Homework #6 – Due 11:59pm Tuesday, December 3
Commercial Real Estate
Common information for all questions.
You want to purchase an office building in Brooklyn. The property contains 27,500 square feet of rentable space
and is currently occupied by multiple tenants each with differing maturities on their respective leases. No lease is
currently shorter than 1 year. The annual rent in the 1st year of ownership is $42.50/sq ft. The vacancy rate is 6.5%.
You expect to incur collection losses (from tenant default) on 1.5% of the square feet during your first year.
1. What is the Potential Gross Income (PGI) for the first year?
2. What is the Effective Gross Income (EGI) for the first year?
3. If operating expenses are expected to be 40% of EGI, what is the Net Operating Income (NOI) generated by the
property in the 1st year of ownership?
4. You decide you want to take out a loan to finance the purchase of this property. It will be an IO loan at a rate of
6.25%, compounded annually, with annual payments. The lender will provide financing up to a minimum Debt
Service Coverage Ratio (DSCR) of 1.2 based off of the 1st year NOI.
What is the largest annual loan payment the lender will allow you to make based on the DSCR?
5. If you get a loan that corresponds to the largest annual loan payment the lender will allow you to make based
on the DSCR (computed in part 4), what will be your Net Income (NI) in the first year?
(A) 100,000
(B) 105,125
(C) 107,525
(D) 110,625
6. What is the largest loan a lender is willing to provide you with based on question 4? (Assume this is an IO loan
at 6.25%)
7. The seller’s asking price for the property is $7,000,000. If the lender has a maximum 70% LTV requirement
what is the most the bank will lend you (the largest loan based on LTV constraint only, ignoring DSCR)?
8. The loan must satisfy both the minimum DSCR of 1.2 and maximum LTV of 70%.
What is the largest loan the borrower can get? (now apply both constraints)
(A) 4,900
(B) 4,900,000
(C) 8,602
(D) 8,602,000
9. If you buy the property at the asking price of $7,000,000 using the biggest loan you can get (from question 8),
what will your down payment be?
10. What is the annual mortgage payment on the loan in question 8?
11. If you buy the property at the asking price of $7,000,000, what will your ‘going in’ Cap Rate be? Write your
answer in percent, but do not include the % sign.
(A) 6.25%
(B) 8.5%
(C) 9.22%
(D) 10.17%
12. If the annual IRR for this property is 8.5%, then based on the cap rate in question 11, what does this imply is
expected NOI growth rate for this property? Write your answer in percent, but do not include the % sign (if your
answer is negative, include the negative sign, as always).
13. You do research and find that similar properties are selling at an 11% cap rate. Using an 11% cap rate, what
price would you offer for this property?
14. Suppose you buy the property at the asking price of $7,000,000 and own it for exactly 1 year.
You make the down-payment in part (9).
You collect the NOI in part (3).
You make the annual mortgage payment in part (10).
In two years, the NOI is expected to be the same. You sell the property at the end of year 1, at a cap rate of 50
basis points below the cap rate in part (11) and you pay off the loan balance when you sell.
Compute the IRR on this investment. Write your answer in percent, but do not include the % sign.
(A) 25.62%
(B) 30.00%
(C) 35.11%
(D) 42.15%
15 (a bit harder question). What should be the cap gains tax rate so that the IRR in question 14 is 30%? Suppose
there is no depreciation, and no deductions are possible (in this case cap gains in dollars = sell price minus buy
price). Write your answer in percent, but do not include the % sign.
Note: (cap gains tax amount in dollars) = (cap gains tax rate) multiplied by (cap gains in dollars).
This question asks to find the cap gains tax rate.