Assignment: Economics 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:
o A $36 million loan
o For 15 years
o With amortization predicated on a 30 year schedule
o 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
o With a three point fee to Potomac Mutual Life Insurance Company
Alternative B is:
o A $38.5 million loan
o For 15 years
o With amortization predicated on a 30 year schedule
o 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
o 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%:
o What is the stated interest rate under Alternatives A and B?
Alternative A =
Alternative B =
o What is the monthly debt service payment under Alternatives A and B?
Alternative A =
Alternative B =
o 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 =
o 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 =
o If the Alternative B Loan is outstanding until maturity, what is the effective annual yield to Potomac Mutual?
o If The Alternative B Loan is outstanding for five years, what is the effective annual yield to Potomac Mutual?
o 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?
Format your assignment according to the following formatting requirements:
o The answer should be typed, using Times New Roman font (size 12), double spaced, with one-inch margins on all sides.
o The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
o Also include a reference page. The Citations and references must follow APA format. The reference page is not included in the required page length.