You are considering buying a commercial property. From observed market cap rates and standard CapEx ratio, you estimated the property’s PBTCF income yield and PBTCF discount rate to be 9% and 12%, respectively.
A lender is willing to originate a non-recourse, interest-only loan[1],[2] at 5% as long as the LTV does not exceed 60%. With LTV at 30% and 60%, what are your expected annual income return and total return to equity?
Hint: A PBTCF discount rate is the expected total return on property. After finding the income and total returns on debt, use one of the WACC formulas.