UGBA 180 Lecture Notes - Lecture 12: Refinancing, Deferral, Internal Revenue Code Section 1031
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Lecture 12 Disposition and Renovation
Recap: Investment Analysis
●Construct and analyze pro formas for income-producing properties
●Importance of debt and benefits of financial leverage
●How to measure and evaluate risk
●Today: when to sell?
Disposition decision
●Keep vs. sell
○Initial purchase is based on anticipated holding period
○But conditions may change ex post
○Investors should periodically evaluate whether it is time to sell the property
(disposition)
●Equity buildup
○Benefits of financial leverage decline over the holding period
○Mortgage amortization leads to equity buildup
○Tied up equity could be placed in another property if the current property is sold
■Opportunity cost of not selling
●Question keep or sell in year 5?
○Find the ATCFs if you sell year 5
■Can this be reinvested at a greater ATIRR than what would be earned if
Apex were not sold?
●Yes? → sell
●No → hold
●Marginal rate of return
○
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Refinancing
●Obtain new loan based on percentage of the current property value
●Allows investor to increase financial leverage
●Refinancing at high loan to value ratio may also provide additional funds to invest
elsewhere
○Alternative to outright sale of the property
○Avoids taxation (unlike cash flows from sale)
●Apex center example
○Year 5: refinance with 75% LTV loan
■Year 5 property value = 250k
○Loan amount = 187.5k
○12% interest
○25 year amortization
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Document Summary
Construct and analyze pro formas for income-producing properties. Importance of debt and benefits of financial leverage. Initial purchase is based on anticipated holding period. Investors should periodically evaluate whether it is time to sell the property (disposition) Benefits of financial leverage decline over the holding period. Tied up equity could be placed in another property if the current property is sold. Find the atcfs if you sell year 5. Can this be reinvested at a greater atirr than what would be earned if. Obtain new loan based on percentage of the current property value. Refinancing at high loan to value ratio may also provide additional funds to invest elsewhere. Alternative to outright sale of the property. Avoids taxation (unlike cash flows from sale) Year 5: refinance with 75% ltv loan. Apex owner considers 200k renovation in year 5. Bank will refinance present loan balance 142,432 plus 75% of renovation cost. Investor needs to put in additional equity of 50k.