Question: You are a Real Estate developer building a small office tower. The construction will take one year and the units have all been pre-leased. The
You are a Real Estate developer building a small office tower. The construction will take one year and the units have all been pre-leased. The stabilized NOI at opening will be $720,000 and comparable cap rates are 6%. The construction lender is willing to finance the project based on the terms and conditions shown below.
Development Budget:
Land
2,000,000
Site preparation
250,000
Hard Costs
8,000,000
Professional Fees
300,000
Permits
75,000
Project Management
150,000
Leasing Commissions
16,000
Other Soft costs
200,000
Interest
109,000
Cash Flow:
The land is purchased and site preparation occur in the first month. The soft cost (excluding interest) are evenly distributed over the 12 month period. The hard costs are evenly distributed over month 3 to month 12. All cash flows occur at the end of the month
Construction Loan:
LTC = 65%
Interest Rate = 5.0%
Mortgage Loan:
Term (years) = 5
Amortization period (years) = 25
Mortgage Rate = 4.0%
Maximum LTV = 75.0%
Minimum DSCR = 1.25
- Based on the budget, calculate the outstanding construction loan at the end of the year.
- How much equity will you be able to withdraw at the end of the construction period if you take-out a mortgage with the terms and conditions shown?
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