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You are considering purchasing a small office building for$1,975,000Your expectations include:First-year gross potential...

You are considering purchasing a small office building for $1,975,000

Your expectations include:

First-year gross potential income of $340,000;
Vacancy & collection losses equal to 15% of PGI;
Operating expenses = 40% of EGI;
Capital expenditures = 5% of EGI
Mortgage (75% LTV) @ 7%

Debt amount = $1,481,250.00

Mortgage will be amortized over 25 years with a monthly payment

Monthly payment = $10,469.17

Total up-front financing costs = 2% of the loan amount

What will be the Net loan proceeds to borrower?

What is the required equity investment?

Solutions

Expert Solution

Given

Office Building Cost = $ 1975000

LTV Ratio = 75%

Loan amount = Building cost *75%

= $ 1975000*75%

= $ 1481250

So the loan amount is $ 1481250

Total upfront Cost = 2% of loan amount.

Upfront fees = $ 1481250*2%

= $ 29625

Net loan proceeds = Loan amount - Upfrontt fees

= $ 1481250-$ 29625

= $ 1451625

Net loan proceeds is $ 1451625

Required Equity investment = Building Cost - Net proceeds from th e loan

= $ 1975000-$ 1451625

=$ 523375

Hence the required equity investment is $ 523375.

jeff jeffy answered 2 years ago

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