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A 100 unit apartment building is for sale. It rents for 500/unit per month. Operating expenses...

A 100 unit apartment building is for sale. It rents for 500/unit per month. Operating expenses for the building are 200,000 per year and property taxes are 10,000 a year. Lisa wants to buy it and thus needs to arrange a mortgage loan of 3,000,000 at j4 = 10% amortized over 25 years with monthly payments. The banker assessed the lending value of the property to be 4,000,000. The banker requires a minimum DCR of 1.15,

(a) Does Lisa qualify for the loan?

(b) What is the maximum size of loan supported by the incomes of the building?

(c) Suppose the banker only wants to lend a maximum of 80% of the lending value of the building. Given (b) and this restriction, what is the size of loan Lisa can actually get?

Expert Solution

a) Debt Coverage Ratio (DCR) is the ratio of the annual net operating income (NOI) over the annual debt service, or the annual mortgage payment in the case of property.

Net Operating Income= Annual revenue - annual operating expenses

Annual Revenue = 500/unit*100 units*12months

=$600,000

NOI = 600000-200000 = $400,000

Annual Debt service can be calculated using BA II Fin Cal

N=25*12 = 300, I/Y = 10/12=.8333, PV=300,000, CPT ->PMT= 27,261

Monthly Payments = 27,261

Total mortagage payments in a year= 27261*12=$327,132

DCR=400000/327132=1.22

Lisa qualifies for the loan as the DCR for Lisa is 1.22 which is mor ethan the DCR required by bank i.e 1.15

b) Maximum size of the loan supported by the incomes of the building can be calculates as below

Annual mortgage payments = NOI/ Minimum DCR

=400000/1.15

=347,826

Monthly mortgage payment = 347826/12 = $28,986

We can calculate the Loan value by using the BA II Fin cal as below,

N=300, I/Y= .833, PMT=28986, CPT-> PV= 3189829

Maximum size of the loan = $3,189,829

c) Amount of loan bank is ready to give = 80% of Lending value of building

=80%*4000000=$3,200,000

Amount lisa can borrow on the basis of b) = $3,189,289

Size of the loan Lisa can actually get = $3,189,289

jeff jeffy answered 1 year ago

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