🏢 Commercial Mortgage Analysis: NOI, Cap Rates, Debt Coverage and Leverage

1. A small retail plaza in Red Deer has three bays: 1,200 sq ft at $28.00, 2,000 sq ft at $24.00 and 3,500 sq ft at $19.50 per sq ft per year. What is its potential gross income (PGI) from base rent at full occupancy?

1. $159,683 of annual base-rent PGI
2. $187,600 of annual base-rent PGI
3. $130,650 of annual base-rent PGI
4. $149,850 of annual base-rent PGI

PMB Blueprint LO 2.8.7 asks candidates to calculate potential gross income, the rent the property would earn if every unit were leased all year. Each bay is priced separately: 1,200 x $28.00 = $33,600, 2,000 x $24.00 = $48,000 and 3,500 x $19.50 = $68,250, for $149,850. Multiplying the total area of 6,700 sq ft by the simple average rate of $23.83 gives $159,683, which wrongly gives the small bay the same weight as the large one.

2. An apartment building has a PGI of $612,000. The lender's underwriting uses a 4.0% vacancy allowance and a 1.5% collection (bad debt) allowance, both applied to PGI. What is the total vacancy and collection allowance?

1. $24,480 for the year
2. $9,180 for the year
3. $33,293 for the year
4. $33,660 for the year

PMB Blueprint LO 2.8.8 covers the vacancy and collection allowance, which is deducted from PGI to reach effective gross income. With both rates applied to PGI: 5.5% x $612,000 = $33,660. Using 4.0% alone ($24,480) omits the bad-debt loss, and applying 1.5% to the after-vacancy amount gives $33,293, which contradicts the stated basis.

3. A 60-unit Calgary apartment has rental PGI of $840,000 and a 6% vacancy and credit loss allowance. Parking and laundry add $18,000 a year, which the lender treats as already net of vacancy. What is the effective gross income (EGI)?

1. $807,600 of effective gross income
2. $789,600 of effective gross income
3. $806,520 of effective gross income
4. $858,000 of effective gross income

Under PMB Blueprint LO 2.8.9, EGI is PGI less the vacancy and collection allowance, plus other income: $840,000 x 0.94 = $789,600, plus $18,000 = $807,600. Leaving out the parking and laundry income gives $789,600, applying the 6% allowance to the other income as well gives $806,520, and $858,000 ignores vacancy altogether.

4. A property has EGI of $512,000. Annual costs: property tax $48,000, insurance $14,500, utilities $31,000, repairs $26,000, management at 4% of EGI, replacement reserve $9,000 (the lender counts it as an operating expense), mortgage payments $210,000 and capital cost allowance $40,000. What is the NOI?

1. $363,020 of net operating income
2. $153,020 of net operating income
3. $372,020 of net operating income
4. $323,020 of net operating income

PMB Blueprint LO 2.8.13 asks for NOI, which is EGI minus operating expenses only. Management is 4% x $512,000 = $20,480, so operating expenses total $148,980 and NOI = $363,020. Mortgage payments are debt service paid out of NOI, not an operating expense (deducting them gives $153,020), and capital cost allowance is a tax deduction, not a cash operating cost ($323,020).

5. An industrial building has PGI of $400,000, a 5% vacancy and collection allowance, and operating expenses of $140,000 that the owner pays whether or not space is leased. What is the NOI?

1. NOI of $260,000 per year
2. NOI of $247,000 per year
3. NOI of $240,000 per year
4. NOI of $233,000 per year

Under PMB Blueprint LO 2.8.9 and 2.8.13, the vacancy allowance applies to income, not to expenses: EGI = $400,000 x 0.95 = $380,000, and NOI = $380,000 - $140,000 = $240,000. Applying the 5% to income net of expenses gives $247,000, which wrongly assumes expenses shrink with vacancy; ignoring vacancy gives $260,000, and $233,000 inflates the expenses by 5% as well.

