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

1. How does deprecation can impact after-tax returns during operating years and at sale?
2. What are 4 warrants found in a General Warranty Deed?
3. What is a default?
4. 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.
5. What clause in a note would stop a lender from going after a borrower directly for loan repayment, except for certain carve-outs?
6. List the 4 basic components of any compounding problem.
7. Explain the difference between Real and Nominal rates of interest.
8. What are the 3 main approaches to valuation? Explain (simply) how each is calculated?
9. 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?
10. According to Dan, what are 3 of the 4 approaches lenders typically take to establish a loan amount?
11. Explain why Lenders use yield maintenance formulas to calculate prepayment penalties? How is yield maintenance different from stated, or stepped prepayment penalties?
12. In your opinion, what are 5 of the most important due diligence items and why?
13. How can standard deviation be used to assess the risk of an investment opportunity when compared to another?
14. What are the four stages of the real estate cycle?
15. How might the credit quality of tenants impact the value of a building?
16. What is meant by "Underwriting Tenants"? What are 4 items to look at?

Problems

1. 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.
   1. What is the monthly payment?
   2. What will the loan balance by when the loan matures?
   3. What is the balance at the end of year 5?
   4. 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?
   5. What is the total interest paid if the loan is held to maturity?
2. 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.
   1. What is the incremental cost of borrowing the additional funds? (Hint: The dollar amount of the loan does not affect the answer.)
   2. How would your answer change if 2 points were charged on the 90 percent loan?
   3. Would your answer to part (b) change if the borrower planned to own the property for only five years?
3. 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.
   1. What is the PV?
   2. 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?
4. Chenxi owns a small retail center. She has a 1,000sf space for rent and has received two offers:
   2. Tenant 1 - 5 years term, initial base rent $25psf, per year increasing 2.5% per year.
   3. 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.

5. 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 annual pro forma showing work)
6. 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:
   1. Taxable gain on sale
   2. Accumulated depreciation at the time of sale
   3. Depreciation recapture tax
   4. Capital gain tax
   5. What was his net after cash proceeds?