Management homework help
Management homework help. A Commercial Property Decision
Introduction:
Unlike residential real estate, commercial real estate’s value
is based on the income it produces during the investors
holding period. Based on the information below, use the
NPV formula to determine if this is a good investment for
Henri and Lila.
Scenario: Henri (66) and Lila (58) are looking to purchase
the 3Forks restaurant.
They have a current combined income of $2.5 million per
year from their current two small retail businesses (there is
no outstanding debt on either business) which they bought
in 1967 in Austin, Texas which they plan to keep. The price
for the current 3Forks property in Tennessee is $2.2 million
for the 8,000 square foot property built in 1968.
The property produces $154,000 each year in Net
Operating Income (NOI) that is expected to increase by 3%
each year over the next 5 years. The bank will make a loan
for the restaurant at 60% LTV for 25 years, fully amortized,
at 5%. The bank also requires a 1.5% debt service
coverage for this type of loan. At the end of the 5-year NPV
analysis, the value of the property will be based on the NOI
at that time and the same CAP rate as the purchase price.
For your NPV formula, the discount rate is the 5% interest
rate.
Checklist:
1. Based on the information above, provide the capitalization
rate (or yield) required by the seller for the purchase of the
restaurant.
2. Using NPV, explain if this a good deal for the buyer.
Assignment Details
3/25/2020 Sample Content Topic
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3. Explain and support your choice from your response to
bulleted checklist item #2, showing the calculations used.
Access the Unit 9 Assignment grading rubric.
Submit your response in a Word® document to the Unit 9
Assignment Dropbox.