Commercial Real Estate Construction expenses
Homework Assignment 3: Commercial Real Estate Construction expenses.
Instructions:
1. Please provide your answers in electronic form and submit your file(s) using designated assignment upload option in Blackboard.
2. Your answers should be relevant and sufficient to earn credit.
3. If you believe there is an error in a problem, please explain that in your answer.
4. You are free to make assumptions if you think they are missing or necessary – make sure they are clearly stated.
5. Point values are shown in parenthesis immediately after a question number.
Chapters 16
1. (15 points) Suppose that an office development project will be financed with $3,000,000 in borrowing before interest carry. The construction will take place over 12 months and the construction loan is expected to be fully repaid at that time. The loan will be drawn in equal amounts over months 1 through 5. The construction loan interest rate is 12 percent with a 3 percent loan fee.
a. What is the amount of construction loan interest carry?
b. What is the amount of construction loan repayment?
c. How much construction loan fee will be paid?
d. What is the construction lender’s yield on the loan?
2. (10 points) What are common contingencies in permanent or take-out loan commitments? What are their purpose and what happens if the developer does not meet them?
Chapter 17
3. (10 points) What is the release price in land development projects? Why do lenders insist on loan repayment rates in excess of sales revenue?
4. (10 points) Consider the table below, which shows monthly construction draws and sales revenues. If the land developer expects to sell deluxe sites for $29,000 each, what is the release price? Assume that the land development loan rate is 14 percent.
Month Construction Draw Sales Revenue
1 $200,000
2 150,000
3 75,000
4 25,000 $600,000
Chapter 21
5. (10 points) Why do REITs have a low potential for growth? Explain. What are the disadvantages of selecting REIT form as opposed to a taxable business organization that invests in real estate? Explain
6. (15 points) Please use the below data to answer the following questions. Please note that the information is not complete and only what you need is provided. Assume no growth in NOI.
Page 2 of 2
Moorhead Communities, Inc. (MCI REIT)
Selected Balance Sheet Data
Assets 2XX5
Net Property Investment $4,355,139
Total Assets $5,198,598
Liabilities
Total Liabilities $2,670,862
Equity
Total Preferred Equity $100,000
Common Shares Outstanding (actual) 73,663
Moorhead Communities, Inc. (MCI REIT)
Selected Income Statement Data
Revenues 2XX5
Rental Revenue $666,376
Expenses
Rental Operating Expense $267,722
a. What is the NOI of MCI in 2XX5?
b. If the cap rate is 6.50%, what is the value of MCI’s assets?
c. What is the Net Asset Value (NAV) of MCI REIT in 2XX5?
d. What is MCI REIT’s NAV per share in 2XX5?
7. (10 points) What is the most basic way of computing a REIT’s FFO? What are the most common adjustments to FFO to obtain Adjusted FFO for a qualified REIT? Explain.
Chapter 22
8. (10 points) Historical results show that by including either REITs or the NCREIF Index in a portfolio containing S&P 500 securities, corporate bonds, and T bills, diversification benefits will be gained.
a. Why is this true? Explain.
b. Do those benefits come about for the same reason for each category of real estate investment? Explain.
c. Does the use of historical data create problems for interactions between various assets class returns in the future? Explain your answers. Explain.
9. (15 points) Please use the below data to answer the following questions.
Standard
Deviation Return
S&P 500 Index 0.0800 0.0340
NCREIF 0.0160 0.0200
Correlation -0.3000
a. What is the covariance between S&P 500 and NCREIF returns?
b. What is the expected return of a portfolio equally (50% in S&P 500 and 50% in NCREIF) invested in S&P 500 and NCREIF?
c. What is the standard deviation (risk) of the portfolio in previous question?
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