Question 5 (15 Marks)

a) A property that was valued at $5,000,000 three years ago is being held as security for a loan. The banks policy is to lend at a loan-to-value ratio of no more than 75%. The current loan outstanding is $2,400,000 and the value of the property has been reduced to $2,800,000 due to a housing bubble.

i. How much does the borrower need to pay to the bank, to remain compliant with this policy? (5 marks)

ii. If the bank prefers to accept additional collateral instead of a payment, what is the minimum value of the security that the borrower needs to present to remain compliant with the policy? (5 marks)

b) Tajai Thomas and Avrille Ashley are considering the purchase of an apartment located in New Kingston. The apartment is currently generating annual income of $2,400,000 but vacancy loss is estimated to be 8% of this income. Given that operating expenses usually amount to 15% of income and the market determined capitalisation rate is 18%, what is the value of the property using the income capitalisation approach? (5 marks)