Compute the market value
1) A certain property market is characterized by 100,000 SF spaces that are expected to rent in 8-year fixed-rent leases, successively in perpetuity (annual payments at the ends of the years). Properties are typically sold just after a lease is signed (1 year prior to first rent payment). There is no vacancy down-time between the successive leases. 'Elie rent in each lease is constant, but between new lease signings the rent is expected to grow at a rate of 2% per year. The current market rent is $10/SF per year. In general, the rents are uncertain prior to lease signings. The opportunity cost of capital (OCC) for investments providing contractually-fixed cash flows is 6% per year, and the typical prevailing cap rate in this property market is 7%.
a. What is the market value of space per square foot?
b. What is the implied inter-lease discount rate applicable to risky cash flows that depend on the real estate market?
2) An adjustable rate mortgage is offered with an initial interest rate of 7.00%. The index is currently yielding 5.50%, and the margin is 200 basis points.
a. What is the size of the "teaser"?
b. In the ARM above, what will be the contract interest rate after the end of the first adjustment interval if the index remains at 5.50%?
3) Consider a 7% loan amortizing at a 30-year rate with monthly payments.
a. What is the maximum amount that can be loaned on a property whose net operating income (N01) is $1,000,000 per year, if the underwriting criteria specify a debt service coverage ratio (DCR) no less than 120%?
b. For the same property as above, suppose the underwriting criteria is a maximum loan/value ratio (LTV) of 80%, and we estimate property value by direct capitalization using a rate of 8% on the stated NO1. By this criterion what is the maximum loan amount?
4) A building that is worth $5 Million has a first mortgage on it with $4 Million owed, a second mortgage with $2 Million owed, and a third mortgage with $1 Million owed. Describe the distribution of the $5 Million proceeds from the foreclosure sale.
5) In a one-period world, if the conditional yield degradation is 20%, the unconditional default probability is 10%, and the lender wants an expected return of 5%, what contract yield must the loan carry?
6) As a borrower, which of the following two 30-year, monthly-payment loans would you choose (and why) if you had a 10-year expected prepayment horizon: 5% interest rate with 3.5 points, versus 5.875% interest with one point?
Suppose your prepayment horizon was 5 years?