Econimc underwriting question for a loan

     

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? 

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