Question

Total property acquisition price $4,224,000

Property consists of eight office suites, 3 on the first floor, 5 on the second floor

Contract rents: 2 suites at $7,200 per month, 1 at $14,400 per month, and 5 at $6,240 per month.

It is anticipated that rents will increase annually at the rate of 3% per year

It is anticipated that vacancy and collection loss will be 10% per year

Operating expenses are 40% of effective gross income

Capital expenditures are 5% of effective gross income

Anticipated holding period is 5 years

Expected selling price is based on a cap rate of 8%

It is anticipated that selling expenses will be 4% of the sales price

The first mortgage is $3,168,000

The mortgage interest rate is 5%

The loan term is 30 years

Total upfront financing costs are 3%

5. Calculate Loan to Value and Debt Service Coverage

Use EXCEL to set up a discounted cash flow analysis

Include calculation of Operating Income

Include after Debt Service Cash Flow

Answer 1

	Loan to Value
A	Mortgare Amount	31,68,000
B	Value of the property	42,24,000
A/B	Loan to Value	75%

Purchase price		42,24,000
Sale price		45,61,920.00
Selling expenses		1,82,476.80
Effective selling price		43,79,443.20

Property cost	42,24,000
Suits	Rent/Month
2	7,200
1	14,400
5	6,240
8	27,840
Years	1	2	3	4	5
Gross Rentals (Growth @3%)	3,34,080	3,44,102	3,54,425	3,65,058	3,76,010
Less; Vacancy and Collection Loss (@10%)	33,408	34,410	35,443	36,506	37,601
Effective Gross Income	3,00,672	3,09,692	3,18,983	3,28,552	3,38,409
Expenses
Operating Expenses @ 40%	1,20,268.80	1,23,876.86	1,27,593.17	1,31,420.97	1,35,363.59
Net Income	1,80,403.20	1,85,815.30	1,91,389.75	1,97,131.45	2,03,045.39
Capital Expenditure @5%	15,033.60	15,484.61	15,949.15	16,427.62	16,920.45
Cash available	1,65,369.60	1,70,330.69	1,75,440.61	1,80,703.83	1,86,124.94
Finance costs Upfront	95040	0	0	0	0
Cash Availale to repay the loan Operating Income	70,329.60	1,70,330.69	1,75,440.61	1,80,703.83	1,86,124.94
Loan opening Balance	31,68,000.00	30,62,400.00	29,56,800.00	28,51,200.00	27,45,600.00
Interest @5%	1,58,400.00	1,53,120.00	1,47,840.00	1,42,560.00	1,37,280.00
Repayment of Principal	1,05,600.00	1,05,600.00	1,05,600.00	1,05,600.00	1,05,600.00
Closing Balance	30,62,400.00	29,56,800.00	28,51,200.00	27,45,600.00	26,40,000.00
Total Payment	2,64,000.00	2,58,720.00	2,53,440.00	2,48,160.00	2,42,880.00
DSCR	0.27	0.66	0.69	0.73	0.77
Working capital reqirement	1,93,670.40	88,389.31	77,999.39	67,456.17	56,755.06

Note: Discounted cashflow can be made but discounting rate is not clear hence it was not prepared

Prepared only for 5 years because of the contraints