Property Project Review

Exam 3

What does it mean to default on a loan?

 Fail to meet an obligation or requirement.

What is the difference between a recourse and a non-recourse loan?

Recourse - lender can seek other assets to satisfy loan.

Non-Recourse - lender cannot seek other assets to satisfy loan.

What does the reciprocal of the capitalization rate tell you?

The NOI Multiplier, or the years to payback.

A comparable property recently sold for 5,000,000. At the time of the sale it was generating 450,000 in effective gross income. The subject property is generating 100,000 in effective gross income. What is the subject property worth?

500,000 / 450,000 =  11.11

11.11 x 100,000 = 1,111,111

A comparable property recently sold for 5,000,000. At the time of the sale it was generating 350,000 in effective gross income. The subject property is generating 100,000 in effective gross income. What is the subject property worth?

500,000 / 350,000 =  14.28

14.28 x 100,000 = 1,428,000

Property A is generating 1,200,000 in effective gross income. The operating expense ratio is 20 percent. Using a capitalization rate of 8 percent, what would be the value indication?

1,200,000 x .20 = 240,000

1,200,000 - 240,000 = 960,000

960,000 / .08 = 12,000,000

If your discount rate is 10%, what would you prefer: 10,000 in 5 years or 20,000 in 10 years?

PV of 10,000 at 10% at 5 years = 6,209  PV of 20,000 at 10% at 10 years = 7,710


If your discount rate is 15%, what would you prefer: 10,000 in 5 years or 20,000 in 10 years?

 10,000 in 5 years

What kind of financing occurs when the bank holds the deed until the loan is paid off? 

Murabahah

Who prefers a non-recourse loan, a borrower or a lender? 

 Borrower

What are the two factors used to calculate a payment in an adjustable rate loan that are not used in a fixed rate loan?

 Index and margin

Name four ways to increase the yield on a commercial real estate property investment.

 Increase rent, lower vacancy, lower operating expenses, increase net leasable area, positive leverage.

What is the definition of Internal Rate of Return?

The rate at which all positive and negative cash flows are equal.

The rate at which the net present value is zero.

What is the maximum LTV ratio in Saudi Arabia?

 70%

What organization regulates the real estate financing industry in Saudi Arabia?

SAMA

If the capitalization rate is 4.0%, what is the NOI multiplier?

1 / 0.04 = 25 

If the capitalization rate is 6.0%, what is the NOI multiplier?

1 / 0.06 = 16.67

 If NOI decreases, what happens to the equity dividend rate of return?

decrease

 If the estimated loan payment is 300,000 and the NOI is 350,000, will a Saudi bank provide a non-recourse loan?

 300,000 / 350,000 = 85.7%, greater than 70%, therefore no loan.

Section 2:  13 questions 4 point each – 52 points possible

17. My target rate of return is 12 percent. Should I purchase the following property? PV = 1,912,886, therefore  NO

Purchase price: 2,000,000

Cash Flows:

1             180,000

2             160,000

3             190,000

4             290,000

5             2,300,000

18. My target rate of return is 9 percent. Should I purchase the previous property?

 PV = 2,146,807,  therefore  Yes

19. If your target rate of return is 8 percent, what is the maximum you should you pay for a property with the following cash flows? PV = 825,127

1             100,000

2             (50,000)

3             50,000

4             75,000

5             1,000,000

20. If your target rate of return is 12 percent, what is the maximum you should you pay for a property with the previous cash flows? PV = 700,105

Use the following information to answer the next six questions:

The asking price is 15,000,000

The gross building area is 3,000 square meters

10 percent of the building is common area.

The potential gross income is 900 per square meter of net leasable area.

The vacancy rate is 10 percent.

The operating expenses are around 1,200,000 a year.

21. What is the property generating in NOI?

987,000

22. What would be the overall capitalization rate if it sold at the asking price?

 6.6%

A bank will loan 70 percent of the price at 5 percent rate amortized over 20 years.

23. What is the equity dividend rate?

 3.2%

24. What is the mortgage constant rate?

 8.0%

25. Will the buyer have positive or negative leverage?

 negative

26. If the new owner can reduce vacancy to 5% and reduce operating expenses to 600,000, what will the equity dividend rate be?

 19.2%

For the next three questions: A property is generating 500,000 in NOI.

27. The maximum debt service ratio a lender is willing to accept is 1.30, how much would the maximum payment be?

500,000 / 1.3 = 384,615

28. If the lender were to amortize the maximum loan over 20 years at 4%, what would the loan amount be?

 PV of 20 payments of 384,615 at 4% = 5,236,176

29. If the maximum LTV ratio is 70%, what can someone pay for the property and get a bank loan?

5,236,176 / 0.7 = 7,480,251

Exam 3 Questions

1. If your discount rate is 12%, what would you prefer: 5,000 in 5 years or 10,000 in 9 years?
2. What are the two ways you can finance real estate in Saudi Arabia?
3. What kind of financing occurs when the bank holds the deed until the loan is paid off? 
4. What kind of financing occurs when the bank puts a lien on the deed until the loan is paid off?
5. What are the six elements that appear in a mortgage financing note?
6. Who is in charge of regulating the real estate mortgage market in Saudi Arabia?
7. What is needed to increase trust in the real estate financing market?
8. What is a default?
9. What is the difference between a recourse and a non-recourse loan?
10. Would you prefer a fixed rate or adjustable rate mortgage and why?
11. What is a margin on an adjustable rate loan?
12. What is the difference between possession and title?
13. How can you improve yield on a commercial property investment?
14. Why do we use ratios in real estate analysis?
15. What are the three categories on ratios?
16. What is the internal rate of return?
17. If the NOI multiplier is 15, what is the capitalization rate?
18. What is the building efficiency ratio?
19. How do you calcuate the mortgage constant rate?
20. When do you use leverage ratios?
21. What is the maximum LTV ratio in Saudi Arabia?
22. What is the minimum DCR banks like to see?
23. Can you estimate EGIM without talking to the building owner?
24. What does a LBR of 7.5 mean?
25. If the capitalization rate is 6.0%, what is the NOI multiplier?
26. If the EGIM is 12 and your property has an effective gross income of 100,000 a year, what is your estimate of value?

Assume the following cash flows:

Period	Cash Flow
0	(1,000)
1	100
2	110
3	105
4	112
5	1,050

27. What is the IRR?
28. If you paid 800 instead of 1,000, what would be your IRR?
 
Assume the following cash flows:

1	5,000.00
2	6,000.00
3	5,000.00
4	9,000.00
5	100,000.00

29. What is the maximum you should pay for this property if your target rate was 9.0%?
30. What is the maximum you should pay for this property if your target rate was 7.0%?

Exam 3 Review

Daniel Goodwin Legal Presentation

CH 15 - 18

CH 9 - 14