Question

A retail shopping center is purchased for $2.1 million. During the next four years, the property appreciates at 4 percent per year. At the time of purchase, the property is financed with a 75 percent loan-to-value ratio for 30 years at 8 percent (annual) with monthly amortization. At the end of year 4, the property is sold with 8 percent selling expenses. What is the before-tax equity reversion

Answer 1

$744,717

Step-by-step explanation:

Computation of before-tax equity reversion

Loan amount $1,575,000

[ 0.75 x (2,100,000)]

Monthly payments11,556.79

Management balance1,515,450

Selling price 2,456,703

[2,100,000 x (1.04)^4]

less: Selling expenses 196,536

( 8% *2,456,703)

Net selling price2,260,167

(2,456,703-196,536)

Less: Unpaid balance 1,515,450

Before-tax equity reversion$744,717

(2,260,167-1,515,450)

Therefore the before-tax equity reversion will be

$744,717

Calculation for the Monthly payments

Monthly Interest=8%/12

Monthly Interest=0.0066666667 *100

Monthly Interest=0.66666667

Number of months=30*12

Number of months=360

Using financial calculator

I/Y=0.66666667 N=360 PV=$1,575,000 FV=0 PMT=?

PMT=11,556.79

Calculation for Management balance using financial calculator

I/Y=0.66666667 N=360 - 48 PV=$1,575,000 FV=0 PMT=?

Management balance1,515,450

Note 4 years *12 months will give us 48 months