Organize
You are the Chief Underwriter of Debt Products for Potomac Mutual Life Insurance Company. The institution's Senior Lending Officer walks into your office and shares the following:
"I'm short on my quota of deals for this year and my wife just told me that her BMW needs a new transmission. I'm trying to finance a 300,000 square foot office building in Tysons Corner. The Property will appraise at a 6.5% cap all day long. I've offered The Borrower two financing alternatives,
Alternative A is:
(a) A $36 million loan
(b) For 15 years
(c) With amortization predicated on a 30 year schedule
(d) At a fixed rate of interest equal to the yield on a 10 year Treasury Bond plus
235 basis points with payments calculated on a monthly basis
(e) With a three point fee to Potomac Mutual Life Insurance Company
Alternative B is:
(a) A $38.5 million loan
(b) For 15 years
(c) With amortization predicated on a 30 year schedule
(d) At a fixed rate of interest equal to the yield on a 10 year Treasury Bond plus
275 basis points with payments calculated on a monthly basis
(e) With a three point fee to Potomac Mutual Life Insurance Company”
If the NOI for 2022 is projected to be $3,600,000 and is projected to increase 5% a year for the foreseeable future, and, the yield on a 10 year Treasury Bond at Closing is 2.5%:
(1) What is the stated interest rate under Alternatives A and B?
Alternative A =
Alternative B =
(2) What is the monthly debt service payment under Alternatives A and B?
Alternative A =
Alternative B =
(3) Calculate The Projected Debt Service Coverage Ratio for Calendar Years 2022 and 2023
for Alternatives A and B.
2022 2023
DSCR Alternative A =
DSCR Alternative B =
(4) If you accept The Loan Officer's valuation premise (that The Property can be valued @ a 6.5 cap) and you compel the Borrower to reserve $150,000 for Capital Expenditures from the Net Operating Income on an annual basis, what is the Loan To Value for 2022 and 2023 for Alternatives A and B? You may ignore amortization for the purposes of calculating the LTVs.
2022 2023
LTV Alternative A =
LTV Alternative B =
(5) If the Alternative B Loan is outstanding until maturity, what is the effective annual
yield to Potomac Mutual?
(6) If The Alternative B Loan is outstanding for five years, what is the effective annual
yield to Potomac Mutual?
(7) What is the yield earned by Potomac Mutual (assuming the Loan is held to maturity) on the additional $2.5 million of funding if The Borrower accepts The Alternative B Loan rather than the Alternative A Loan?
