	1000000		2500000	456343.7706
Year 4	1043656.2	1000000		2500000	456343.7706
Year 5	1043656.2	1000000		2500000	456343.7706
Year 6	1043656.2	1000000		2500000	456343.7706
Year 7	1043656.2	1000000		2500000	456343.7706
Year 8	1043656.2	1000000		2500000	456343.7706
Year 9	1043656.2	1000000		2500000	456343.7706
Year 10	14619470.1	1000000		2500000	-13119470.14

ROI for the first 9 year will be final Cash inflow/ total equity investment = 456343.78/3000000 = 15.2%