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Miami River Inc. Financial Analysis Report:

By:   •  May 27, 2019  •  Case Study  •  1,693 Words (7 Pages)  •  850 Views

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Case Study #1

Miami River Inc.

Financial Analysis Report:

Overview:

This report is aimed at conducting detailed financial analysis towards recommending refinancing alternatives for Miami River Inc. Miami River Inc. is an established real estate company in Miami. In October 2012, Miami River Inc. purchased Westside Retail Center for $7.5 Million. The property has a leasable area of 45,000 square feet. TD bank made a $6 million interest only loan (i.e., with three-year loan maturity and an interest rate of 6.5%) to Miami River Inc. The remaining $1.5 million was provided by our President Mr. Tom out of his own equity to complete the transaction. When we bought the property, it had a vacancy rate of 65%. However, over the next three years, we were able to lease the vacant space and the occupancy rate was 98% now. The property was built in 2001. In November 2012, Miami River Inc. completed another transaction, an office building (Beacon Office Building) for $9 million. The building had a total square footage of 55,000. We obtained a similar interest only loan from TD Bank for the property ($7.5 million, 7% interest rate) and once again the remaining $1.5 million was put by our honorable President from his equity for the sales. The office building was built in 1998 and had a vacancy rate of 5% at the time of refinancing.  

We aim to refinance the two properties and this report aims towards recommending the suitable alternative for refinancing given the loan options available, internal constraints and refinancing objective.

Refinancing Objective:

The management of Miami River Inc. plans to expand into new projects as a part of our vision. We plan to invest in a new apartment project and therefore conducting a financial analysis becomes even more important. We have had healthy finances and we are working towards extracting as much equity as possible from our earlier projects to finance our expansion into the new ones. Thus the primary objective of refinancing the purchase of these properties is converting home equity into cash, to finance the expansionary projects.

Refinancing alternatives:

The most basic option in mortgage loan refinancing is the rate and term refinance. With this option, the borrower is attempting to attain a lower interest rate and/or adjust the term of the loan.

However since our objective is extracting equity as cash from past projects for the sake of investment in future projects, the best option for us is opting for a cash-out refinance. A cash-out refinance allows the borrower to convert home equity into cash by creating a new mortgage for a larger amount than the original. The borrower receives the difference of the two loans in cash. This is possible because the borrower only owes the original mortgage amount to the lending institution. The additional loan amount of the cash-out refinanced mortgage is paid to the borrower in cash at the closing.

Now let us have a look at the loan options available to us:

TD bank loan: This loan would be a recourse loan with the loan maturity being 3 years and the amortization period of 20 years. The loan is priced at 5.5% and 6% interest rate for retail properties and office properties, respectively. The loan fee will be 1% of the initial loan balance. TD allowed borrowers to prepay the loan at any time without a penalty. Moreover, if WE prefer, after the initial loan matures, the loan can be automatically renewed for two more terms (i.e., 3 years + 3 years) with the same interest rates and the same 1% loan fee.

The insurance company loan: The insurance company indicated that they would make a 10 year, non-recourse loan. The interest rates for retail properties and office properties would be 5.25% and 5.85%, respectively. Similarly, the amortization periods for retail properties and office properties are also different (i.e., 20 years for retail properties and 15 years for office properties). Moreover, loan upfront fees for retail properties and office properties will be 1% and 2%, respectively. In case of prepayment, AMB will charge a 1% prepayment penalty based on outstanding loan balance.

More details about the loans can be found in the Exhibits below:

Loan WorkSheet: Beacon Office Building

Loan from TD Banks

Loan from AMB Insuance

Projected Rate

6.00%

5.85%

Loan Term

3

10

Amortization

20

15

Debt Constant *

8.718%

10.196%

Stabilized NOI

975,000

975,000

Required Debt Coverage Service Ratio (DSCR)

1.20

1.25

Maximum Annual Debt Service based on Debt Coverage Service Ratio

812,500

780,000

Maxinmm Loan Using Debt Coverage Test

9,319,311

7,650,358

Capitalization Rate for Office Properties

7.50%

7.50%

Value Based on Cap Rate

13,000,000

13,000,000

Required Loan to Value Coverage (LTV)

75%

70%

Maximum Loan Using Loan to Value Test

9,750,000

9,100,000

Upfront Fees

1.00%

2.00%

Recourse or Non-Recourse

Recourse

Non-Recourse

Prepayment Penalty

None

1.00%

Other Considerations

Short-term

Long term

  Loan Worksheet: Westside Retail Property

 

Loan from TD Bank

Loan from AMB Insurance

Projected Rate

5.50%

5.25%

Loan Term

3

10

Amortization

20

20

Debt Constant *

8.368%

8.195%

Stabilized NOI

750,000

750,000

Required Debt Coverage Service Ratio (DSCR)

1.20

1.25

Maximum Annual Debt Service based on Debt Coverage Service Ratio

625,000

600,000

Maxinmm Loan Using Debt Coverage Test

7,468,989

7,321,334

Capitalization Rate for Office Properties

7.00%

7.00%

Value Based on Cap Rate

10,714,286

10,714,286

Required Loan to Value Coverage (LTV)

75%

70%

Maximum Loan Using Loan to Value Test

8,035,714

7,500,000

Upfront Fees

1.00%

1.00%

Recourse or Non-Recourse

Recourse

Non-Recourse

Prepayment Penalty

None

1.00%

Other Considerations

Short term

Long term

...

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