Question

5. A bank is financing 100% of the construction costs of a real estate development secured by a 1st mortgage on the property (land + structure). With a full draw-down of the facility, the $340K budgeted project cost is now only 75% completed vs. estimated costs to fully complete. The land was appraised at $185K based on the planned construction. Unpaid sub-trades, whose value is not yet counted in the building’s value to date, amount to $13. The expected cost over-run cannot be covered by the owners. The bank may fund the costs to complete if it is in its best interests. Alternatively, it can demolish the structure and sell the raw land for $350K on a standalone, undeveloped basis since RE prices have risen. It can then possibly sue the guarantor for any unrecovered amounts. Demolition costs of the existing structure are estimated to be $65K. Assuming the completed property could be sold at its invested cost outlay, what is the loan-to-value percentage of its two options (complete/demolish)?: *

a 88%/112%

b 54%/156%

c 71%/119%

d 109%/56%

6. A lender to a large corporation has $150 million in subordinated (“junior” vs. all other debts), unsecured bonds outstanding. “Senior” secured debentures amount to $75 million. Short-term bank debt secured by a charge over $50 million of A/R amounts (40% collectible) to $14 million. Trade suppliers are owed $34 million. The income tax authorities are owed $12 million. Unpaid payroll deductions for the state’s social security taxes are $4.5 million. Customer deposits for undelivered product orders amount to $1.5 million. The net realizable liquidation value of all assets is estimated to be $234 million after all costs. The recovery rate on the subordinated bonds will be: *

a 62%

b 89%

c 108%

d 43%

Answer 1