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CFA Level I · CFA Level I Exam · Real Estate and Infrastructure

A property has net operating income (NOI) of $900,000 in year one and is valued using a cap rate of 7.5%. It is financed with a $7,200,000 loan at 6% interest-only. The annual levered cash flow before tax (NOI less interest) is closest to:

Levered cash flow is NOI of $900,000 minus interest of $432,000 (6% on $7.2 million), which equals $468,000. The $432,000 option is only the interest cost and $900,000 ignores debt service entirely.

  1. A$432,000
  2. B$468,000Correct
  3. C$900,000

Explanation

Interest = 7,200,000 × 6% = 432,000. Levered cash flow = 900,000 − 432,000 = 468,000. The 432,000 option is the interest itself; 900,000 ignores financing. (Property value 900,000/0.075 = 12,000,000, loan-to-value 60%, consistent.)

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