Consider a 100,000 square foot property with an expected first year potential gross income (PGI) of $20 per square foot.

Consider a 100,000 square foot property with an expected first year potential gross income (PGI) of $20 per square foot. Vacancy and bad credit losses are expected to be 10% of PGI in the first year, and operating expenses are expected to be 35% of effective gross income (EGI). Recent sales of similar properties indicate a first-year (or going-in) cap rate of 7.5% is reasonable for valuation purposes.

a.    A lender requires a minimum DCR (or DSCR) of 1.25 and will loan up to 75% of appraised value on a first mortgage. If the mortgage interest rate is 5.5%, payments are monthly and the amortization period is 20 years, what is the maximum-sized loan the lender will advance?

b.    Suppose the borrower is able to negotiate a longer amortization period on the loan. Specifically suppose the loan amortization is extended from 20 years to 30 years. Does this change the maximum-sized loan the borrower can obtain, based on the lender's DCR, and LTV criteria above? [Show your calculations]