In: Finance
The CEO of Kuehner Development Company has just come from a
meeting with his marketing staff where he was given the latest
market study of a proposed new shopping center. The study calls for
a construction phase of 1 year, and a subsequent operation phase.
This question focuses largely on the construction phase.
The marketing staff has chosen a 12-acre site for the project that
they believe they can acquire for $2.25 million. The initial
studies indicate that this shopping center will have gross building
area (GBA) of 190,000 sq. ft.
The head of the construction division assures the CEO that hard
costs will be kept to $54 per sq ft. of GBA, and soft costs
(excluding interest carry and loan fees) will be kept to $4.50 per
square foot of GBA. Site improvements will cost $750,000.
The Shawmut Bank has agreed to provide construction financing for
the project. The bank will finance the construction costs (hard and
soft) and the site improvements at an annual rate of 13%. They will
also charge a loan-commitment fee of 2% of the total balance.
The construction division estimates that 60 percent of the financed
construction costs will be taken down evenly during the first six
months of the construction project. The remaining 40 percent will
be taken down evenly during the last six months.
a. What are the total construction costs that the bank is willing
to finance?
b. Given the terms of the construction loan, what will be the total
interest carry for the shopping center project?
c. What will be the total amount that Kuehner must borrow (Hint:
remember to include interest carry)?
d. How much equity does Kuehner need to put into the project?
e. Acme Insurance Co. agrees to provide permanent financing for the
project and “take-out” the construction loan at the end of 1 year.
They agree to provide a fully amortizing mortgage with a 20 year
maturity at a 12 percent annual interest rate. What is the monthly
debt service that Kuehner will have to make once construction is
complete and operations begin?
(a) Bank is willing to finance hard costs , soft costs & Site improvement costs = (54+4.5) * 190000 + 750000 = $11865000
(b)
Total Construction Cost | 118,65,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Months | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | |||||||||||||||||||||||||||||||||||||||||||||||||
Debt Drawn | 11,86,500 | 11,86,500 | 11,86,500 | 11,86,500 | 11,86,500 | 11,86,500 | 7,91,000 | 7,91,000 | 7,91,000 | 7,91,000 | 7,91,000 | 7,91,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
Interest Rate Annually | 13% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Rate Monthly | 1.08% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Amount | 1,54,245 | 1,41,391 | 1,28,538 | 1,15,684 | 1,02,830 | 89,976 | 51,415 | 42,846 | 34,277 | 25,708 | 17,138 | 8,569 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total Interest Amount | $ 9,12,616 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(c) Kuehner must borrow total amount = Construction Costs + Interest Carry = 11865000 + 912616 = $ 1,27,77,616 (d) Equity to be put up by Kuehner = $ 22,50,000 (e)
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