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QUESTION 25 Ann wants to buy a building. The annual NOI for the building will be...

QUESTION 25

Ann wants to buy a building. The annual NOI for the building will be $100,000. She wants to get a 30 year, fully amortizing, fixed rate mortgage at an annual rate of 5% with monthly compounding and monthly payments to buy the building. The lender has a minimum Debt Service Coverage Ratio (DSCR) of 1.20.

If Ann gets a 50% LTV loan for $500,000, what is her DSCR?

	A.	4.00
	B.	There is not enough information to compute Ann's DSCR.
	C.	1.20
	D.	3.10

16 Ann purchased a property for $1,000,000. She bought the property at a 7.00% cap rate.She finances the purchase with an Interest Only senior loan at 60% LTV at an interest rate of 4.00%.She also decides to get subordinate / mezzanine financing for 20% of the capital stack (from 60%-80% LTV) at 8.00% interest only. What is Ann’s return on equity (ROE) in year 1?

Expert Solution

For an LTV loan of $500,000, DSCR with NOI of $100,000 = 3.10

The answer is option D.

Calculation as follows:

Given,

Purchase price= $1,000,000 and cap rate= 7%

Therefore, NOI= $1,000,000*0.07= $70,000

Total loan= 80% of value= $1,000,000*80%= $800,000

Therefore, Ann’s equity= $1,000,000*20%= $200,000

Loan payment a year: Being interest only loan, yearly payments are towards to interest only.

Yearly payment= $600,000*4% + $200,000*8% = $40,000

Net yearly surplus= NOI-Loan payment= $70,000-$40,000 = $30,000

Return on equity= Yearly surplus/Equity= $30,000/$200,000 = 15%

jeff jeffy answered 2 years ago

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