Lesson10_Investment

05412 4500 before tax equity reversion bter before tax

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Unformatted text preview: s IRR with a Loan? i = 0.6459% per month N = 60, PV = 1m, PMT = 4500, FV = 1.8m Back to Office Building Example Dr. Eriksen Lesson 10: RE Investment 16 17 18 Exhibit 20-1 Assumptions for Centre Point Office Building Total acquisition price: $885,000 Property consists of 9 office suites, 4 on the first floor and 5 on the second. Contract rents: 6 suites at $1,800 per month and 3 at $1,400 per month. Annual market rent increases: 3% per year Vacancy and collection losses: 10% per year Operating expenses: 40% of effective gross income each year Capital expenditures: 5% of effective gross income each year Expected holding period: 5 years Expected selling price in year 5: Year 6 NOI capitalized at 10 percent Selling expenses in year 5: $58,300 First mortgage loan: $663,750 (75% LTV) Annual interest rate: 8% Loan term and amortization period: 30 years Up-front financing costs: 3% of loan amount 6 Real Estate Fundamentals Texas Tech University EXAMPLE USING DCF METHODS IN OUR EXAMPLE… Suppose Initially … 75% LTV of $885,000, or $663,750 30 year FRM Loan @ 8% with up front fees of 3% Net loan proceeds: = $663,750 (0.03 663,750) = $643,837.50 Equity = $885,000 $643,837.5 = $241,162.50 Payment: $4,870.36 or $58,444.32 per year NOTE: $4,870 x 12 = $58,444.32 BEFORE TAX CASH FLOWS (BTCFs) Estimate Before Tax Equity Reversion (BTER) 6 Year NOI = $103,291 & Market Cap Rate of 10% Sales Price = $1,032,910 minus commission of 6% Net Sales Proceeds = $974,610 Outstanding Loan Balance of $631,026 BTER = $974,610 $631,026 = $343,674 Dr. Eriksen Lesson 10: RE Investment 19 Exhibit 20-2 Centre Point Office Building: 5-Year Operating Pro Forma Potential Gross Income (PGI) - Vacancy and Collection Loss (VC) = Effective Gross Income (EGI) - Operating Expenses (OE) - Capital Expenditures (CAPX) = Net Operating Income (NOI) 1 $180,000 18,000 162,000 64,800 2 3 $185,40 $190,962 18,540 19,096 166,860 66,744 171,866 68,746 8,343 8,593 8,100 $89,100 $91,773 $94,526* 4 $196,691 19,669 5 $202,592 20,259 177,022 70,809 182,332 72,933 8,851 9,117 $97,362 $100,283* 20 x 21 Centre Point Office Building: Estimated Before Tax Cash Flows 1 2 3 4 5 89,100 91,773 94,527 97,362 100,282 58,444 58,444 58,444 58,444 58,444 $343,674 = Net Operating Income (NOI) - Debt Service (DS) + Before-Tax Equity Reversion = Before Tax Cash Flow (BTCF) $30,656 $33,329 $36,082 38,918 $385,513 th 7 Real Estate Fundamentals Texas Tech University NPV OF LEVERED CASH FLOWS NPV @ DIFFERENT DISCOUNT RATES At a d...
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This document was uploaded on 03/13/2014 for the course FIN 3332 at Texas Tech.

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