FIN 444 - REAL ESTATE FINANCE

PROJECT 2: COMPUTER ASSISTED REAL ESTATE INVESTMENT/FINANCE

ANALYSIS
Due Date:

ASSIGNMENT: By now you should have received (or downloaded the program from
my homepage) explored the computer program titled: “GATRE.”
The program has a hypothetical apartment complex demonstrated
and on memory. You will use this project, with some changes, to
conduct the required investment and financial analysis. Remember,
unless you specifically save any changes you make to the input
variables, the program will revert back to the base model.

FACTS:

The current loan amount is $3.3 million; the property is valued at

$4.2 million; the loan-to-value (LTV) ratio is 78.57%; and the loan
maturity is 30 years, but the loan has a 15- year balloon.

The lender’s required minimum yield is 9%, which is the current rate
of interest on the proposed loan. One discount point has been
charged. More risky loans should compensate the lender with
higher yields. The lender will not accept a LTV that exceeds 78.57%.
The debt service coverage ratio (DSCR) must exceed 1.15 in year
one and is expected to show improvement over the life of the loan.
Additionally, the loan maturity cannot exceed 30 years.

The investor’s discount rate or required rate of return is 15%, after

taxes. This project requires an equity investment no greater than
$933,000.

REQUIRED WORK:

1.Develop two new loans that will satisfy both lender an investor
requirements. Briefly explain your proposed new loans and prove
that they satisfy lender and investor requirements. Pay particular
attention to, and discuss, the lender's yield, riskier loans must
provide higher yields. Print a hard copy of the Summary Inputs and
Outputs for your loan ideas and the mortgage 1 page.
2. Conduct sensitivity analysis on the base model, not your
proposals, to test the project for risk associated with the
possibility of an input variable not meeting best-guess
estimates.

Change one variable at a time. This process will allow you to

observe how “sensitive” important output variables are to
changes in key input variables.

Test for the following changes (one at a time A, B, C then D):

A. Vacancy rates are 8% in years 1-5 and 6%
thereafter.
B. Operating expenses growing at 6% annually.
C. Change monthly rents to $280 and $360
respectively. BEWARE - you must actually
calculate the gross new rental figures and
input them in column 1 (Year 1) under
income projections.
D. Change the estimated sales price of the
complex by increasing the cap rate used to
estimate the sales price. Increase the cap
rate to 10%.

What impact did the changes have on key output variables?

Give particular attention to the DSCR, LTV, the projected year ten-
sale price of the property, and the investor’s tenth year ATIRR.
Discuss which of the input variables appears to represent the
greatest risk to the investor and the lender. Develop a table(s)
showing changes to input variables and output results compared to
base model.

The investor’s ATIRR must minimally be 15% by year 10 and should

be showing steady improvement during the investment holding-
period. Print hard copies of input and output summary pages for
the four scenarios.