Example 1: Financing for a Commercial Property

A commercial property has been valued at $8 million and is expected to generate a Net Operating
Income (NOI) of $640,000 in the upcoming year. A financial institution is considering offering a loan
under the following conditions:

• The loan is to be issued at a 7% annual interest rate.

• The loan-to-value (LTV) ratio must not exceed 75%.

• The Debt Service Coverage Ratio (DSCR) must be at least 1.20.

• The loan is an interest-only loan, with the principal due at the end of a 10-year term.

Question: What is the maximum loan amount that can be secured under these conditions?

To solve this problem, follow the same steps as in the previous example:

1. Calculate the maximum loan amount based on the LTV ratio.

2. Calculate the maximum loan amount based on the required DSCR.

3. The final maximum loan amount will be the lower of the two amounts calculated in steps 1 and
2.

Example 2: Investment Property Loan Calculation

An investor is looking to purchase a multifamily apartment complex that has been appraised at $12
million. The expected Net Operating Income (NOI) for the first year is $960,000. A bank is offering to
finance the purchase with the following terms:

• The interest rate on the loan will be 6.5% per annum.

• The maximum Loan-to-Value (LTV) ratio the bank allows is 70%.

• The minimum Debt Service Coverage Ratio (DSCR) required by the bank is 1.3.

• This will be an interest-only loan, with the full loan amount due in 5 years.

Question: Determine the maximum amount of loan the investor can secure under these conditions.

To solve this problem, you need to:

1. Calculate the maximum loan amount based on the LTV ratio.

2. Calculate the maximum loan amount based on the DSCR requirement.

3. The final maximum loan amount will be the lesser of the two amounts calculated from steps 1
and 2.
Example 3: Loans on Real Estate

A property has been appraised for $5 million and is expected to have NOI of $400,000 in the first year.
The lender is willing to make an interest-only loan at an 8% interest rate as long as the loan-to-value ratio
does not exceed 80% and the DSCR is at least 1.25. The balance of the loan will be due after seven years.
How much of a loan can be obtained?

Using the information in Example 3 above,

a) what is the equity dividend rate, or cash-on-cash return, assuming the property is purchased at
its appraised value?
b) Suppose the same property is sold for $6 million after five years. What IRR will the equity
investor receive on his or her investment?
c) What would the IRR be if the property were purchased on an all-cash basis (no loan)?
KEY Example 3: Loans on Real Estate
We already determined that the maximum loan that can be obtained is $4,000,000 based on
both the Loan-to-Value (LTV) ratio and the Debt Service Coverage Ratio (DSCR) requirements as
above.

Calculating the Internal Rate of Return (IRR) for scenarios (b) and (c) using a financial calculator
involves a series of steps that follow the logic of inputting cash flows and asking the calculator
to compute the IRR based on those cash flows. Here's how you would typically perform these
calculations: