question about the real estate finance 5 questions

  1. Suppose you own a vacant but developable land parcel on the outskirts of the metropolitan area. This land produces no income but owes 2% of its value per year in property taxes. Meanwhile, typical income properties are yielding 9% (that is, they have a current cash yield, or “cap rate,” of 9%). If inflation is expected to be around 3% per year, and you expect your land will appreciate at 10% per year, what should you do with this land parcel? (Be specific and please explain why you should do what you say.
  1. Consider the following fully-amortizing 5-year ARM (contract interest rate can change once every 60 months) with 15- year maturity, monthly payments. The ARM has initial interest rate 6.5% with 2 points; caps are 2% per jump, 5% lifetime, the margin is 300 basis points, the index is Treasury Bonds that are currently yielding 6.0%. The loan amount is 100,000. Under the “straight line” assumption about future interest rates (i.e., assuming the market rate on the index remains constant), what is the yield to maturity? (Show your work)
  1. Consider a $4,000,000, 7%, 25-year mortgage with monthly payments and a 7-year maturity with a balloon. If the market yield is 7.5% (BEY), how many disbursement discount points must the lender charge to avoid doing a negative NPV deal from a market value perspective?
  1. Why is it that construction loans are almost always used to finance all or most of the construction costs in development investment, even when the investor has plenty of cash that could be used to pay for construction?
  1. Suppose a property can be bought for $2,500,000 and it will provide $200,000/year net cash flow forever, and you can borrow a perpetual interest-only mortgage secured by that property at a 7% interest rate, up to an amount of $950,000. (a) Does this present “positive” or “negative leverage,” and (b) why? (c) Do you think that the use of leverage, in this case, will increase the NPV of the investment for the equity investor in the property? (d) Why or why not?

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