6. An Edmonton office building has EGI of $410,000, operating expenses of $124,000 and annual debt service of $150,000. Comparable sales indicate a 6.5% capitalization rate; the proposed mortgage rate is 6.0%. What value does direct capitalization indicate?

1. Estimated value of $4,766,667
2. Estimated value of $6,307,692
3. Estimated value of $2,092,308
4. Estimated value of $4,400,000

PMB Blueprint LO 2.9.1 and 2.15.11 rest on the income approach: value = NOI / cap rate. NOI = $410,000 - $124,000 = $286,000, so value = $286,000 / 0.065 = $4,400,000. Capitalizing EGI ($6,307,692) skips operating expenses, capitalizing cash flow after debt service ($2,092,308) mixes financing into value, and dividing by the 6.0% mortgage rate ($4,766,667) uses a cost of debt, not a market cap rate.

7. A comparable strip mall sold for $3,150,000. In the year of sale it had EGI of $290,000, NOI of $204,750 and annual debt service of $141,000. What overall capitalization rate does this sale indicate?

1. 15.38% overall capitalization rate
2. 2.02% overall capitalization rate
3. 9.21% overall capitalization rate
4. 6.50% overall capitalization rate

PMB Blueprint LO 2.9.3 and 2.15.6 cover deriving a cap rate from comparable sales: cap rate = NOI / sale price = $204,750 / $3,150,000 = 6.50%. Using EGI gives 9.21% because operating expenses are skipped, and using cash flow after debt service gives 2.02%, which is an equity measure. 15.38% comes from inverting the ratio (price / NOI = 15.38).

8. A lender holds a mortgage on a warehouse with stable NOI of $520,000. Market cap rates rise from 5.75% to 6.25% with no change in NOI. By about what percentage does the property's indicated value change?

1. Value falls by about 8.7%
2. Value falls by about 0.5%
3. Value rises by about 8.0%
4. Value falls by about 8.0%

Under the income approach (PMB Blueprint LO 2.9.1 and 2.15.11), value = NOI / cap rate, so value moves inversely with the cap rate: $520,000 / 0.0575 = $9,043,478 and $520,000 / 0.0625 = $8,320,000, a drop of $723,478, or 1 - 5.75/6.25 = 8.0%. The 8.7% figure (0.50 / 5.75) measures how much the cap rate rose, not how much value fell, and a higher cap rate never raises value when NOI is unchanged.

9. An appraiser uses the build-up method: safe (risk-free) rate 3.25%, risk premium 2.25%, illiquidity premium 0.75% and management premium 0.50%. The current commercial mortgage rate is 5.50%. What capitalization rate results?

1. A capitalization rate of 6.75%
2. A capitalization rate of 3.50%
3. A capitalization rate of 6.25%
4. A capitalization rate of 9.00%

PMB Blueprint LO 2.15.6 lists the build-up method, which starts from a safe rate and adds a premium for each risk an investor bears: 3.25% + 2.25% + 0.75% + 0.50% = 6.75%. Starting from the 5.50% mortgage rate instead of the safe rate gives 9.00%, adding only the premiums gives 3.50%, and dropping the management premium gives 6.25%.

10. A mixed-use building in Lethbridge has EGI of $354,000, NOI of $318,600 and annual debt service of $236,000. The owner also pays about $42,000 a year in income tax. What is the debt coverage ratio (DCR)?

1. A debt coverage ratio of 0.74
2. A debt coverage ratio of 1.50
3. A debt coverage ratio of 1.17
4. A debt coverage ratio of 1.35

PMB Blueprint LO 2.18.3 and 2.19.3: DCR = NOI / annual debt service = $318,600 / $236,000 = 1.35. Inverting the ratio gives 0.74, using EGI gives 1.50 because operating expenses are skipped, and deducting the owner's income tax gives 1.17; income tax is not part of the property's NOI.

