Question
In: Finance
You purchase a brand-new property that had an NOI of $12 million last year (year 0)....
You purchase a brand-new property that had an NOI of $12 million last year (year 0). NOI is expected to grow at 5% a year. In order to maintain this growth, you hire a management team to manage the property and they charge 3% of NOI per annum. The risk-free rate is 1%. 1. You go to bank ABC to take out an amortized loan. The going-in cap rate for the property is 6%. They are willing to lend you 75% of the fair market value of the property. The term of the loan is 25 years, the interest rate = 4% above the risk-free rate. What is the maximum amount of debt you can take? 2. Assume you take the maximum amount of debt that bank ABC offered. Your accountant deems that 30% of the property value is attributed to land while 70% is to the building. The building will depreciate for 39 years. Show the value of the building, the land, and annual depreciation. 3. Prepare a 10 year pro forma for the property, ending with ATCFs. Include the following assumptions: a. Tax rate is 30% b. Recapture tax rate is 20% c. Capital gain tax rate is 15% d. Going-out cap rate at the end of 10 years is 8% 4. Calculate the NPV (discount rate = 9%) and IRR of the property.
Solutions
Expert Solution
Calculation of FMV of property
FMV = Annual NOI / Going out cap rate
= 12000000 / 0.06
= 200000000
Max. Permissible Bank Loan
= FMV of property * 0.75
= 200000000 * 0.75
= 150000000
ROI of Bank loan = 4% + Risk free rate
= 4% + 1%
= 5%
Tenor = 25 Years
In absence of any information, we have assumed that bank loan is non-amortizing loan. Investor has to pay interest on principle amount during entire tenor.
Interest cost = 150000000 * 0.05 = 7500000
Calculation of Depreciation
Building Cost = FMV of Property * 0.7
= 200000000 * 0.7
= 140000000
Depreciation = 140000000 / 39
= 358974
Book Value of Property at the end of 10 years
= 200000000 – ( 358974 *10)
= 200000000 – 3589740
=16410260
Calculation of Recapture tax liability
= 200000000 – 16410260
= 3589740 * 20%
= 717948
Calculation of Capital tax liability
FMV of property at the end of 10th year = NOI at the end of 10th year / Going out cap rate
= 18057460/ 0.08
= 225718250
Capital Gain = 225718250 - 200000000
= 25718250
Capital Gain Tax
= 25718250 * 15%
= 3857737.5
Calculation of terminal cashflow
|
Particulars |
Amount |
|
Sale proceeds of property |
225718250.0 |
|
Less : payment of bank loan |
150000000.0 |
|
Less: Recapture Tax |
717948.0 |
|
Less : Capital Gain Tax |
3857737.5 |
|
Net Terminal cashflow |
71142564.5 |
Calculation of cashflow
|
Particulars |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
|
NOI |
12000000.00 |
12600000.00 |
13230000.00 |
13891500.00 |
14586075.00 |
15315378.75 |
16081147.69 |
16885205.07 |
17729465.33 |
18615938.59 |
|
Less : Property Management Fees @3% |
360000.00 |
378000.00 |
396900.00 |
416745.00 |
437582.25 |
459461.36 |
482434.43 |
506556.15 |
531883.96 |
558478.16 |
|
EBIT |
11640000.00 |
12222000.00 |
12833100.00 |
13474755.00 |
14148492.75 |
14855917.39 |
15598713.26 |
16378648.92 |
17197581.37 |
18057460.43 |
|
Less : Interest paid ( 150 Millon * 5%) |
7500000.00 |
7500000.00 |
