Ace Development Company is trying to structure a loan with the First National Bank. Ace would like to purchase a propert

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Ace Development Company is trying to structure a loan with the
First National Bank. Ace would like to purchase a property for
$3.25 million. The property is projected to produce a first
year NOI of $125,000. The lender will allow only
up to an 80 percent loan on the property and requires
a DCR in the first year of at least 1.25. All
loan payments are to be made monthly but will increase by 3.5
percent at the beginning of each year for five years. The contract
rate of interest on the loan is 5.5 percent. The lender is willing
to allow the loan to negatively amortize; however, the loan will
mature at the end of the five-year period.
Required:
a. What will the balloon payment be at the end of the fifth
year?
b. If the property value does not change, what will the
loan-to-value ratio be at the end of the five-year period?