SS13 - Real Estate Valuation question, capital, mortgage, knowledge, following

IAmNeil

Try the following question to test your knowledge. I will post the answers later.

1. NOI is 64,000
2. Price is 525,000
3. Improvements make up 85.9% of the price. Using a 27.5-year life, SLD gives 16,399 annual tax depreciation.
4. Equity cont.: 131,250
5. Debt cont.: 30-year 8% fixed rate mortgage for 393,750. Monthly payment: 2,889.20. LTV ratio: 75%
6. 36% marginal income tax; 20% capital gains tax; 25% recaptured depreciation tax.
7. Required after-tax return: 12%
8. Holding period: 4 years. NOI expected to grow over holding period 5% annually. Market value at end of year 4 is 777,924. Selling costs are 7% of sales price (market value). Outstanding loan balance at end of year 4 is 378,862.
9. Annual compounding used for the equity TVM calculations.

A. Determine taxes payable (years 1 through 4)
B. Determine after-tax cash flow (years 1 through 4)
C. Determine after-tax equity reversion (end of year 4)
D. Calculate NPV of the investment (12%)
E. Calculate IRR of the investment
F. Explain using the NPV and IRR rules why an investor would or would not invest in this real estate venture.

SFoyil

true, but there is more than improvement on this building. They didn't say here but they are assuming that basically the land cost is $525000 - 451,000 = $74k. The point is that we should depreciate based on total price minus land.

brainsX

legendary...although probably wont need it. cheers cpk

kickthatcfa

it is not weird. this is exactly the example in the text book (douglas Manor, or whatever).

CP

zephyranalyst

Why is depreciation calculated based on the improvement cost and not the total cost?
Looks weird to me.

ayaz_mahmud369

I don't think interest per year can be calculated without a full schedule, or by doing an amortization function with your calculator, right?

bolligerallstar

it can be done with the Amort button on your calc.

Use
PV=-393750 N=360 I/Y=8/12
CPT PMT
=2889.20

2nd Amort
P1=1 Down Arrow
P2=12
BAL=390460.75
PRN=3289.25
INT=31381

P1=13
P2=24
PRN=3562.25
INT=31108

25,36
PRN=3857.92
INT=30812

37,48
4178
30492

CP

Swanand

Thanks ASM299 but do you have the calc to get the below interest payments. The book omits this which makes me think if this came up in the exam they will give you the interest payments (if interest only) and also the debt servicing value when getting to ERAT.

Interest Yr 1 = 31,381
Yr 2 = 31,108
Yr 3 = 30,812
Yr 4 = 30,492

Cheers

tarunajwani

ahh~~~ so thats how debt service is calculated.

firat

<reposted



Edited 1 time(s). Last edit at Tuesday, May 25, 2010 at 06:28AM by joseph213.