11. A brokerage's commercial files include a 12-storey apartment tower, an office warehouse, a 90-room hotel and a self-storage facility. Which TWO of these properties belong to the special-purpose subtype?

1. The 12-storey apartment tower and the 90-room hotel
2. The 90-room hotel and the self-storage facility
3. The office warehouse and the self-storage facility
4. The office warehouse and the 90-room hotel

PMB Blueprint LO 2.7.8 lists the commercial property subtypes: office (by class and location), retail (by ICSC shopping centre type), multi-family (high-rise and low-rise), industrial (warehouse and office warehouse) and special purpose (hotels, restaurants, recreational facilities, storage, etc.). The hotel and the self-storage facility are therefore special purpose. The office warehouse is industrial despite its office space, and the apartment tower is high-rise multi-family.

12. A lender will advance the lesser of 65% of value and the amount supported by a 1.30 DCR. The property is appraised at $6,200,000, NOI is $380,000 and the annual mortgage constant is 7.80%. What is the maximum loan?

1. A maximum loan of $4,030,000
2. A maximum loan of $3,747,535
3. A maximum loan of $6,333,333
4. A maximum loan of $4,871,795

PMB Blueprint LO 2.18.1 and 2.19.2 cover how lenders use LTV and DCR in lending decisions; when both tests apply, the lower amount governs. LTV limit: 65% x $6,200,000 = $4,030,000. DCR limit: $380,000 / 1.30 = $292,308 of debt service, / 0.078 = $3,747,535. The DCR amount is lower, so it governs; $4,030,000 is the LTV limit alone, $4,871,795 (NOI / constant) ignores the 1.30 cushion, and $6,333,333 multiplies NOI by 1.30 instead of dividing by it.

13. An investor is buying a commercial condo unit for $4,250,000; the appraisal comes in at $4,400,000. The requested first mortgage is $2,850,000, and the lender measures value as the lower of price and appraisal. What is the loan-to-value ratio?

1. A loan-to-value ratio of 35.23%
2. A loan-to-value ratio of 64.77%
3. A loan-to-value ratio of 32.94%
4. A loan-to-value ratio of 67.06%

PMB Blueprint LO 2.18.2: LTV = loan / value, and with the lower-of-price-or-appraisal rule the value is $4,250,000, so $2,850,000 / $4,250,000 = 67.06%. Using the higher appraisal gives 64.77% and overstates the borrower's equity; 32.94% and 35.23% are equity ratios, not LTV.

14. A Calgary suburban office submarket has a total inventory of 2,400,000 sq ft, of which 228,000 sq ft is vacant and available for lease. What is the submarket vacancy rate?

1. A vacancy rate of 10.50%
2. A vacancy rate of 8.68%
3. A vacancy rate of 9.50%
4. A vacancy rate of 90.50%

PMB Blueprint LO 2.7.4 asks candidates to define the vacancy rate, which is vacant space divided by total inventory: 228,000 / 2,400,000 = 9.50%. Dividing by occupied space only gives 10.50%, adding vacant space to inventory a second time gives 8.68%, and 90.50% is the occupancy rate.

15. An industrial market started the year with 2,000,000 sq ft of inventory at 7.5% vacancy. During the year 120,000 sq ft of new space was completed, and the year ended with 2,120,000 sq ft at 8.0% vacancy. What was net absorption?

1. Positive net absorption of 120,000 sq ft
2. Negative net absorption of 19,600 sq ft
3. Positive net absorption of 100,400 sq ft
4. Positive net absorption of 19,600 sq ft

PMB Blueprint LO 2.15.1 and 2.15.2: net absorption is the change in occupied space over the period. Occupied space went from 1,850,000 to 1,950,400 sq ft, so net absorption = 100,400 sq ft. The 120,000 sq ft is new supply, not absorption, and the 19,600 sq ft rise in vacant space shows supply outpaced demand while absorption stayed positive.

