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This is 4 questions. I attached files of each question as well as typed them out
This is 4 questions. I attached files of each question as well as typed them out.
Problem 16-1
The investor-developer would not be comfortable with a 7.8 percent return on cost because the margin for error is too risky. If construction costs are higher or rents are lower than anticipated, the project may not be feasible. The asking price of the project is $16,300,000 and the construction cost per unit is $83,000. The current rent to justify the land acquisition is $2.6 per square foot. The weighted average is 900 square feet per unit. Average vacancy and Operating expenses are 5% and 35% of Gross Revenue respectively. Use the following data to rework the calculations in Concept Box 16.2 to assess the feasibility of the project:
Required:
a. Based on the fact that the project appears to have 9,360 square feet of surface area in excess of zoning requirements, the developer could make an argument to the planning department for an additional 10 units, 250 units in total, or 25 units per acre. What is the percentage return on total cost under the revised proposal? Is the revised proposal financially feasible?
Note: Do not round intermediate calculations. Round your percentage answer “Total cost under the revised proposal” to 2 decimal places.
b. Suppose the developer could build a 240-unit luxury apartment complex with a cost of $150,500 per unit. Given that NOI is 60% of rents. What would such a project have to rent for (per square foot) to make an 8 percent return on total cost?
Note: Do not round intermediate calculations. Round your final answer to nearest whole dollar amount.
Problem 16-3
As a financial advisor for the Spain Development Company, you have been given the construction and marketing studies for the proposed Timbercreek office project. Several potential sites have been selected, but a final decision has not been made. Your manager needs to know how much she can afford to pay for the land and still manage to return 16 percent on the entire project over its lifetime.
The strategic plan calls for a construction phase of one year and an operation phase of five years, after which time the property will be sold. The marketing staff says that a 1.3-acre site will be adequate because the initial studies indicate that this site will support an office building with a gross leasable area (GLA) of 26,520 square feet. The gross building area (GBA) will be 31,200 square feet, giving a leasable ratio of 85 percent. The marketing staff further assures you that the space can be rented for $19.1 per square foot. The head of the construction division maintains that all direct costs (excluding interest carry and all loan fees) will be $3.5 million.
The First Street Bank will provide the construction loan for the project. The bank will finance all of the construction costs, site improvements, and interest carry at an annual rate of 6 percent plus a loan origination fee of 1.5 points. The construction division estimates that the direct cost draws will be taken down in six equal amounts commencing with the first month after close. The permanent financing for the project will come at the end of the first year from the Reliable Company at an interest rate of 5 percent with a 4 percent prepaid loan fee. The loan has an eight-year term and is to be paid back monthly over a 25-year amortization schedule. No financing fees will be included in either loan amount. Spain will fund acquisition of the land with its own equity.
Spain expects tenant reimbursements for the project to be $3.30 per square foot and the office building to be 75 percent leased during the first year of operation. After that, vacancies should average about 5 percent of GPI per year. Rents, tenant reimbursement, and operating expenses are expected to increase by 3 percent per year during the lease period. The operating expenses are expected to be $9.55 per square foot. The final sales price is based on the NOI in the sixth year of the project (the fifth year of operation) capitalized at 9.5 percent. The project will incur sales expenses of 4 percent. Spain is concerned that it may not be able to afford to pay for the land and still earn 16 percent (before taxes) on its equity (remember that the land acquisition cost must be paid from Spain’s equity). To consider project feasibility,
Required:
a1. Estimate the construction draw schedule, interest carry, and total loan amount for improvements.
a2. Determine total project cost (including fees) less financing and the equity needed to fund improvements.
b1. Estimate cash flows from operations.
b2. Estimate cash flow from eventual sale.
c. After discounting equity cash inflows and outflows, is the NPV positive or negative?
d. If the asking price of the land were $210,000, would this project be feasible?
Problem 19-1
Two 15-year maturity mortgage-backed bonds are issued. The first bond has a par value of $10,000 and promises to pay a 9.0 percent annual coupon, while the second is a zero coupon bond that promises to pay $10,000 (par) after 15 years, with interest accruing at 8.5 percent. At issue, bond market investors require a 10.5 percent interest rate on both bonds.
Required:
a. What is the initial price on each bond?
b. Now assume that both bonds promise interest at 9 percent, compounded semiannually. What will be the initial price for each bond?
c. If market interest rates fall to 8 percent at the end of the fifth year, what will be the value of each bond, assuming annual payments as in (a) (state both as a percentage of par value and actual dollar value)?
Problem 19-2
The Green Mortgage Company has originated a pool containing 75 ten-year fixed interest rate mortgages with an average balance of $101,800 each. All mortgages in the pool carry a coupon of 12 percent. (For simplicity, assume that all mortgage payments are made annually at 12% interest.) Green would now like to sell the pool to FNMA.
Required:
a. Assuming a constant annual prepayment rate of 10 percent (for simplicity, assume that prepayments are based on the pool balance at the end of each year), what will be the price that Green should obtain on the date of issuance if market interest rates were (1) 11 percent? (2) 12 percent? (3) 9 percent?
b. Assume that five years have passed since the date in (a). What will the pool factor be? If market interest rates are 12 percent, what price can Green obtain then?
c. Instead of selling the pool of mortgages in (a), Green decides to securitize the mortgages by issuing 100 pass-through securities. The coupon rate will be 11.5 percent and the servicing and guarantee fee will be 0.5 percent. However, the current market rate of return is now 9.5 percent. How much will Green obtain for this offering of MPTs? What will each purchaser pay for an MPT security, assuming the same prepayment rate as in (a)?
d. Assume now that immediately after purchase in (c), interest rates fall to 8 percent and that the prepayment rates are expected to accelerate to 20 percent per year, beginning at the end of the first year. What will the MPT security be worth now?
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