Question

1. A developer in Chicago is planning to build a 7 story building with 28 condo units (14 one bedroom units and 14 two bedroom units). The target market is the growth in new households living within a 1 mile radius of downtown Chicago with age groups 25-64. The construction takes approximately one year and is expected to be completed at the end of 2019. From comparable pricing data, they expect to sell the one bedroom condos for $750,000 each and the two bedroom condos for $900,000 each in 2020.

1. If they can sell all the units in 2020, what are the total projected revenues for 2020 achieved by selling all the units?

2. They expect that qualifying households who buy the condos will take out a fixed rate 30 year loan (with an interest rate of 4.5%) and a 20 percent down payment. What down payment (equity amount) is required from the buyers for each type of condo? Does the down payment amount change if interest rates increase to 5%? Why or why not?

3. Use the PMT function in Excel to compute the minimum qualifying income for the condos priced at $750,000. Also, what is the minimum qualifying income for the condos priced at $900,000? (You may assume that property taxes and insurance will cost 2% of the sale price annually and the minimum qualifying ratio from the bank is 35%). What are the minimum qualifying incomes if interest rates rise to 5%? Why does it change?

4. There is some concern whether there is sufficient demand to sell all the units in 2020. To help estimate the demand, they purchased data from ESRI that gives the number of households in 2018 and the projected number of households in 2023 by age and income within the 1 mile radius of Downtown Chicago. The data appear in the file Chicago Condos.xls . The developers want to focus on the 25-64 age groups in the area and estimates that approximately 40 percent of the households in the 25-34 age group prefer to own rather than rent. Similarly, 60 percent in the 35- 44 age group, 75 percent in the 45-54 age group and 85 percent in the 55–64 age group prefer to own (rather than rent). Also, market focus groups indicate that out of those who qualify and want to own, 50 percent prefer the one-bedroom type condos and 65 percent prefer the two bedroom condos

   Estimate the number of new households in 2020 who qualify for the one-bedroom condos priced at $750,000, prefer to own, and prefer the one-bedroom condo design. Similarly, estimate the household demand in 2020 for the two-bedroom condos. Also, estimate the demand for each design if interest rates rise to 5% for a 30 year fixed rate loan and indicate how it changes.

5. If the developer builds 14 of each design type (28 total), what are the “capture rates” of the household demand for each condo type if the developer sells all 28 condos in 2020 and if interest rates remain at 4.5 percent? What are the demand capture rates if interest rates increase to 5 percent? Discuss what other important information is needed to determine the market feasibility of the condo project for the developer.

Answer 1

Total Condo units = 28

Single bedroom condo = 14

Single bedroom condo price = $750000

Double bedroom condo = 14

Double bedroom condo price = $900000

Answer A :

Total projected revenues for 2020 = 14*$750000 + 14* $900000

Revenue = $23100000

Answer B.

The down payment will be made in year 2020

Down payment for one bedroom condo = 20%*$750000

= $150000

Down payment for two bedroom condo = 20%*$900000

= $180000

As downpayment is the percentage of price of the condo , it does not get affected with changes in interest rates

Answer C.

For one bedroom condo's:

Property tax and insurance costs for a year= 2%*$750000 = $15000

Interest rate = 4.5%

Yearly PMT = PMT ( Interest rate, year , principal)

Yearly payment = $46043

Total payments = $46043+ $15000 = $61043

Minimum qualifying income = $61043/ .35

= $174410.44

For two bedroom condo's:

Property tax and insurance costs for a year= 2%*$900000 = $18000

Interest rate = 4.5%

Yearly PMT = PMT ( Interest rate, year , principal)

Yearly payment = $55252.38

Total payments = $55252.38+ $18000 = $73252.38

Minimum qualifying income = $73352.38/ .35

= $209292.53

Answer D.

If interest rates change to 5%

For one bedroom condo's:

Property tax and insurance costs for a year= 2%*$750000 = $15000

Interest rate = 5%

Yearly PMT = PMT ( Interest rate, year , principal)

Yearly payment = $48788.57

Total payments = $48788.57+ $15000 = $63788.5

Minimum qualifying income = $63788.5/ .35

= $182253

For two bedroom condo's:

Property tax and insurance costs for a year= 2%*$900000 = $18000

Interest rate = 5%

Yearly PMT = PMT ( Interest rate, year , principal)

Yearly payment = $58546.3

Total payments = $58546.3+ $18000 = $76546.30

Minimum qualifying income = $76546.30/ .35

= $218703.7

Here yearly payment changes as interest rate change which in turn leads to change in minimum qualifying income.