Question: QUESTION 1 Use the information below to answer questions 1 to 7. John presently owns an office building, which is 30 years old, and is
QUESTION 1
Use the information below to answer questions 1 to 7.
John presently owns an office building, which is 30 years old, and is considering renovating it. Assume that if John does the renovation, he will be able to obtain a new loan that is equal to the balance of the existing loan plus 75% of the renovation costs. Assume a five-year holding period. Below is the information about the property and Johns estimation if he does the renovation.
| CURRENT | IF RENOVATED | |||||||
| Purchase Price |
| 1,000,000 |
| Renovation Cost | 400,000 |
| ||
| Building Value |
| 800,000 |
| Initial Increase in NOI (year 4) | 20.00% |
| ||
| Land Value |
| 200,000 |
| Annual Increase in NOI | 3.00% |
| ||
| Loan-to-value ratio | 75.00% |
| Resale Value after holding 5 years | 1,523,000 |
| |||
| Interest |
| 9.00% |
| Selling Expenses | 3.00% | of sale price | ||
| Term |
| 30 | years | New Loan: |
|
|
| |
| Payments per year | 12 |
| Interest Rate | 11.00% | 11.00% |
| ||
| Years since Purchased | 3 |
| Term |
| 30 years |
| ||
| Current NOI (year 4) |
| 90,000 |
| Payments per year |
| 12 |
| |
| Projected Increase in NOI | 2.00% | per year |
|
|
| |||
| Resale Value Today | 1,050,000 |
|
| |||||
| Depreciable Life |
| 39 | years |
| ||||
| Ordinary income tax rate |
| 28.00% |
|
| ||||
| Price appreciation tax rate |
| 28.00% |
|
| ||||
| Depreciation recapture tax rate |
| 28.00% |
|
| ||||
What is the annual loan payment if John does not renovate the property?
| a. | $60,598 | |
| b. | $32,700 | |
| c. | $25,000 | |
| d. | $72,416 |
1 points
QUESTION 2
The NOI for year 4 is $90,000. What is the after-tax cash flow from operations for year 4 if John does not renovate the property? (Choose the nearest value)
| a. | $17,275 | |
| b. | $22,880 | |
| c. | $22,131 | |
| d. | $16,526 |
1 points
QUESTION 3
What is the additional equity investment John needs if he does the renovation?
| a. | $100,000 | |
| b. | $200,000 | |
| c. | $300,000 | |
| d. | $400,000 |
1 points
QUESTION 4
What is the annual loan payment if John does renovate the property? (Choose the nearest value)
| a. | $98,456 | |
| b. | $88,152 | |
| c. | $152,366 | |
| d. | $118,066 |
1 points
QUESTION 5
What is the capital gain tax from the property sale by the end of year 8 if John does renovate the property? (Choose the nearest value)
| a. | $45,949 | |
| b. | $43,077 | |
| c. | $60,308 | |
| d. | $81,955 |
1 points
QUESTION 6
What is the mortgage balance by the end of year 8 if John does renovate the property? (Choose the nearest value)
| a. | $1,152,233 | |
| b. | $1,003,848 | |
| c. | $954,230 | |
| d. | $965,662 |
1 points
QUESTION 7
If John can renovate the property with obtaining a new loan that is equal to 75% of the sum of the existing value of the property ($1,050,000) plus the renovation costs. What is the additional equity John needs to invest if he does the renovation?
| a. | $37,824 | |
| b. | $45,641 | |
| c. | $55,245 | |
| d. | $85,423 |
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