Question

Ivy Terrace The third property was Ivy Terrace, a 75-unit garden apartment project under construction near...

Ivy Terrace The third property was Ivy Terrace, a 75-unit garden apartment project under
construction near Arlington, Virginia. There was a building moratorium in parts of the county
because of inadequate public facilities, preventing much short-term competition. The property was
for sale for $11.2 million, but the broker was certain it could be purchased for $11 million. A 10-year,
$7 million mortgage at a 4.25% interest rate had been arranged. The loan had a 30-year amortization
period. The land was leased for 99 years with annual payments of $100,000. Although land leases
normally had cost of living or other increases every year or every third year, the land owner agreed
to keep the lease at a constant $100,000 for the first 10 years.
The buyer would take title upon completion of the construction and issuance of a certificate of
occupancy. For depreciation purposes, the owner would be able to depreciate the full $11 million
purchase price using a straight-line method over 27.5 years. The gross rentals for the property were
estimated at $1,450,000. The projected cash flow from operations **1** after a vacancy allowance of 7%,
real estate taxes, operating expenses, and reserves, but before financing and leasehold payments,
would be $900,000. Cartwright knew that property taxes in Arlington were about 10% of the gross
rents. Since they lived nearby, Cartwright and the DeRights had checked the area closely and
concluded that the rental and expense projections were reasonable.

***1*** Also known as Net Operating Income, or NOI. It is different from the finance and accounting NOI. Cash flow from
operations is also sometimes referred to as “Free and Clear Cash Flow” because it is free and clear of financial payments, land
lease payments, and capital expenditures. Capital expenditures may include tenant improvements, leasing commissions,
and/or structural improvements such as a new roof, parking lot, or elevator.********

Find :

No. of Units/Square Feet of Rental Space
Gross Purchase Price
Depreciable Base
Depreciable Life
Estimated Sales Price
Expected Year of Sale
Cash Flow from Operations (CFO) or Net Operating Income (NOI)
Annual Increase in CFO or NOI
Leasehold Payments
Equity Investment
Amount of 1st Mortgage
Interest Rate
Term
Amortization Period
Constant Loan Payments

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