Question

Assume that you were given an opportunity to purchase a real estate project using an equity participation loan. The NOI for each year of the holding period are shown below:

2 Annual payments are being used to make the problem easier!

	Year 1	Year 2	Year 3	Year 4
NOI	124,787	132,225	139,954	148,468

Additional information:

1) Purchase price = $1,900,000

2) Estimated value of land = $500,000

3) Anticipated mortgage terms:

a) Loan to value ratio = .80 b) Interest rate = 5.25%
c) Years to maturity = 25

d) Points charged = 3

e) Prepayment penalty = 2% of outstanding balance

f) Level payment, fully amortized

g) Fixed interest rate, monthly payments

4) Participation terms:
a) Share of NOI = 15.5% over $130,000 b) Share of Appreciation = 18%

5) Future sales price = $2,350,000

6) Estimated selling expenses as proportion of future sales price = 5%

7) Client's minimum required before-tax rate of return on equity = 12%

Calculate:

The before-tax cash flows and the before-tax equity reversion (you do not need to calculate the after-tax cash flows or reversion).

The before-tax net present value to the investor.

Answer 1

Equity Participation Loan is where the Creditor/Lender also has right to participate in the profits of the business.

In this case, the Equity Reversion, the share of the lender is

• 15.5% of NOI over $130,000
• 18% of Appreciation [(2350,000 - 1900,000)*18% = $81,000]

The balance of Principal Left at the end of year 4 (or 48 payments)

is $1389,000 it is considered along with 2% prepayment penalty

The Loan to Value ratio gives the DownPayment and the Loan Value. of $380,000 and $1,520,000

Loan Payments are considered Annually. [ If Monthly considered, NPV would be, $131,488]

Everything else is pretty common.

Good luck