Question

Atlas Realty Partners, a real estate investment company, is under contract to buy a 30-unit mixed-use apartment building in Brooklyn, NY for $11,000,000. The property consists of 28 apartments, each 850 square feet, renting for $2,400 a month per unit, and 2 stores - the first is a 2,000 square foot space with a yoga studio as the tenant in place, paying a $8,500 rent per month and the second is a 3,000 square foot space with a sport equipment store as the tenant, paying $11,500 rent per month. Vacancy rates in the area are 5% for ground floor commercial spaces and 3% for the apartments on the upper floors. The borrower owns several similar properties in the neighborhood and knows that expenses are about 30% of the effective gross income.

5. What is the loan constant based on a 30-year amortization schedule and a 3.50% interest rate?

6. What is the annual debt service? (also use answers to questions 4 and 5)

7. What is the actual debt service coverage ratio? (also use answers to questions 2, 4, 5 and 6)

8. How much equity will the borrower need to invest if closing costs are $150,000? (also use answer to question 4)

9. How much is the free cash flow after debt service? (Also use answers to questions 2, 4, 5 and 6)

10.What is the borrower's cash on cash return? (Also use answers to questions 2, 4, 5, 6 and 8)

Answer 1

Since there are multiple sub parts, I will address the first four of them. Please post the balance sub parts as a separate question.

Q - 5

Loan constant = Annual debt service amount per dollar of loan.

So, let's assume we take out a loan of $ 1. We will use PMT function of excel to calculate the annual payment. Inputs are:

Rate = 3.5%, Period = 30 years, PV = -1

Hence, Annual debt service amount = PMT ( Rate, Period, PV) = PMT (3.5%, 30, -1) = $ 0.0544

Hence, Loan constant = $ 0.0544 / $ 1 = 0.0544

Q - 6

Annual debt service = Loan constant x Loan amount = 0.0544 x $ 7,150,000 (from answer to Q - 4) = $ 388,755

Q- 7

Actual debt service coverage ratio = Annual NOI / annual debt service

Annual NOI = $ 707,146 (from answer to Q - 2)

Hence, Actual debt service coverage ratio = Annual NOI / annual debt service = $ 707,146 / 388,755 = 1.82

Q - 8

Equity the borrower will need to invest = Capital Value x (1 - LTV) + Closing costs = $ 11,000,000 x (1 - 65%) + $ 150,000 = $  4,000,000

Please post the balance sub parts as a separate question.