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A property has a maturing loan and needs to be refinanced. It is appraised at $25...

A property has a maturing loan and needs to be refinanced. It is appraised at $25 million based on a cap rate of 6%. Your lender has put two constraints on your next loan. It must have debt service coverage of 1.5x and LTV of 50%.  Interest rates are 5% and the lender offers you a 10-year loan with a 20- year amortization schedule.

  1. Which constraint limits your loan?
  2. How much can you borrow?

Solutions

Expert Solution

first year NOI / value = cap rate

NOI = 6%*25 million = 1.5 million

1. Debt service coverage ratio = first year NOI / debt service = 1.5 million / 1.5 = 1 million

corresponding loan amount = 1 million / 5% = 1 million/0.05 = 20 million

2. Loan-to-value ratio = loan amount/ appraisal value

loan amount = 50% * 25 million = 12.5 million

Maximum Loan amount = Min. ( 20 million, 12.5 million )

Maximum loan amount = 12.5 million and loan-to-value ration constraints your loan amount.

jeff jeffy answered 3 years ago
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