Question

Ann is looking to buy an office building in 2014. She plans to rent it out for 5 years (2015-2019) and sell it at the end of 2019.

Inputs
Annual Interest Rate	5.75%
Minimum DSCR	1.20
Maximum LTV	90%
Cash Available to Close	$1,500,000.00
Asking Price / Value	$21,257,764.62
NOI 2015	$1,381,754.70

Income Test
Maximum Annual Mortgage Payment	?
Maximum Loan Amount	?
Collateral Test
Maximum Loan Amount LTV Test	?
Both tests
Maximum Loan Amount	?
Debt Service Payment	?
Loan Ann Borrows
Loan amount to buy the property	?
Debt Service Payment	?

Answer 1

a. Income Test

Minimum DSCR = 1.2 (DSCR stands for Debt Service Coverage Ratio.It is the ratio measuring the amount of income available to service the debts)

NOI 2015 = $1,381,754.7

DSCR = Net Operating Income / Debt Service per annum

1.2 = $1,381,754.7 / X

X = $1,381,754.7/1.2 = $1,151,462.25 which can be termed as the yearly payment.

Thus, the maximum annual mortgage payment = $1,151,462.25.

Interest rate = 5.75%

Thus, the maximum loan amount basis the maximum annual mortgage payment of $1,151,462.25. = $1,151,462.25./5.75% = $20,025,430.43

b. Collateral Test

Maximum LTV = 90% (LTV stands for Loan to Value ratio. It measures the value of debt with reference to the value of the underlying asset).

LTV = Loan amount / Value of asset = 90%

= X/$21,257,764.62 = 90%

X = $21,257,764.62/90% = $19,131,988.16

Thus, maximum loan basis LTV test = $19,131,988.16

(Note: The calculation here is basis the value of the asset and cash currently available to buy the asset has no relevance)

c. Both Tests:

Maximum Loan Amount = $19,131,988.16 (the lower of loan basis income test and LTV test is the maximum loan that can be availed)

Debt service payment = Maximum Loan Amount * interest rate = $19,131,988.16*5.75% = $1,100,089.32

d. Loan Ann borrows

Value of the building = $21,257,764.62

Cash available to close = $1,500,000

Loan requirement for Ann to buy the building= $21,257,764.62-$1,500,000 = $19,757,764.62

Debt service payment = Loan requirement for Ann * Interest rate = $19,757,764.62*5.75% = $1,136,071.47

However, though Ann has $1,500,000 cash to close and requires $19,757,764.62 as loan amount, she will only be eligible for a maximum loan amount of only $19,131,988.16 as per (c) above with debt service payment of $1,100,089.32. Thus, Ann has to have total of $2,125,776.46 as cash ($21,257,764.62-$19,131,988.16) meaning she needs to have additional $625,776.46 as cash ($2,125,776.46-$1,500,000).