1 points QUESTION 12 [The information presented here applies to questions 12 --

Question

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QUESTION 12

[The information presented here applies to questions 12 -- 15] You have purchased a small multi-family building in Montclair, NJ for $2M. You expect that NOI in your first year of ownership will be $175,000, what is the initial cap rate?

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QUESTION 13

Your acquisition was financed with a 10-year loan form $1.5M offering a 5% interest rate and a 20-year amortization period. If payments are made on an annual basis, what is the mortgage interest deduction you receive in your first year of ownership?

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QUESTION 14

If the land value is assessed at $625,000, what is the depreciation allowance in your first year of ownership?

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QUESTION 15

If you are in a 25% marginal tax bracket and do not plan to make any capital expenditures in your first year of ownership, what is your tax liability in the first year?

Explanation / Answer

12. Cap rate = NOI / purchase value

THus, initial cap rate is $175,000 / $2,000,000 = 8.75%

13. Interest reduction we receive in the first year is 5%*1.5 million = $75,000

14. Land is not depreciated, instead building can be depreciated. Now if the land is valued at $625,000 and total purchase price was $2 million, value of building is $1,375,000 and assuming 40 years straight line depreciation, total depreciation for the first year will be $1,375,000 / 40 = $34,375

15. EBITDA = NOI = $175,000. Depreciation is $34,375. So EBIT = $140,725

Now interest payment is $75,000 and so PBT = $65,725

Interest @25% = $16,431.25 in the first year.

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