7500000.00 |
7500000.00 |
7500000.00 |
7500000.00 |
7500000.00 |
7500000.00 |
7500000.00 |
7500000.00 |
|
EBT |
4140000.00 |
4722000.00 |
5333100.00 |
5974755.00 |
6648492.75 |
7355917.39 |
8098713.26 |
8878648.92 |
9697581.37 |
10557460.43 |
|
Less: Depreciation |
358974.00 |
358975.00 |
358976.00 |
358977.00 |
358978.00 |
358979.00 |
358980.00 |
358981.00 |
358982.00 |
358983.00 |
|
CFBTAD |
3781026.00 |
4363025.00 |
4974124.00 |
5615778.00 |
6289514.75 |
6996938.39 |
7739733.26 |
8519667.92 |
9338599.37 |
10198477.43 |
|
Less : tax @30% |
1134307.80 |
1308907.50 |
1492237.20 |
1684733.40 |
1886854.43 |
2099081.52 |
2321919.98 |
2555900.38 |
2801579.81 |
3059543.23 |
|
CFAT |
2646718.20 |
3054117.50 |
3481886.80 |
3931044.60 |
4402660.33 |
4897856.87 |
5417813.28 |
5963767.54 |
6537019.56 |
7138934.20 |
|
Add : Depreciation |
358974.00 |
358975.00 |
358976.00 |
358977.00 |
358978.00 |
358979.00 |
358980.00 |
358981.00 |
358982.00 |
358983.00 |
|
CFBDAT |
3005692.20 |
3413092.50 |
3840862.80 |
4290021.60 |
4761638.33 |
5256835.87 |
5776793.28 |
6322748.54 |
6896001.56 |
7497917.20 |
Calculation of NPV of project
|
A |
B |
C |
D = C^A |
E = B * D |
|
Sr. no. |
CFBDAT |
PV Factor |
||
|
1 |
3005692.2 |
1.09 |
1.09000 |
2757515.78 |
|
2 |
3413092.5 |
1.09 |
1.18810 |
2872731.67 |
|
3 |
3840862.8 |
1.09 |
1.29503 |
2965850.80 |
|
4 |
4290021.6 |
1.09 |
1.41158 |
3039159.46 |
|
5 |
4761638.3 |
1.09 |
1.53862 |
3094738.20 |
|
6 |
5256835.9 |
1.09 |
1.67710 |
3134479.47 |
|
7 |
5776793.3 |
1.09 |
1.82804 |
3160103.75 |
|
8 |
6322748.5 |
1.09 |
1.99256 |
3173174.29 |
|
9 |
6896001.6 |
1.09 |
2.17189 |
3175110.69 |
|
10 |
7497917.2 |
1.09 |
2.36736 |
3167201.25 |
|
10 |
71142565 |
1.09 |
2.36736 |
30051388.08 |
|
PV |
60591453.44 |
|||
|
Less : Initial Investment |
50000000 |
|||
|
NPV |
10591453.44 |
Let’s assume, PV factor is 12%
|
A |
B |
C |
D = C^A |
E = B * D |
|
Sr. no. |
CFBDAT |
PV Factor |
||
|
1 |
3005692.2 |
1.12 |
1.12000 |
2683653.75 |
|
2 |
3413092.5 |
1.12 |
1.25440 |
2720896.44 |
|
3 |
3840862.8 |
1.12 |
1.40493 |
2733850.28 |
|
4 |
4290021.6 |
1.12 |
1.57352 |
2726386.28 |
|
5 |
4761638.3 |
1.12 |
1.76234 |
2701881.47 |
|
6 |
5256835.9 |
1.12 |
1.97382 |
2663276.65 |
|
7 |
5776793.3 |
1.12 |
2.21068 |
2613127.91 |
|
8  jeff jeffy answered 2 years agoRelated SolutionsA property has first year NOI of $1.5 million. NOI grows at 7% during the next...A property has first year NOI of $1.5 million. NOI grows at 7%
during the next two years. In year four, NOI goes drops 50% due to
a lost tenant. You are very lucky and replace the tenant. Year five
NOI is 4X year four. (continues below…)
What is year 5 NOI?
continue…You have a $10 million mortgage on this property, at 5%
interest, amortization of twenty years. There are two partners who
have invested $3 million total in the...
A property that can be purchased for $1.7 million has an expected first year NOI of...A property that can be purchased for $1.7 million has an
expected first year NOI of $190,000. An investor is considering two
loan alternatives:
LOAN A:
A 70% loan-to-value ratio, with interest at 7.5% per annum. The
loan will require level monthly payments to amortize the principle
over 20 years.
