Parkchester is a sprawling collection of red brick apartment buildings with typical housing project style architecture. The 129 acre property with a community feel of bus stops, subway stops, restaurants, neighborhood stores and recreation and leisure locations is between White Plains Road and Castle Hill Avenue and Tremont and Westchester Avenue. Tenants must have a good credit score, verifiable employment and a minimum income of $37,875 for a one bedroom apartment and $50,063 for a two bedroom apartment. Apartments rent for
7,500 1-Bedroom Units Renting @ $1050/month
5,000 2-Bedroom Units Renting @ $1382/month
Additionally, this property has covered parking, a recreation facility, and other non-real estate revenue equal to 3.5% of the Potential Gross Rent. Also, there are several commercial buildings that derive cumulative NOI of $50,000,000 annually and the Cap Rate for these properties is 8, while the Cap Rate for the residential properties is 7. While this is a highly desirable place to live with a waiting list during most years there are times when apartments are empty while renovations occur. The vacancy allowance is 2.5% of Potential Gross Income and Operating Expenses are typically 42% of Effective Gross Income.
Current Market Lending Terms for similar properties are 60% LTV, 5.75% Interest Rate, 20-yrs, 2.0 Pts, $1,000,000 in Fees, DCR = 1.35, EDR = 6.5%. Unfortunately due to the strict loan terms you will need a second and third loan to buy this property as you feel ill-equipped for the necessary down payment. Due to the higher risk nature of this second loan the terms are even less favorable. For your second mortgage you will receive 15% LTV, 7.5% Interest Rate, 10-yrs, 2.0 Pts, $500,000 in Fees. And your third mortgage will come at 10% LTV, 9.5% Interest Rate, 10-yrs, 3.0 Pts, $300,000 in Fees. Your EDR = 6.5%, BV/TV = 0.8 still apply. The acquisition of the property would occur in January 2016. All properties can be depreciated at the residential rate. Carryover losses can be used.
Despite inflation being quite low currently the partners ask you to model inflation at 2% for all 10-years. Also, due to the standard of living Parkchester provides to those that live within this oasis in New York City appreciation is expected to be equal to the inflation rate. This investment on behalf of the partnership is expected to last 10 years at which time the market for housing is expected to be robust and the partnership will then sell the investment and invest the profits elsewhere. The sales expense at that time is expected to be 1.5%. However, despite the return to a “good” real estate market the partnership will most likely accept an offer at 5% less than the full value of the property.
Calculate and show the Annual Cash Flows, Taxes (utilize and show both methods), IRR & NPV for your Partnership (Round all dollar answers to the nearest dollar, and assume that losses cannot be carried forward).
Would you make these laons? Why?