1) The following data, objectives, and constraints have been provided with respe

ID: 2587675 • Letter: 1

Question

1) The following data, objectives, and constraints have been provided with respect to a proposed venture: Costs (including transportation costs) $3,900,000 Net leasable area (square feet) 29,500 Financing Specifications: a. Mortgage loan terms: 9 percent interest; 25 year monthly amortization schedule; 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) $23.50 Vacancy Rate 9% Operating expenses, per sq. ft. of leaseable area $9.50 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?

Explanation / Answer

1. Maximum Loan to Value Ratio(LTV ratio) is 70%: LTV ratio is a number that describes the size of a loan compared to the value of the property securing the loan. So this venture has 70% LTV. Which means maximum loan on this Venture cost of $3,900,000 will be = $3,900,000*70%= $2,730,000

Debt to coveraage ratio is 1.2 : Debt Coverage ratio is arrived by calculating Net Operating Income by debt service. Debt as calcuted from above is $2,730,000 and with 9%, mortgage interet will be = $2,730,000*9%=$245,700

Calculation of Net Operating Income:

Year 1

Revenue - $23.5*29500sft

693250

Less:

Vacancy rate 9% of Rental Income

62392.5

Gross Operating Revenue

630857.5

Operating Expense : $9.5*29500sft

280250

Net Operating Income

350607.5

Debt Coverage ration = NOI/debt interest = $350607.5/$245,700=1.43

And Expected Debt coverage ratio is 1.2 and arrive debt coverage ratio is 1.43 which is more than expected, hence this project feasible.

2. Expected equity yeild is 6%:

Of total cost debt is $2,730,000 and equity is $3,900,000-$2,730,000=$1,170,000

6% on Equity = $1,170,000*6%=$70,200

Net Income = Net Operating Income - Mortgage Interest = $350607.5-$245700=$104907.5

Net Income is more than expected equity yeild, hence this project is feasible from expected equity yeild as well.