Question

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?

Answer 1

(a) Total Construction Costs that bank is willing to finance = (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) Amount that Kuehner must borrow = Construction Costs + Interest carry = $ 11865000 + $ 912616 = $ 12777616 (d) Equity that Kuehner need to put up = $ 22,50,000 (e) Total Amount of Loan that Acme Insurance Co. need to finance = construction cost principal amount + Interest Carry = 12277616 At the end of year 1, Debt Service = Principal Repayment + Interest Accrued Principal Repayment just after construction phase is over considering 20 year mortgage = 12777616/(20*12) $ 26620.03 Interest for the month = (12777616)*(1.08%) = $138424.17 Total Debt Service = 26620.03+138424.17 = $ 165044.21