Problem 3:

A developer wants to finance a project costing $1.5 million with a 70 percent, 20-year loan at an interest rate of 4.5 percent. The projects NOI is expected to be $100,000 during year 1 and the NOI, as well as its value, is expected to increase at an annual rate of 2 percent thereafter. The lender will require an initial debt coverage ratio of at least 1.20.

Would the lender be likely to make the loan to the developer? Support your answer with a cash flow statement for a five-year period. What would be the developers before-tax yield on equity (BTIRR)?

Based on the projection in (a), what would be the maximum loan amount that the lender would make if the debt coverage ratio was 1.20 for year 1? What would be the loan-to-value ratio?

Assuming conditions in part (a), suppose that mortgage interest rates suddenly increase from 4.5 percent to 6.5 percent. NOI and value will now increase at a rate of 5 percent. If the desired DCR is 1.20, will the lender be as willing to make a conventional loan now? Support your answer with a cash flow statement.

Problem 8

A borrower and lender negotiate a $20,000,000 interest-only loan at a 5 percent interest rate for a term of 15 years. There is a lockout period of 10 years. Should the borrower choose to prepay this loan at any time after the end of the 10^th year, a yield maintenance fee (YMF) will be charged. The YMF will be calculated as follows: A treasury with a maturity equal to the number of months remaining on the loan will be selected, to which a spread of 150 basis points (1.50%) will be added to determine the lenders reinvestment rate. The penalty will be determined as the present value of the difference between the original loan rate and the lenders reinvestment rate.

How much will the YMF be if the loan is repaid at the end of year 13 if two-year treasury rates are 2 percent? What if two-year treasury rates are 4 percent?