Question

A company is negotiating loan terms with a bank. The company would like to purchase a property for $2.5 million. The property is projected to produce a first-year NOI of $180,000. Loan: The bank is willing to allow the loan to negatively amortize; however, the loan will need to be paid back at the end of the four-year period. Because of the risky nature of such loan, the bank will allow a 65 percent LTV loan on the property at the time of its purchase. It also requires a DCR in the first year of at 1.30. The contract (or the accrual) rate of interest on the loan is 12 percent. All loan payments are to be made monthly.

a. Show the loan amortization schedule for the next four years: Year 1, Year 2, Year 3 and Year 4, no months. Show and explain all calculations.

b. If the property value does not change, what will the loan-to-value ratio be at the end of the four-year period? Calculate. Show and explain all calculations.

c. Since the loan balance will be due in four years, let’s say the bank would like to make sure that the LTV at that time does not exceed 70 percent. To make this happen, how should the company counter-offer the asking price? Calculate the counter-offer price. Show and explain all calculations.

Answer 1

Please post C seperately.Rate on the basis of a and b.Thanks.

	Worth of property =	$2,500,000
	LTV =	65%
	Therefore, Loan amount =	$2,500,000*65% =	$1,625,000
	1st year NOI =	$180,000
	1st year DCR =	1.3
	Therefore, 1st year loan amount paid =	$180,000/1.30 =	$138462 in 1 year (=$138462/12 in 1 month) =	$11,538.50
	Since loan is allowed to negatively amortize, any unpaid interest would be added to the principal in next period.
	It is assumed that the interest rate is 12% per year, or 1 % per month and calculations are done accordingly.
a.	Year	Month	Principal unpaid	Interest on principal	Loan repayment made	Payment towards interest	Interest unpaid
	1	1	$1,625,000	$16,250	$11,538.50	$11,538.50	$4,711.50
		2	$1,629,711.50	$16,297.12	$11,538.50	$11,538.50	$4,758.62
		3	$1,634,470.12	$16,344.70	$11,538.50	$11,538.50	$4,806.20
		4	$1,639,276.32	$16,392.76	$11,538.50	$11,538.50	$4,854.26
		5	$1,644,130.58	$16,441.31	$11,538.50	$11,538.50	$4,902.81
		6	$1,649,033.39	$16,490.33	$11,538.50	$11,538.50	$4,951.83
		7	$1,653,985.22	$16,539.85	$11,538.50	$11,538.50	$5,001.35
		8	$1,658,986.57	$16,589.87	$11,538.50	$11,538.50	$5,051.37
		9	$1,664,037.94	$16,640.38	$11,538.50	$11,538.50	$5,101.88
		10	$1,669,139.82	$16,691.40	$11,538.50	$11,538.50	$5,152.90
		11	$1,674,292.71	$16,742.93	$11,538.50	$11,538.50	$5,204.43
		12	$1,679,497.14	$16,794.97	$11,538.50	$11,538.50	$5,256.47
	2	1	$1,684,753.61	$16,847.54	$11,538.50	$11,538.50	$5,309.04
		2	$1,690,062.65	$16,900.63	$11,538.50	$11,538.50	$5,362.13
		3	$1,695,424.78	$16,954.25	$11,538.50	$11,538.50	$5,415.75
		4	$1,700,840.52	$17,008.41	$11,538.50	$11,538.50	$5,469.91
		5	$1,706,310.43	$17,063.10	$11,538.50	$11,538.50	$5,524.60
		6	$1,711,835.03	$17,118.35	$11,538.50	$11,538.50	$5,579.85
		7	$1,717,414.88	$17,174.15	$11,538.50	$11,538.50	$5,635.65
		8	$1,723,050.53	$17,230.51	$11,538.50	$11,538.50	$5,692.01
		9	$1,728,742.54	$17,287.43	$11,538.50	$11,538.50	$5,748.93
		10	$1,734,491.46	$17,344.91	$11,538.50	$11,538.50	$5,806.41
		11	$1,740,297.88	$17,402.98	$11,538.50	$11,538.50	$5,864.48
		12	$1,746,162.36	$17,461.62	$11,538.50	$11,538.50	$5,923.12
	3	1	$1,752,085.48	$17,520.85	$11,538.50	$11,538.50	$5,982.35
		2	$1,758,067.83	$17,580.68	$11,538.50	$11,538.50	$6,042.18
		3	$1,764,110.01	$17,641.10	$11,538.50	$11,538.50	$6,102.60
		4	$1,770,212.61	$17,702.13	$11,538.50	$11,538.50	$6,163.63
		5	$1,776,376.24	$17,763.76	$11,538.50	$11,538.50	$6,225.26
		6	$1,782,601.50	$17,826.02	$11,538.50	$11,538.50	$6,287.52
		7	$1,788,889.02	$17,888.89	$11,538.50	$11,538.50	$6,350.39
		8	$1,795,239.41	$17,952.39	$11,538.50	$11,538.50	$6,413.89
		9	$1,801,653.30	$18,016.53	$11,538.50	$11,538.50	$6,478.03
		10	$1,808,131.33	$18,081.31	$11,538.50	$11,538.50	$6,542.81
		11	$1,814,674.15	$18,146.74	$11,538.50	$11,538.50	$6,608.24
		12	$1,821,282.39	$18,212.82	$11,538.50	$11,538.50	$6,674.32
	4	1	$1,827,956.71	$18,279.57	$11,538.50	$11,538.50	$6,741.07
		2	$1,834,697.78	$18,346.98	$11,538.50	$11,538.50	$6,808.48
		3	$1,841,506.26	$18,415.06	$11,538.50	$11,538.50	$6,876.56
		4	$1,848,382.82	$18,483.83	$11,538.50	$11,538.50	$6,945.33
		5	$1,855,328.15	$18,553.28	$11,538.50	$11,538.50	$7,014.78
		6	$1,862,342.93	$18,623.43	$11,538.50	$11,538.50	$7,084.93
		7	$1,869,427.86	$18,694.28	$11,538.50	$11,538.50	$7,155.78
		8	$1,876,583.64	$18,765.84	$11,538.50	$11,538.50	$7,227.34
		9	$1,883,810.97	$18,838.11	$11,538.50	$11,538.50	$7,299.61
		10	$1,891,110.58	$18,911.11	$11,538.50	$11,538.50	$7,372.61
		11	$1,898,483.19	$18,984.83	$11,538.50	$11,538.50	$7,446.33
		12	$1,905,929.52	$19,059.30	$11,538.50	$11,538.50	$7,520.80
b	LTV	$1905929.52/$2500000
		76.24%