Assume that you were given an opportunity to purchase a real estate project using an equity participation loan. The NOI for each year of the holding period are shown below:
|Year 1||Year 2||Year 3||Year 4|
- 1) Purchase price = $1,900,000
- 2) Estimated value of land = $500,000
- 3) Anticipated mortgage terms: a) Loan to value ratio = .80 b) Interest rate = 5.5%
c) Years to maturity = 25
- d) Points charged = 3
- e) Prepayment penalty = 2% of outstanding balance
- f) Level payment, fully amortized
- g) Fixed interest rate, monthly payments
- 4) Participation terms:
a) Share of NOI = 17.5% over $130,000 b) Share of Appreciation = 20%
- 5) Future sales price = $2,350,000
- 6) Estimated selling expenses as proportion of future sales price = 5%
- 7) Client’s minimum required before-tax rate of return on equity = 12%
- The before-tax cash flows and the before-tax equity reversion (you do not need to calculate the after-tax cash flows or reversion).
- The before-tax net present value to the investor.
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