A borrower wants to finance an apartment building costing $2 million with a 75%, 25 year loan at the interest rate of 6%. The projects’ NOI is expected to be $150,000 during first year. Assuming that NOI and the building will increase 5% each year. The lender will require an initial debt coverage ratio of at least 1.25.
a. Would the lender be likely to make the loan to the borrow? Show your cash flow statement for a 3-year period. What would be the borrower’s before-tax yield on equity?
b. Would the lender be likely to make the loan to the borrower if the mortgage rate is 8%?
c. What would be the maximum loan amount that the lender would make if the debt coverage ratio was 1.2 for year 1? What would be the loan-to-value ratio?