16. The Bank of Canada raises its policy rate and capitalization rates rise for every property type across the country. Under the four levels of commercial real estate risk, what kind of risk is this?

1. Non-systematic risk: a risk tied to one sector or location that diversification can reduce
2. Asset risk: a risk that comes from the physical condition and location of one property
3. Enterprise risk: a risk that comes from the borrower's business, management and finances
4. Systematic risk: a market-wide risk that diversifying across properties cannot remove

PMB Blueprint LO 2.2.3 lists four levels of risk: asset, enterprise/entity, non-systematic and systematic. A policy-rate move that lifts cap rates for all property types everywhere is systematic (market) risk, which no mix of properties diversifies away. Non-systematic risk is limited to a sector, region or property type, while asset and enterprise risks belong to one property or one borrower.

17. An investor buys a $8,000,000 office building with a first mortgage for 60% of the price and a mezzanine loan for a further 15%. How much sits in the equity layer of the capital stack?

1. $2,000,000 of common equity
2. $3,200,000 of common equity
3. $1,200,000 of common equity
4. $4,800,000 of common equity

PMB Blueprint LO 2.13.1 and 2.13.2 define the capital stack as the debt and equity that fund a purchase. Debt here is 60% + 15% = 75%, so equity is 25% x $8,000,000 = $2,000,000. Treating the mezzanine loan as equity gives $3,200,000; $1,200,000 is the mezzanine layer and $4,800,000 the senior layer.

18. A $10,000,000 property was financed with a $6,500,000 first mortgage, a $1,500,000 mezzanine loan and $2,000,000 of equity. After a default it sells for $7,400,000 net of costs. How much does the mezzanine lender recover?

1. $1,500,000 of its $1,500,000 advance
2. $600,000 of its $1,500,000 advance
3. $900,000 of its $1,500,000 advance
4. $1,110,000 of its $1,500,000 advance

PMB Blueprint LO 2.13.3 covers the impact of the capital stack: proceeds pay each layer in order of priority. The first mortgage takes $6,500,000, leaving $7,400,000 - $6,500,000 = $900,000 for the mezzanine lender, and equity receives nothing. A pro rata share (15% x $7,400,000 = $1,110,000) ignores priority, and $600,000 is the mezzanine lender's loss, not its recovery.

19. An investor buys a $5,000,000 property producing NOI of $325,000, using a 65% loan at 5.0% interest only. What is the before-tax cash-on-cash return on equity in year 1?

1. A cash-on-cash return of 6.50%
2. A cash-on-cash return of 3.25%
3. A cash-on-cash return of 9.29%
4. A cash-on-cash return of 18.57%

PMB Blueprint LO 2.16.1 links leverage to return on equity. Loan = $3,250,000, interest = $162,500, equity = $1,750,000; cash flow = $325,000 - $162,500 = $162,500, and $162,500 / $1,750,000 = 9.29%. 6.50% is the unlevered return (cap rate), 3.25% divides cash flow by the full price, and 18.57% forgets to pay the interest.

20. A $4,000,000 building has NOI of $240,000 (a 6.00% cap rate). The buyer takes a $2,600,000 loan with an annual mortgage constant of 7.20%. What type of leverage results, and what is the cash-on-cash return?

1. Positive leverage: the cash-on-cash return rises to 17.14%
2. Negative leverage: the cash-on-cash return drops to 3.77%
3. Negative leverage: the cash-on-cash return drops to 1.32%
4. Neutral leverage: the cash-on-cash return stays at 6.00%

PMB Blueprint LO 2.16.6 contrasts positive and negative leverage: when the mortgage constant (7.20%) exceeds the property's unlevered return (6.00%), each borrowed dollar costs more than it earns. Debt service = $187,200, cash flow = $52,800, and $52,800 / $1,400,000 equity = 3.77%, below 6.00%. 17.14% ignores debt service, and 1.32% divides by the full price instead of the equity.

