JPI Request Fleet to:
- Drop its interest rate by half a percent (0.5%)
- Reduce commitment fee by a quarter of a percent (0.25%)
- Extend loan terms from 24 to 36 months
- Raise LTVR from 75% to 80%
- Reduce DCR from 1.25 to 1.1
- Loan amount from $16,250,000 to $15,715,000
Agreement:
- reduced loan amount ($15,715,000)
- reduced commitment fee 0.25%
- 30 months term
- 75% LTV
- DCR 1.25
- Reduced loan rate by 0.25%
- $150,000 changes in construction budget w/o written consent from fleet
Risks:
- Absorption
- Reputation
How much profit can the developer expect to receive from this project? What are JPI’s biggest risks?
Using the assumptions on the pro forma/return analysis spreadsheet, JPI is able to sell the project to an institutional investor at an 8.5% cap rate. This resulted a $29.5 million on the sale while the project cost was $19.6 million. This leaves a profit of nearly $10 million for the 5-year hold. JPI was able to achieve a 26.5% IRR on equity, 16.6% on the overall IRR, a going in cap rate of 10.6% and an terminal cap rate of 8.5%. These returns have been inline with JPI’s investment strategy of going in cap rate of at least 10% and going out cap of 8 – 9%.
JPI’s biggest risks are
• the ability to construct the 8 apartment projects simultaneously and be able to finish on schedule
• be able to lease up the large number of units
• and lastly and just as equally importantly, JPI’s reputation