Question

A client of Mr. Richards wants to purchase a large commercial building. The building costs $20 million and he will make a down payment of 15% and finance the rest with a local bank. The bank terms are 10-year bullet loan with 30-year amortization at 4.5% interest. The building earns annual rent of $2,500,000 and it pays annual taxes of $1,000,000 per year. What will be the annual cash flow from the building? What will be the ROI on the investment? Given only this information, what are some of the obvious pieces missing that also need to be considered? What is your recommendation?

Excel: Using the basic TVM setup, calculate the mortgage for the property and calculate the cash flow, and ROI for this project.

Written: Briefly describe the analysis that you have performed, why how you calculated the cash flow, mortgage payment and ROI. Briefly give your recommendation and the list any missing risks that should be considered.

Answer 1

Ideally we should also look at the NPV of the project for which we also need a discount rate.