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Calculation of Effective Rent with CAM Reimbursement

**Instructions to students**

- Show your work for all problems, even if its only pencil scratch on paper. If simple math, show how formula/problem is set up. No work, max 1/2 credit.
- Answer in your own words. Do not copy answers from the book...or answer sheet. If so, max 1/2 credit.
- If I ask you to show the formula, I'm referring to Excel. e., PMT (n, i, PV, FV). You can also use whatever financial calculator notation you use.

**Questions**

- How does deprecation can impact after-tax returns during operating years and at sale?
- What are 4 warrants found in a General Warranty Deed?
- What is a default?
- Which of the following two ARMs is likely to be priced higher, that is, offered with a higher initial interest rate? ARM A has a margin of 3 percent and is tied to a three-year index with payments adjustable every two years; payments cannot increase by more than 10 percent from the preceding period; the term is 30 years, and no assumption or points will be allowed. ARM B has a margin of 3 percent and is tied to a one-year index with payments to be adjusted each year; payments cannot increase by more than 10 percent from the preceding period; the term is 30 years, and no assumption or points are allowed.
- What clause in a note would stop a lender from going after a borrower directly for loan repayment, except for certain carve-outs?
- List the 4 basic components of any compounding problem.
- Explain the difference between Real and Nominal rates of interest.
- What are the 3 main approaches to valuation? Explain (simply) how each is calculated?
- All else being equal, if similar properties sold but one had a 5% cap rate and the other 8%, what might this tell about the properties?
- According to Dan, what are 3 of the 4 approaches lenders typically take to establish a loan amount?
- Explain why Lenders use yield maintenance formulas to calculate prepayment penalties? How is yield maintenance different from stated, or stepped prepayment penalties?
- In your opinion, what are 5 of the most important due diligence items and why?
- How can standard deviation be used to assess the risk of an investment opportunity when compared to another?
- What are the four stages of the real estate cycle?
- How might the credit quality of tenants impact the value of a building?
- What is meant by "Underwriting Tenants"? What are 4 items to look at?

**Problems**

- Garret just closed a new loan on his 4-unit apartment as follows: Initial loan amount, $1,000,000, 4% interest, 10-year term, 30-year amortization, and there was a 2% loan fee paid at closing.
- What is the monthly payment?
- What will the loan balance by when the loan matures?
- What is the balance at the end of year 5?
- What is the effective interest rate if Garret holds the note until maturity? What if he pays it off at the end of year 5?
- What is the total interest paid if the loan is held to maturity?

- Ambrose is buying a $100,000 property and can obtain an 80 percent loan with an 8 percent interest rate and monthly payments. The loan is to be fully amortized over 25 years. Alternatively, he could obtain a 90 percent loan at an 8.5 percent rate with the same loan term. Ambrose plans to own the property for the entire loan term.
- What is the incremental cost of borrowing the additional funds? (Hint: The dollar amount of the loan does not affect the answer.)
- How would your answer change if 2 points were charged on the 90 percent loan?
- Would your answer to part (b) change if the borrower planned to own the property for only five years?

- Stephy inherited an annuity from her grandmother. Her CPA wants to know the PV of what she inherited. She will receive $5,000 at the end of each of the next 5 years. The CPA suggests she use a 5% discount rate.
- What is the PV?
- If Stephy put each payment in the bank and it earned interest at 3%, compounded annually, what amount would she have at the end of 5 years?

- Chenxi owns a small retail center. She has a 1,000sf space for rent and has received two offers:
- Tenant 1 - 5 years term, initial base rent $25psf, per year increasing 2.5% per year.
- Tenant 2 - 5 years term, initial base rent $26psf, per year increase 3% per year, but have requested an initial 3 months of free rent.

Both tenants will pay an additional $10psf for CAM reimbursement, increasing 2.5% per year. Operating expenses for year 1 are $12psf.

Based on the above, what is the effective rent each tenant is offering. Lucy uses a 10% discount rate when making these decisions.

- Jake is considering purchasing a property for $6,150,000 and flipping it in 5 years. The expected rent is $50,000/month and expenses are $15,500/month. Jake anticipates rental increase of 3% per year, expense increases of 2.5% per year and a terminal cap rate in year 5 of 7.5% (applied to year 5 NOI inflated by 2.5%). Assume selling costs of 6%.
- What is the IRR of the investment?
- What is the IRR partitioned between cash flow and appreciation? (Must develop an

- Charles is selling the condo he bought 4 years ago and has rented it out to fellow Huskies. He purchased the condo for $250,000…for cash…no debt. He is selling it for $400,000 (thank you hot Seattle market!) and will pay 7% in commissions and closing costs. Since he purchased it, he has taken an annual depreciation deduction of $8,300. Assuming a 15% capital gains tax rate and 25% depreciation recapture rate, what are:
- Taxable gain on sale
- Accumulated depreciation at the time of sale
- Depreciation recapture tax
- Capital gain tax
- What was his net after cash proceeds?