ID# 1206955 Professor Ley First year Net Operating Statement Projected Gross Income (PGI) - Vacancy Cost

(VC) =Estimated Gross Income (EGI) - Operating Expense (OE) - Capital Expenditures (CAPX) =Net Operating Income (NOI) $409,860.00 $20,493.00 $389,367.00 $20,493.00 $16,394.00 $352,479.60

-----------------------------------------------------------------------------------------------------------Estimate of Value Net Operating Income: $352,479.60 Market Capitalization rate: 7% Estimate of Value: $5,035,422.86

-----------------------------------------------------------------------------------------------------------Debt Coverage Ratio Net Operating Income: $352,479.60 Debt Service: $248,225.07 D.C.R.: 1.42

-----------------------------------------------------------------------------------------------------------First year Before- Tax Cash flow Projected Gross Income (PGI) $409,860.00 - Vacancy Cost (VC) $20,493.00 =Estimated Gross Income (EGI) $389,367.00 - Operating Expense (OE) $20,493.00 - Capital Expenditures (CAPX) $16,394.00 =Net Operating Income (NOI) $352,479.60 - Debt Service (DS) $248,225.07 =Before Tax Cash flow $104,000.53 -----------------------------------------------------------------------------------------------------------Loan to Value Ratio Loan Amount: $3,853,310.00 Estimated Value: $5,035,422.86

ID# 1206955 Professor Ley Loan to Value: 76.5%

-----------------------------------------------------------------------------------------------------------Break-even Ratio Operating Expense (OE): $20,493.00 Capital Expenditures (CAPX): $16,394.00 Debt Service (DS): $248,225.07 Projected Gross Income (PGI): $409,860.00 Break-even Ratio (BER): 69.5%

In the matter of obtaining the property and retail leasing I would work directly with the owner/landlord. I seek to capitalize on the current market capitalization rate that puts the leverage in favor of the investor by 2%. My plan of financing would be to take out a typical commercial real estate balloon mortgage that would mature in 10 years and would be amortized over 30. Upon maturity I would sell the property. When considering the price I would be willing to pay for the property I first looked at how much I required the return on the investment to be. With the current spread over 10-year treasury rates it would be acceptable to have a return on investment yield 2% or more. After projecting the first years NOI to be $342,479.60, with consideration to the market capitalization rate I calculated the estimated value of the property to be $5,035,422.86. Then I took into account the average DCR required by lenders of 1.42 to abstract the maximum amount of debt service I would be able to take on, which came out to be $248,225.07. As reflected in the first year before-tax cash flow statement, the NOI less debt service projected first year before-tax cash flow to be

ID# 1206955 Professor Ley positive $104,000.53. This cash flow projection would yield 2.06% return on investment and satisfies my requirement of the ROI to be 2% or above. I went on to allocate the total amount in debt service at end of year over 12 months to figure how much I could afford my monthly mortgage payments to be. With the given financing cost to be 5%, maximum loan amortization of 30 years, and knowing the allotted monthly payment I calculated that the maximum loan amount I would acquire to be $3,853,310.00. The loan to value ratio is 76.5%, this is above the average of 72% but still well below the maximum of 85%. Given that the maximum loan amount is limited to 80% of purchasing price, I would have to make the initial down payment of $963,327.50. With the said down payment and loan amount my acquisition price cannot exceed $4,816,637.50. Therefore I would be willing to pay up to $4,816,637.50 for the property. I realize that I leveraged the loan to the tilt by taking on the maximum amount in debt service that the required DCR would allow. If I opted to take out a lower loan amount my cash flows would be greater, however that would also reduce the amount that I would be able to pay for the property. I choose to take out a longer-term loan as opposed to a shorter because I would be able to barrow more and put the money to use. A shorter-term loan would significantly reduce the total amount in interest paid over the term, however the saving is not worth its discounted rate because it is over a long period of time. This method of financing is secured for the long-term because the break- even ratio is 69.5%. This effectively shows that the loan carries a lower risk because there is a greater safety margin between cash inflows and outflows, thus a greater amount of

ID# 1206955 Professor Ley decline in gross revenue or an increase in expenses can be bared before the investment has a negative cash flow.