Michael Razza purchased a 500,000 square foot farm in Wyoming on June 1, 2005. At the...

Michael Razza purchased a 500,000 square foot farm in Wyoming on June 1, 2005. At the time of purchase, the building had a Net Operating Income of $3,500,000. Mr Evans was able to obtain a loan with a 7% loan constant with a 30-year amortization schedule at the closing of the property. The Annual Debt Service (ADS) for this loan is $1,900,000.00. The loan has a maturity date of May 31, 2015. The loan does not contain a prepayment penalty.

What was the original amount of the loan at time of purchase?

Assume the original loan at purchase was 75% of the purchase price, how much equity did Michael put into the property at closing?

Assume that the loan has been in place for four (4) years, what is the loan balance at the end of Year 4?

Solutions

Expert Solution

Loan constant = Annual debt service / Loan amount

7% = 1,900,000 / Loan amount, or Loan amount = 1,900,000 / 7% = $27,142,857

Since loan amount = 75% of purchase price, Michael put in 25% of the purchase price, where purchase price = loan amount / 75% = 27,142,857 / 75% = $36,190,476

Hence, Michael's equity contribution = 25% * 36,190,476 = $9,047,619

Loan amortization table can be built as below which shows loan balance at end of year 4 (month 48) is $25,616,560

Period	Opening balance	Interest payment	Principal repaid	Closing balance
1	27,142,857	129,974	28,359	27,114,498
2	27,114,498	129.838	28,495	27,086,003
3	27,086,003	129,702	28,631	27,057,372

48	25,652,058	122,836	35,498	25,616,560

Opening balance (from month 2) = prior period closing balance

Interest payment = interest rate (5.746229%) * opening balance

[Note: interest rate is solved for to arrive at a monthly payment of $158,333.33, which is annual debt service / 12 = 1,900,000 / 12]

Principal repaid = monthly payment ($158,333.33) - interest payment

Closing balance = opening balance - principal repaid

jeff jeffy answered 2 years ago

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