Question

Given the following:

            Net Operating Income                        $900,000

            Cost of Sale (Broker + Any)                6%

            Current Loan Balance                         $2,500,000

            Loan to Value Ratio                            75%

            Capitalization Rate                             10%

What is the cash available for distribution to the equity partners under each of the following scenarios?

a) The property is sold.

b) The property is refinanced.

If possible, please use a financial calculator and show me how to solve as I need to learn this concept for this class.

Answer 1

a) Total Property Value= loan amount / loan to value ratio

=$2,500,000 / 75%

=$3,333,333.33

Property Value = $3,333,333.33

Cost of Sale @ 6% = Property Value * 6%

= $3,333,333.33 * 6%

= $199,999.99

Cash for Loan Repayment= Property Value - Cost of Sale

= $3,333,333.33 - $199,999.99

Cash for Loan Repayment= $3,133,333.34

Loan Repayment : $2,500,000

Cash Available after loan repayment : $633,333.34 ($3,133,333.34 - 2,500,000)

I am assuming that the net Income is all in cash, so

Total Cash : :$1,533,333.34 ($633,333.34 + 9,000,000)

b) Interest on loan = $2,500,000 * 9.5%

Interest on loan =$237,500

As there is no property sale, so there is only cash income

Cash Available for Distribution: = $662,500 ($900,000 - 237,500)

Dear Student, if u have any doubt, plz feel free to reach me.