1School of Hotel Administration Cornell University HAdm 3210 – Principles of Hospitality Real Estate Fall 2013 Preliminary Examination II Announcement The Preliminary Examination is scheduled for Tuesday, November 19 at 7:30pm in Statler 265 (Last Names A-K), Statler 196 (Last Names L-S) and Statler 165 (Last Names T-Z). There will not be a make-up exam except by university excuse. You should bring to the exam: 1. Several pencils 2. A financial calculator (see syllabus) You may bring to the exam: 1. One (1) sheet (8 ½” X 11” or A4) of paper with any facts, notes, formulas, etc. you wish to have during the exam, i.e., two ‘crib sheets,’ one of which might be the one you created for the preliminary exam. The sheets must be handwritten originals, you may write on both sides; you will be asked to turn in the sheets with your exam. The present value formulas will be provided, see top of next page. You may not use during the exam: 1. Any personal musical device, cell phone, computer, laptop, or PDA The exam will consist of a series of multiple choice, short answer, and calculation type problems. The exam covers material presented in Lectures 11-21. You should know how to perform present value calculations on your financial calculator, including: - The present value of a future cash flow - The present value of an annuity - The monthly or annual loan payment for a given loan and the mortgage constant - Net Present Value and IRR for the analysis of a multi-year investment - See next page for formulas that will be provided Suggestions for Study: 1. Review the text and readings 2. Review your lecture notes and the lecture outlines 3. Review the homework and their respective solutions (on the Blackboard site, Assignments section) 4. Study the practice prelim questions attached2 The practice problems are meant to be indicative of the types of questions you will see on the preliminary examination. 1. True/False – Mezzanine debt holders get paid before equity. a. True 2. Describe how one could obtain a “promoted interest” (promote) in a project. a. The promoted interest is part of the process of negotiating for sweat equity in a deal. The promoted interest is a legal device in which an equity interest is created if certain things (usually good things) happen. For example, a promoted interest is often created once an investment produces a targeted return on investment or equity yield to the “money partner”. 3. Lenders underwrite generally consider three broad categories when deciding whether to originate a loan of a project. List the three categories and provide an example of the type of information that lenders would require. a. Quality of the borrower – personal financial statements and financial statements for the borrower’s businesses b. Quality of the project – market study and/or appraisal c. Quality of the market – market study and/or appraisal 4. You are seeking a loan for your restaurant, which had a cash flow of $500,000 last year. The lender says that they will underwrite the loan with a 2.0 debt coverage ratio on last year’s cash flow using an interest rate of 7.5% , 20 year amortization, monthly payments and requires an origination fee of 2 points. What are the estimated net loan proceeds? Show your work. a. Annual Debt Service = $500,000/2.0 = $250,000/year = $20,833.33/month b. Gross Loan Proceeds =$2,586,086.07; from calculator, 240 payments of $20,833.33 using the annual interest rate of 7.5% c. Origination Fee = $51,721.72 = 2.0% of $2,586,086.07 d. Net Loan Proceeds = $2,534,364.35 = $2,586,086.07 - $51,721.7235. What is the loan amount for a mortgage with the following parameters? 1.5 DCR on $240,000 of Stabilized NOI 8.0% annual interest Interest Only Loan, No Amortization 10 Year Term a. $1,073,613 LA=NOI/DCR = 240K/1.5 b. $1,600,000 MC .08 c. $2,000,000 d. $2,400,000 e. Cannot determine from information provided 6. A loan with a DCR of 1.3 will be ______ a loan with a DCR of 1.5, holding all other factors constant. a. Smaller than b. The same size as c. Larger than d. More important than 7. Calculate the net proceeds from the refinancing outlined below. Existing Loan: o Original Amount $400,000 o Interest Rate 11% o Loan Term 15 years o Amortization Term 20 years o Payments Monthly o Age of Loan 10 years o Current Remaining Balance $299,728 o Prepayment Penalty 5% of remaining balance Remaining Balance = $299,728 * 1.05 = $314,714 including prepayment penalty New Loan: o 1.25 DCR on 90,000 of annual NOI o Interest Rate 8.5% o Amortization Term 20 years MC=.1041388 o Payments Monthly o Points/Origination Fees 2% New Loan $691,385 = [ ( $90K/1.25) ÷ .1041388} Less: Points $ 13,827 Net Loan Proceeds $677,557 Less: Existing Loan Payoff $314,714 Net Proceeds from Refinancing $362,842 8. For any given real estate investment, assuming that the loan will have a LTV of 66% means that the loan will be ______ than a loan with a LTV of 75%, holding all other factors constant. a. Smaller than b. The same size as c. Larger than d. More important than49. Consider a mortgage with the following characteristics (Do not show calculations – no partial credit): Loan Amount $1,000,000 Annual Interest Rate 9.0% Loan Term 15 years Amortization Term 20 years Payments per Year 12 Points Paid at Origination 3 Prepayment Penalty None If the loan is held for 10 years instead of the full 15-year term, the effective cost of borrowing (ECB) will __________. a. Decrease b. Stay the same c. Increase d. Cannot determine from information given 10. Define Internal Rate of Return. IRR = That rate of return that makes the present value of the inflows equal to the present value of the outflows 11. Be prepared to calculate the ECB of a loan with points and a prepayment penalty. A good practice problem is found in lecture 14; replicate the 5.98% ECB on page three of the lecture. II "Plain Vanilla" Loan with Points and Prepayment PenaltyLoan Amount $20,000,000Annual Interest Rate 5.50%Loan Term 10Amortization Term 25Payments Per Year 12Points paid at Origination 2.00%Prepayment Penalty (or Additional Interest) 3.00% of Remaining Mortgage BalancePeriodic Payment ($122,817) using the PMT functionLoan Amount less Points $19,600,000RMB = ($15,031,206) using the FV functionPPP = ($450,936)ECB using the