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Purchasing a building North Riyadh - Financial risk ratios

Question 2:

Ahmed Ibraheem is considering purchasing a building, which consists of one unit of showroom, four units of medium size offices and five units of specialized shops. The building is located in North Riyadh. The expected rental for each unit is as follows:

i) Showroom - SAR32,000 per month ii) Office SAR 8,000 per month

iii) Shop SAR 9,000 per month

With the current economic situation, vacancy and loss in collection is estimated at 9% per year. The first-year operating expenses are expected to be at 40 percent of effective gross income (EGI). Capital expenditures allocation is 6 percent of EGI.

The purchase price of the building will be SAR8,580,000. If Ahmed Ibraheem agrees to purchase the building, Bank A&B will provide 70 percent financing with a partially amortized fixed-rate commercial mortgage at 6.8 percent per year. Amortization term is 25 years, while the maturity period is 10 years.

You are required to:

a) Prepare the first-year net operating income statement of the building.

b) Compute the debt coverage ratio. Assume the lender requires a minimum debt coverage ratio of 1.40.  Explain.

c) Compute the equity dividend rate for this property and explain.

d) Since this loan is partially amortized, compute the balloon payment which needs to be settled by Ahmed Ibraheem at the end of maturity period.

e) Suggest two methods where Ahmed Ibraheem can settle the balloon payment of this mortgage.

f) Explain two financial risk ratios which will be used by the lender to evaluate loan application

by Ahmed Ibrahim.

Purchasing a building North Riyadh - Financial risk ratios

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