Question

1) The following data, objectives, and constraints have been provided with respect to a proposed venture: Cost (including transaction costs) Net leaseable area (square feet) $3,900,000 29,500 Financing specifications: Mortgage loan terms: 9 percent interest; 25 year monthly а. amortization sched ule; renegotiable after 10 years b. Minimum acceptable current yield on equity funds: 6 percent Operating forecast for first year: Market rent per square foot (based on analysis of comparable properties) Vacancy rate (percent) $23.50 8 $8.50 Operating expenses, per sq. ft. of leaseable area If the minimum acceptable debt coverage ratio is 1.20 and the maximum loan-to-value ratio is 70 percent, what is the maximum total investment (combined equity funds) that will make the above proposal financially feasible?

Answer 1

Maximum Total Investment = Value of property based on income discounting = $\frac{Net\ Annual\ Income}{Cost\ of \ capital}$

Cost of capital = K_e*W_e + K_d*W_d

Cost of debt = 9% monthly payment

annual effective rate = ( 1+9/12%)^12 -1 = 9.381%

Cost of equity = 6%

Maximum (W_d) = 0.70 , Maximum (W_e)= 0.30

Cost of capital = 9.381%*0.70+6%*0.30 = 8.3667%

Calculation of net annual Income:

= (Market rent - Operating expenses)*(1-Vacancy rate) = (23.5-8.5)*(1-0.08)= 13.8 per square feet

Total income = 29,500*13.8 = $40,7100

Maximum Total Investment =$40,7100 / 8.3667%= $ 4,865,718