Question: Assume that you were given an opportunity to purchase a real estate project using an equity participation loan. The NOI for each year of the holding period are shown below:
NOI
Year 1 124,787
Year 2 132,225
Year 3 139,954
Year 4 148,468
Additional information:
1) Purchase price = $1,900,000
2) Estimated value of land = $500,000
3) Anticipated mortgage terms:
a) Loan to value ratio = .80
b) Interest rate = 5.5%
c) Years to maturity = 25
d) Points charged = 3
e) Prepayment penalty = 2% of outstanding balance
f) Level payment, fully amortized
g) Fixed interest rate, monthly payments
4) Participation terms:
a) Share of NOI = 17.5% over $130,000
b) Share of Appreciation = 20%
5) Future sales price = $2,350,000
6) Estimated selling expenses as proportion of future sales price = 5%
7) Client's minimum required before-tax rate of return on equity = 12%
Calculate: a. The before-tax cash flows and the before-tax equity reversion (you do not need to calculate the after-tax cash flows or reversion).
b. The before-tax net present value to the investor.