LOAN B:
An 80% loan-to-value ratio, with interest at 8% per annum. This
loan will require level monthly payments to amortize the principal
over 25 years.
Fore each loan, determine:...
A property is expected to have NOI of $100,000 the first year. The NOI is expected...A property is expected to have NOI of $100,000 the first year.
The NOI is expected to increase by 3 percent per year thereafter.
Assume that the appraiser would estimate the value in year 10 by
using a 10 percent capitalization rate. The appraised value of the
property is currently $1 million and the lender is willing to make
a 90 percent LTV loan with a contract interest rate of 9 percent,
and it will be amortized with fixed monthly...
You purchase a fully-occupied shopping center for $5,000,000. The NOI is $750,000. The property has no...You purchase a fully-occupied shopping center for $5,000,000.
The NOI is $750,000. The property has no debt. You are considering
obtaining debt in order to maximize your return. If a Lender is
willing to provide a loan at a 75% LTV, 3.00% rate and 20-year
amortization schedule, what is your: (a) Unlevered Return, and (b)
Levered Return?
A property has an expected first-year NOI of $1 million. Recent sales of similar properties indicate...A property has an expected first-year NOI of $1 million. Recent
sales of similar properties indicate that a first-year (or
going-in) cap rate of 12% is reasonable for valuation purposes. A
lender requires a minimum DSCR of 1.25x and will loan up to 75% of
appraised value on a first mortgage. Say the mortgage interest rate
is 6.75%, payments are monthly, and the amortization period is 20
years. (10 points) Hint: solve for the debt
service.
a)
What is the...
An industrial property recently sold for $5,500,000. First-year NOI is $440,000. NOI is expected to increase...An industrial property recently sold for $5,500,000. First-year
NOI is $440,000. NOI is expected to increase annually by 4% over
the next decade. The expected holding period is 7 years.
1. What would terminal cap rate be appropriate?
2. what is the relationship between today's cap rate and the going
out cap rate?
3. In addition to capitalizing income, there is a second method to
estimate terminal value describe the method and provide a numerical
example.
You are considering the purchase of an apartment complex. Purchase price: $775,000 BTCF: Year NOI 1...You are considering the purchase of an apartment complex.
Purchase price: $775,000
BTCF:
Year NOI
1 $103,085
2 $108,361
3 $113,875
4 $119,636
5 $125,651
Holding period is four years
Cap rate is expected to be 7% in year 4
Selling expenses will be 5% of the sale price
The 4-year Treasury bill rate is 3% and your risk premium for
this project is 8%
a) Calculate the NPV of this project assuming that you do not
take any mortgages...
Seashell Mfg., Inc. had $750 million of sales last year, and it had $435 million of...Seashell Mfg., Inc. had $750 million of sales last year, and it
had $435 million of fixed assets that were used at only 65% of
capacity. What is the maximum sales growth rate Seashell could
achieve before it had to increase its fixed assets?
Last year LaCroix Optical had $145 million of sales, and it had $40 million of fixed...
Last year LaCroix Optical had $145 million of sales, and it had
$40 million of fixed assets that were used at 75% of capacity. Use
this information to solve the next two problems.
In millions, by how much could LaCroix Optical sales increase
before it is required to increase its fixed assets?
LaCroix Optical was approached by the Department of Defense
(DoD)because of their ability to manufacture the lens required for
night vision goggles. LaCroix Optical is the last remaining...
Last year LaCroix Optical had $145 million of sales, and it had $40 million of fixed...
Last year LaCroix Optical had $145 million of sales, and it had
$40 million of fixed assets that were used at 75% of capacity. Use
this information to solve the next two problems.
(10 points) In millions, by how much could LaCroix Optical
sales increase before it is required to increase its fixed
assets?
(10 points) LaCroix Optical was approached by the Department of
Defense (DoD)because of their ability to manufacture the lens
required for night vision goggles. LaCroix Optical...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
ADVERTISEMENT
|