21. A buyer of a $6,000,000 industrial building can borrow 65% of the price at 5.50% or 75% at 6.00%, both interest only. What is the effective annual cost of the extra $600,000 borrowed under the larger loan?

1. An effective cost of 6.00% on the extra debt
2. An effective cost of 3.75% on the extra debt
3. An effective cost of 5.75% on the extra debt
4. An effective cost of 9.25% on the extra debt

PMB Blueprint LO 2.16.10 asks candidates to calculate the cost of using leverage. The larger loan costs $4,500,000 x 6.00% = $270,000 a year against $3,900,000 x 5.50% = $214,500, so the extra $600,000 costs $55,500 a year, or 9.25%. Quoting 6.00% ignores that the higher rate also applies to the first $3,900,000, 5.75% averages the two rates, and 3.75% counts the 0.50% rate increase on the whole loan but leaves out the base interest on the extra $600,000. Unless the property earns more than 9.25% on that slice, the added debt is negative leverage.

22. A commercial lender charges 1.5 origination points on a $3,600,000 first mortgage. How much is the origination fee?

1. $5,400 payable at funding
2. $54,000 payable at funding
3. $36,000 payable at funding
4. $540,000 payable at funding

PMB Blueprint LO 3.1.17 covers the impact of origination points: one point equals 1% of the loan amount, so 1.5 points = 1.5% x $3,600,000 = $54,000. $5,400 treats a point as 0.1%, $36,000 charges a single point, and $540,000 treats a point as 10%.

23. The owner of a strip mall wants $250,000 in 8 years to replace the roof. Deposits earn 4.0% compounded annually and are made at the end of each year. What annual sinking fund deposit is needed?

1. $27,131.96 deposited each year
2. $31,250.00 deposited each year
3. $26,088.42 deposited each year
4. $37,131.96 deposited each year

PMB Blueprint LO 2.11.4: the sinking fund payment is FV x i / ((1 + i)^n - 1) = $250,000 x 0.04 / (1.04^8 - 1) = $27,131.96. $31,250.00 ignores interest earned, $26,088.42 is the payment for deposits made at the start of each year (annuity due), and $37,131.96 is a loan payment that amortizes $250,000 today rather than accumulating it.

24. The owner of a small office building deposits $15,000 at the end of each year into a capital reserve earning 3.5% compounded annually. What will the fund hold immediately after the 10th deposit?

1. $150,000.00 after the tenth deposit
2. $124,749.08 after the tenth deposit
3. $175,970.90 after the tenth deposit
4. $182,129.88 after the tenth deposit

PMB Blueprint LO 2.11.3: the future value of an ordinary annuity is PMT x ((1 + i)^n - 1) / i = $15,000 x (1.035^10 - 1) / 0.035 = $175,970.90. $150,000.00 ignores interest, $182,129.88 treats the deposits as made at the start of each year (annuity due), and $124,749.08 is the present value of the deposits, not their future value.

25. A tenant pays rent of $8,000 at the start of each month for 5 years. Discounting at 6.00% compounded monthly, what is the present value of all the lease payments, measured at the start of the lease?

1. Present value of $415,873.51
2. Present value of $413,804.49
3. Present value of $480,000.00
4. Present value of $404,386.92

PMB Blueprint LO 2.11.2 contrasts an ordinary annuity (payments at period end) with an annuity due (payments at the start). With i = 0.5% and n = 60: PV of an ordinary annuity = $413,804.49, and an annuity due is worth one period more, x 1.005 = $415,873.51. $413,804.49 treats the rent as paid in arrears, $480,000.00 ignores discounting, and $404,386.92 lumps the rent into five year-end payments of $96,000 discounted at 6% a year.

26. A private lender is offered a mortgage that pays $120,000 at the end of each year for 20 more years. If the lender requires 6.5% compounded annually, what is the most it should pay for the mortgage today?

