Mortgage Finance Exercise Property NOI from a suburban office building is expected to be $8m per annum rising 3% per annum over the next 10 years. Assume 5% of NOI for management fees and reserves. The ten year treasury is 5.0%. 1. Fixed rate debt is available for an 80 basis point spread over the 10 year treasury with a 25 year amortization schedule. Minimum Debt Service Coverage is 1.2X. What is the maximum amount of debt that you can support with this property? 2. Assume the “going in” cap rate is 7%. Calculate the Fair Market Value of the property. Maximum Loan to Value (LTV) is 60%. Does this change the amount that you can borrow? If so by how much? 3. Assume the property is purchased at Fair Market Value with an 80% allocation to building and 20% to land. 4. Assume that you borrow the maximum debt that you can. Prepare 10 yr. After Tax Cash Flows for this property. Tax rate is 35%, recapture rate is 25%, capital gains rate is 15%. 5. Calculate the Terminal Value of the property assuming a 7.5% exit cap rate . 6. Calculate the NPV of the property at 9%. Calculate the IRR. 7. Mezzanine Financing: You can borrow an additional 10 million dollars over the mortgage amount in #4 above. This financing is a ten year term interest only second mortgage at 200 basis points over the ten year treasury. This raises your debt to? What is the DSC and LTV of this debt 8. High LTV Loan: You can borrow a high LTV mortgage with $10m in proceeds over the mortgage amount in #4. The rate on the entire mortgage is 135 bp over the ten year treasury rate. What is the DSC and LTV on this loan? 9. Calculate the NPV at 9% and the IRR of each financing strategy. Which financing option would you take: a) the first mortgage alone, b) the first mortgage plus the Mezzanine loan or c) the high LTV loan? 10. At what spread over treasury for the High LTV loan does your result change? 11. What is the marginal cost of the last 10m in the High LTV loan?