Real Estate Finance
Description
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Assume that you are a looking to obtain a commercial real estate loan for a property that is for sale at $10,000,000 and generates $1,000,000 per year in NOI (Net Operating Income). You have $2,000,000 in cash that can be used as the equity (down payment) for the loan. All loans have a 25-year amortization period and a 5-year term.
(A) What is the effective cost of borrowing (lenders yield) expressed as a percentage (%) for each of the following loans for the 5-year term?
(B) What is the outstanding loan balance (including penalties that may be due) payable to the lender at the end of the 5-year term?
- Lender # 1 offers you an interest only mortgage with a 9% interest rate.
- Lender # 2 offers you a normal constant payment mortgage with a 9% interest rate.
- Lender # 3 offers you a constant amortization mortgage with a 9% interest rate.
- Lender # 4 offers you an adjustable-rate mortgage with a 2% teaser rate for 12 months, 3% for next 24 months, and 11% thereafter.
- Lender # 5 offers you an 8.5% normal constant payment mortgage with a 6% upfront loan origination fee.
- Lender # 6 offers you an 8.5% normal constant payment mortgage with a $150/month loan servicing fee (administrative fee).
- Lender # 7 offers you an 8.5% normal constant payment mortgage with a 7% prepayment penalty. For this loan assume that the loan is prepaid in month 12 and you acquire a new 5% loan for the remaining 48 months.
- Lender # 8 offers you a PLAM (Price Level Adjusted Mortgage) with a 5% stated interest rate. Assume that the outstanding mortgage is upwardly adjusted by an index of 3% at the end of each of the 5 years.
- Lender # 9 offers you a 6% normal constant payment mortgage with an upfront 4% loan origination fee, a $150/month administrative fee, and a 5% prepayment penalty. Assume that this loan is prepaid early at the end of month 59, therefore subject to prepayment penalty. Calculate the mortgage balance + prepayment penalty at the end of month 59.
- Rank the top 3 loans above loans by which ones have the lowest overall cost of borrowing and offer any explanations that you deem relevant to justify your rankings.
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