Courtney Baxter has presented Joshua with yet another opportunity: It is related to a commercial property investment. Based upon a market analysis involving the review of supply and demand, rents, and estimated operating expenses, annual net operating income (NOI) is estimated as follows:
Year | NOI |
1 | $1,000,000 |
2 | $1,000,000 |
3 | $1,000,000 |
4 | $1,100,000 |
5 | $1,200,000 |
6 | $1,250,000 |
7 | $1,287,500 |
8 | $1,326,125 |
There is the expectation that Citadel, LLC should be able to earn a 10% return on an investment like this venture. And, starting from year 6 to year 7 and every year thereafter, the NOI is expected to grow at 3% per year indefinitely. Assuming this investment is expected to produce NOI in years 1-8 and be owned for seven years and then sold, what would be the value for this property today?
4) Why should Joshua and Jim consider building a portfolio by investing in real estate income property? Are there any special considerations that should be taken into account when it comes to taxation of income property? What about depreciation?
5) American National is willing to make a loan for $750,000 on a commercial property at a 9% interest (accrual) rate with payments calculated using a 7% rate and a 30-year loan term. After the first five years, the payments are to be adjusted so that the loan can be amortized over the remaining 25-year term. What is the initial payment? What will the balance be after 5 years?
6) How should Citadel, LLC go about analyzing the risk of different properties and investments? What is the difference between business and financial risk, and what should be more important to take into consideration? Finally, explain the concept of a real option and how this can help Joshua and Jim as they continue with their business.
Questions must be addressed in a complete manner with an average of 50 words per question. For problem-based questions, the solution must be provided, but it is also recommended that mathematical work be provided for support.
Grading Rubric:
Category |
Points |
Description |
Wraparound Loan Analysis |
25 |
Calculate and compare loan alternatives related to wraparound financing. |
Truth-in-Lending and RESPA Disclosures |
25 |
Demonstrate an understanding of Truth-In-Lending and RESPA/Settlement Statement requirements. |
Present Value of a Property using NOI | 25 | Calculate the value of an income producing property. |
Income Producing Property | 25 | Demonstrate an understanding of income producing properties, including tax and depreciation factors. |
Accrual Loans | 25 | Calculate an initial payment (12.5 points) and balance of an accrual loan (12.5 points); understand the difference between an accrual rate and a pay rate. |
Risk Analysis |
25 |
Demonstrate an understanding of risk, the difference between business and financial risk, and a real option. |
Total |
150 |
A quality assignment will meet or exceed all of the above requirements. |