1. Present value of $2,400,000.00
2. Present value of $1,322,220.87
3. Present value of $1,271,281.71
4. Present value of $1,408,165.23

PMB Blueprint LO 2.11.5: the present value of a mortgage is the present value of its payments at the required yield, PMT x (1 - (1 + i)^-n) / i = $120,000 x (1 - 1.065^-20) / 0.065 = $1,322,220.87. $2,400,000.00 ignores discounting, $1,271,281.71 discounts at 7% instead of 6.5%, and $1,408,165.23 treats the payments as made at the start of each year.

27. A $1,800,000 commercial mortgage at 7.00% compounded annually is repaid by equal blended payments at the end of each year over 20 years. What is the annual payment?

1. $126,000.00 payable each year
2. $169,907.27 payable each year
3. $90,000.00 payable each year
4. $158,791.84 payable each year

PMB Blueprint LO 2.11.6: the annual payment is P x i / (1 - (1 + i)^-n) = $1,800,000 x 0.07 / (1 - 1.07^-20) = $169,907.27. $90,000.00 repays principal with no interest, $126,000.00 is interest only and never retires the loan, and $158,791.84 is the payment if each one fell at the start of the year.

28. An Edmonton office submarket had 8,000,000 sq ft of inventory at 5.0% vacancy a year ago. Since then 450,000 sq ft of new space has been completed and net absorption was a positive 180,000 sq ft; asking rents are still rising, but more slowly. Which phase of the four-phase market cycle do these figures point to?

1. Recovery: vacancy is high but falling and little new space is being built
2. Expansion: demand absorbs space faster than it is built, so vacancy falls
3. Recession: tenants give back more space than they lease, so vacancy climbs
4. Hypersupply: completions outpace positive absorption, so vacancy is rising

PMB Blueprint LO 2.7.15 asks candidates to outline the commercial real estate market cycle and its 4 phases, commonly named recovery, expansion, hypersupply and recession. Vacant space went from 400,000 sq ft (5.0% of 8,000,000) to 400,000 + 450,000 - 180,000 = 670,000 sq ft of 8,450,000, or 7.9%: absorption is still positive but new supply exceeds it, the mark of hypersupply. Recession would need negative absorption, expansion would show falling vacancy, and recovery comes with little construction.

29. An investor puts $1,500,000 of equity into a property. Projected cash flows to equity are $95,000, $110,000, $120,000, $125,000 and $130,000 in years 1-5, plus $1,900,000 of sale proceeds at the end of year 5. At a 9% required return, what is the NPV?

1. Net present value of $980,000
2. Net present value of $180,317
3. Net present value of $1,680,317
4. Net present value of $291,455

PMB Blueprint LO 2.20.3: NPV = sum of each year's cash flow / 1.09^t, minus the initial equity. The year-5 flow is $130,000 + $1,900,000 = $2,030,000, and the total present value is $1,680,317, so NPV = $1,680,317 - $1,500,000 = $180,317. $980,000 ignores discounting, $1,680,317 forgets to subtract the investment, and $291,455 discounts the sale proceeds one year too early.

30. Equity of $2,000,000 buys a property expected to return $150,000, $160,000, $170,000 and $180,000 in years 1-4, plus net sale proceeds of $2,300,000 at the end of year 4. What is the internal rate of return (IRR)?

1. An IRR of about 8.25%
2. An IRR of about 12.00%
3. An IRR of about 11.35%
4. An IRR of about 8.20%

PMB Blueprint LO 2.20.4: the IRR is the discount rate that sets the NPV of all cash flows to zero; solving 0 = -$2,000,000 + 150,000/(1+r) + 160,000/(1+r)^2 + 170,000/(1+r)^3 + 2,480,000/(1+r)^4 gives r = 11.35%. 8.25% is the average cash yield and ignores the $300,000 gain, 12.00% is a simple average return that ignores timing, and 8.20% assumes the property sells for its purchase price.

