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Homework 3 – Falling Creek Apartments
PART A (10-year hold)
Assume you are a Sponsor in the Richmond, Virginia area and you are purchasing Falling
Creek Apartments on January 1st, 2019. Your cousin, Vinney, who is one of the first 10
employees of Google is considering partnering with you to make this deal happen.
Vinney only has ½ his bonus left to invest of approximately $7 Million.
Mr. Max Commission, your local FNMA DUS underwriter, has agreed to provide 75% of
the purchase price financing on a 10-year loan term with a 30-year amortization. As an
incentive, the first 24 months of the loan will be IO (Interest Only) schedule provided
your cousin, who has a high net worth and liquidity, agrees to sign on the loan application
with you. Mr. Max Commission is certain to get your loan approved but needs to charge
an interest rate of 3.75% (30-day Months) and a 1% commission on the loan amount.
Uncertain and overwhelmed with his new-found wealth Vinney has hired a financial
planner named Mr. Cheater to help him manage his money. Mr. Cheater has asked you
to provide a one-page executive summary for him and Vinney to review.
The executive summary needs to contain cash flow analysis which answers the following
1. Cash on Cash return per year (Include Leveraged and unleveraged)
2. Internal Rate of Return (IRR) (Include Leveraged and unleveraged)
3. Equity Multiple (Include Leveraged and unleveraged)
4. Partition of IRR (cash flow from operations vs. cash flow from sale)
5. DSCR (annual through loan term)
6. Sensitivity table
a. Two-way data table that calculates leveraged internal rate of return
varying both residual capitalization rate (25 basis point intervals from
5.50% to 7.75%) and Average Market rent ($25 intervals from $650-
Note: Assume for Part A that when the loan matures the property is sold. Also, your
proforma should indicate before and after debt service cash flows with annual principal
and interest payments shown separately.
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PART B (shorter hold period)
As you know, the projected proforma analysis from Part A is hypothetical. Please make
a new model assuming all the same assumptions from Part A, except you sell the property
in December 31st 2023 for a residual capitalization rate of 6.00%. Also, there is a yield
maintenance provision in your FNMA loan which equates to 250 basis points per year on
the outstanding principal balance (assume the yield maintenance runs through the entire
term of the loan). Please explain for each of the above calculations (Questions 1-5
above) how and why the numbers differ from Part A.
PART C (distressed market)
It is now December 2026 and your sale from Part B did not happen. Please project the
NOI for year ending 2026. Unfortunately, market vacancy is now 15% and market rents
have collapsed to $700 per unit per month. (Collection loss stays at 1.25%.) Assume the
expenses would be the same as calculated in year 8 of your DCF analysis in Part A.
Also, assume that the property would not generate any other income.
1. Does your projected NOI cover the debt service payments? (Show your
PART D (capital structure)
Assuming that instead of a syndication structure utilized in Parts A, B and C that a
pension fund purchases the property and only leverages the acquisition at 50% of
purchase price utilizing an insurance company loan with a 10-year term, 30-year
amortization, and a 3.25% (30-day months) interest rate.
1. Please calculate the Leveraged IRR of the pension fund. (Assume the same 10
year holding period and residual capitalization rate as projected in Part A).
2. How does the leveraged pension fund IRR compare to the Leveraged IRR
calculated in Part A (Syndicated Equity Structure)?
3. Does the 2026 NOI projection calculated in Part C (distressed market
scenario) cover the debt service on the insurance company loan?
4. Please write a paragraph that explains risk versus returns comparing the
syndicated equity capital structure to the pension fund insurance company