Instructions:

1. Round all final dollar amounts to the nearest cent and don't enter the dollar sign.

E.g. if the answer is $1,022.912, enter it as 1,022.91.

Commas don't matter, hence you can also enter 1022.91.

2. Round all final percentages to the nearest basis point and don't enter the percent sign.

E.g. if the answer is 17.238%, enter it as 17.24.

If the answer is 0.52%, enter it as 0.52.

You want to purchase an office building in Brooklyn. The property contains 112,000 square feet of rentable space and is currently occupied by multiple tenants each with differing maturities on their respective leases. No lease is currently shorter than 1 year.

The annual rent in the 1st year of ownership is $55.50/sq ft.

The vacancy rate is 3.5%.

You expect to incur collection losses (from tenant default) of 1.5%.

1. What is the Potential Gross Income (PGI) 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 1st year of ownership?

4. You decide you want to take out a loan to finance the purchase of this property. It will be a 10 yr balloon at an interest rate of 4.25% amortizing over a 30 year period with monthly payments and monthly compounding.The lender will provide financing up to a minimum Debt Service Coverage Ratio (DSCR) of 1.2 based off the 1st year NOI.

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 (Cash flow after debt service) in the first year?

6. What is the largest loan a lender is willing to provide you with based on question 4? (Use the terms and loan payment from question 4.)

7. The seller's asking price for the property is $55,000,000 (assume this is the value). If the lender has a maximum 70% LTV requirement, what is the most the bank will lend you? (Only based on the LTV requirement.)

8. The loan must satisfy both the minimum DSCR of 1.2 and maximum LTV of 70%.

What is the biggest loan the borrower can get?

9. If you buy the property at the asking price of $55,000,000 using the biggest loan you can get (from question 8) and purchase costs are 5% of the purchase price, what will your down payment be?

10. What is the annual mortgage payment on the loan in question 8?

11. If you buy the property at the asking price of $55,000,000, what is your 'going in' Cap Rate?

12. If the annual irr for this property is 8.5%, then based on the cap rate in question 11, what does this imply is expected NOI growth rate for this property? (think about the formula for a growing perpetuity)

13. You do research and find that similar properties are selling at an 8% cap rate. Using an 8% cap rate, what price would you offer for this property?

14. Suppose you buy the property at the asking price of $55,000,000 and own it for exactly 3 years.

You make the down payment in part (9).

You collect the NOI in part (3).

You make the annual mortgage payment in part (10).

The NOI is expected to grow 3% annually.

You sell the property at the end of year 3 (based on proforma year 4 NOI), at a cap rate of 6.5% (roughly equal to the cap rate in part (11) and pay off the loan balance when you sell (this loan is amortizing principal).

Sale costs are 3% of the sales price.

Compute the IRR on this investment.