Question

In: Finance

You have an opportunity to buy an office building for $125,000 that produces an annual NOI...

You have an opportunity to buy an office building for $125,000 that produces an annual NOI of $10,000. You can obtain an 80% loan from a bank with a 7% interest rate and amortized for 30 years. Your required investor cash on cash return is 12%. You will have to put 20% of the purchase down. What is the value of the office building?

A. $140,999 B. $118,242 C. $113,895 D. $125,000

Solutions

Expert Solution

Value of building = NOI / Cap rate

Calculation of the CAP rate:-

CAP rate = F + E

Where F= Financing component

E = Equity component

Calculation of the Financing component :-

Annual Mortgage constant = 12 * i / [ 1 - ( 1 / (1+i)n ]

where i = per month interest rate = 7% / 12 = 0..5833%

n = number of months = 30 years * 12 = 360 months

Annual Mortgage constant = 12 * 0.00583 / [ 1 - 1/(1.00583)360 ] = 12* 0.00583 / [ 1 - 0.123206]  

= 12 * 0.006653

Annual Mortgage constant = 0.079836

Financing Component = Annual mortgage constant * Loan to value ratio = 0.079836 * 0.80 = 0.063869

Calculation of the Equity Component :-

Equity component = investor requried rate of return * equity to value ratio = 12% * 20% = 0.024

CAP rate = Financing component + equity component = 0.063869 + 0.024 = 0.087869

CAP Rate = 8.79%

Value of Building = NOI / CAP rate = 10,000 / 0.0879 = $ 113,765.64

Value of building = $ 113,765,64 = $ 113,895 (Approx )

option C is correct


Related Solutions

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 wants to buy a building. The annual NOI will be $100,000 She wants a 30...
Ann wants to buy a building. The annual NOI will be $100,000 She wants a 30 year fully amortizing fixed rate mortgage at an annual rate of 5% with compounding monthly payments. The lender has a minimum DSCR of 1.2. If Ann gets a 50% LTV loan for $500,000 what is her DCSR?
You are considering the purchase of a small office building. The NOI is expected to be...
You are considering the purchase of a small office building. The NOI is expected to be the following: Year 1 = $200,000 Year 2 = $210,000 Year 3 = $220,000 Year 4 = $230,000 Year 5 = $240,000 -The property will be sold at the end of year 5. -You believe that the property will have a terminal cap rate of 7%. -You plan to pay all cash for the property. -You want to earn a 10% return on investment...
An office building is purchased with the following projected cash flows: NOI is expected to be...
An office building is purchased with the following projected cash flows: NOI is expected to be $180,000 in year 1 with 2 percent annual increa The purchase price of the property is $910,000. 100% equity financing is used to purchase the property The property is sold at the end of year 4 for $970,000 with selling cost 8 % Calculate the unlevered internal rate of return (IRR). A. 19.9% B. 20.7% C. 21.5% D. 22.3% E. 23.1%
An office building is purchased with the following projected cash flows: NOI is expected to be...
An office building is purchased with the following projected cash flows: NOI is expected to be $180,000 in year 1 with 2 percent annual increa The purchase price of the property is $910,000. 100% equity financing is used to purchase the property The property is sold at the end of year 4 for $970,000 with selling cost 8 % Calculate the unlevered internal rate of return (IRR). A. 19.9% B. 20.7% C. 21.5% D. 22.3% E. 23.1%
An office building has the following investment characteristics: Year 1 NOI $2,100,000 Year 2 NOI $2,200,000...
An office building has the following investment characteristics: Year 1 NOI $2,100,000 Year 2 NOI $2,200,000 Year 3 NOI $2,300,000 Year 4 NOI $2,400,000 Initial (going in) cap rate 7% Loan Principal $18,000,000 Interest rate 5% Amortization 30 years Exit cap rate 8% Holding period 3 years Solve for each of the following: Purchase price Loan to value ratio Annual debt service Debt service coverage ratio for year 1 Loan balance at the end of year 3 Equity (Levered) IRR
2. An office building has the following investment characteristics:             Year 1 NOI                   
2. An office building has the following investment characteristics:             Year 1 NOI                             $2,100,000             Year 2 NOI                             $2,200,000             Year 3 NOI                             $2,300,000             Year 4 NOI                             $2,400,000             Initial (going in) cap rate        7%             Loan Principal                        $18,000,000             Interest rate                             5%             Amortization                           30 years             Exit cap rate                            8%             Holding period                        3 years Solve for each of the following:             Purchase price                                                                                                 Loan...
You are seeking financing for a $500,000 investment in an apartment building. The NOI in the...
You are seeking financing for a $500,000 investment in an apartment building. The NOI in the first year is projected to be $35,000. The bank is willing to underwrite a fully-amortizing, 30 year fixed rate mortgage with constant monthly payments at an interest rate of 6%, compounded monthly. Please note the following ratio: Debt Coverage Ratio= Net Operating Income/ Annual Debt Service Compute the Debt Coverage Ratio if the bank underwrites a mortgage at a Loan-to-Value Ratio of 75%.
You buy  a recently completed industrial-office building and starting at the beginning of the first year, you...
You buy  a recently completed industrial-office building and starting at the beginning of the first year, you put in a single tenant who pays net rent $50,000 per year at the end of each year on a 5-year triple-net lease.  At the end of the fifth year, if all goes well between you and the tenant, you expect to increase the rent to $70,000 per year, and put the tenant on a 10-year triple-net lease.  After owning the property for 10 years, and...
Assume that it is the end of year 2015 and you have an opportunity to buy...
Assume that it is the end of year 2015 and you have an opportunity to buy the stock of​ CoolTech, Inc., an IPO being offered for ​$4.92 per share. Although you are very much interested in owning the​ company, you are concerned about whether it is fairly priced. To determine the value of the​ shares, you have decided to apply the free cash flow valuation model to the​ firm's financial data that​ you've developed from a variety of data sources....
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT