You are considering the purchase of a small office building in Brooklyn. The pro

Question

You are considering the purchase of a small office building in Brooklyn. The property contains 20,000 square feet of rentable space and is currently occupied by multiple tenants each with differing maturities on their respective leases. The vacancy rate is 6%. No lease is currently shorter than 1 year The annual rent in the 1st year of ownership is $45/sq ft You will hire a management firm to collect the Tent which will charge you collection co sts of 2% per dollar of rent. 1. What is the Potential Gross Income (PGl) for the first year? 2. What is the Effective Gross Income (EGI) for the first year? 3. If operating expenses are expected to be 40% of EGI, what is the Net Operating Income (NOI) generated by the property in the 1t year of ownership? 4. You decide you want to take out a loan to finance the purchase of this property. It will be an IO loan at a rate of 6.25%, compounded annually, with annual payments. The lender will provide financing up to a minimum Debt Service Coverage Ratio (DSCR) of 1.2 based off of the 1st year NO. What is the largest annual loan payment the lender will allow you to make based on the DSCR? 5. If you get a loan that corresponds to the largest annual loan payment the lender will allow you to make based on the DSCR (computed in part 4), what will be your net income in the first year? 6. What is the largest loan a lender is willing to provide you with based on question 4? (Use the fact that this is an IO loan at 6.25%. Also use the loan payment from question 4) 7. The seller's asking price for the property is $7,000,000. If the lender has a maximum 70% LTV requirement what is the most the bank will lend you? (Only based on the LTV requirement.)

Explanation / Answer

1.poential gross income = 20000sft * $45 = $9,00,000

2.effective gross income = $900,000- 6% vacancy - 2% collection charges = $828,000

3. net operating income = $828,000-40% operating expenses= $496,800

4.annual loan payment = net operating income / debt service coverage ratio = 496800/1.2 = $ 414,000

5.net i9ncome = $496800- ($414000*6.25%) = $470,925

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