Question

You are interested in purchasing a commercial property. You project that the property’s NOI next year will be $1,200,000. The current cap rate for similar properties is 8%. You are interested in acquiring a loan with a 30-year amortization term at a 6% annual interest rate. Based on the two metrics provided below calculate the loan amount. You must show all your calculations to receive full credit. (a) LTV = 75% [8 points] (b) DCR = 1.35

Answer 1

Calculation of the loan amount based on the two metrics.

A) if LTV = 75%

Value of property using CAP rate = NOI / cap rate

= 1,200,000 / 0.08

Value of property = $ 15,000,000

Loan to value ratio = 75%

Loan amount / value of property = 0.75

Loan amount = 0.75 * 15,000,000 = 11,250,000

Loan amount based on one matric that is LTV = $ 11,250,000

B) if DCR = 1.35

DCR = 1.35

NOI / annual debt serving = 1.35

Annual debt service = 1,200,000 / 1.35

Annual debt serice = 888,888.889

Monthly payment =888,888.889/12 = 74,074.074

Monthly payment means EMI .

EMI = P * r * (1+r)n / [ (1+r)n -1]

Here P = loan amount

r = rate per month = 6% /12 = 0.5%

n = number of months = 30 years * 12 = 360 months

74,074.074 = P * 0.005 * (1.005)360 / [ (1.005)360 - 1]

74,074.074 = P * 0.0301128761/ 5.02257521

74,074.074 = P * 0.00599550526

P = 74,074.074 / 0.00599550526

P = 12,354,934.4

Loan amount = 12,354,934.4