31. A lender values a single-tenant lease paying $200,000 at the end of each of years 1-3 and $220,000 at the end of years 4 and 5. Discounting at 7% compounded annually, what is the present value of the rent?

1. Present value of $820,039
2. Present value of $1,040,000
3. Present value of $909,026
4. Present value of $849,557

PMB Blueprint LO 2.20.2: uneven cash flows are discounted one at a time, CF_t / 1.07^t, and summed, giving $849,557. $820,039 ignores the step-up to $220,000, $1,040,000 ignores discounting, and $909,026 treats each payment as received at the start of the year.

32. A pro forma assumes a sale at the end of year 5. NOI is $400,000 in year 5 and $412,000 in year 6; the buyer is expected to capitalize the coming year's NOI at a 7.0% terminal cap rate, selling costs are 3% of the price and the mortgage balance at sale will be $3,100,000. What is the reversionary equity value?

1. Reversionary equity of $2,609,143
2. Reversionary equity of $2,785,714
3. Reversionary equity of $2,442,857
4. Reversionary equity of $5,709,143

PMB Blueprint LO 2.12.6 and 2.12.9: the sale price is the coming year's (year-6) NOI capitalized at the terminal rate, $412,000 / 0.07 = $5,885,714; less 3% selling costs = $5,709,143; less the $3,100,000 mortgage payout = $2,609,143. Capitalizing year-5 NOI instead gives $2,442,857, skipping selling costs gives $2,785,714, and $5,709,143 forgets to repay the mortgage.

33. An investor buys a multi-family property for $7,500,000 and pays $150,000 in acquisition costs (legal, appraisal and reports). The first mortgage is 70% of the price. How much initial equity must the investor provide?

1. Initial equity of $2,295,000
2. Initial equity of $2,400,000
3. Initial equity of $2,250,000
4. Initial equity of $5,250,000

PMB Blueprint LO 2.12.5 and 2.12.8: initial equity = total acquisition cost - mortgage = ($7,500,000 + $150,000) - $5,250,000 = $2,400,000. $2,250,000 leaves out the acquisition costs, $2,295,000 assumes the lender also finances 70% of those costs, and $5,250,000 is the loan itself.

34. A $4,200,000 first mortgage on an apartment building bears 6.25% compounded semi-annually, not in advance, with a 25-year amortization and monthly payments (rounded to the cent). What is the annual debt service?

1. Annual debt service of $262,500.00
2. Annual debt service of $332,473.32
3. Annual debt service of $329,989.80
4. Annual debt service of $336,397.40

PMB Blueprint LO 2.12.10: the monthly rate is (1 + 0.0625/2)^(1/6) - 1 = 0.514178%, the payment is $27,499.15, and 12 x $27,499.15 = $329,989.80. Dividing 6.25% by 12 skips the semi-annual conversion ($332,473.32 a year), $262,500.00 is interest only, and $336,397.40 assumes one payment a year compounded annually.

35. A vacant Edmonton site is zoned for four uses, each physically possible. Stabilized NOI, cap rate and building cost: retail strip centre $310,000, 7.0%, $3,200,000; apartment building $420,000, 5.5%, $6,500,000; office building $380,000, 7.5%, $3,900,000; self-storage facility $240,000, 6.75%, $2,250,000. Which is the highest and best use of the site?

1. Build the retail strip centre
2. Build the apartment building
3. Build the self-storage facility
4. Build the office building

PMB Blueprint LO 2.14.1 and 2.14.2: among uses that are legally permitted, physically possible and financially feasible, the highest and best use is the one that gives the land the highest value. Residual land value = NOI / cap rate - building cost: retail $1,228,571, apartments $1,136,364, office $1,166,667 and self-storage $1,305,556, the highest. The apartment building has the highest NOI and the highest completed value ($7,636,364), but its $6,500,000 building cost leaves the least for the land.