Suppose a property can be bought for $2,500,000 and it will provide $200,000/year net cash flow forever, and you can borrow a perpetual interest-only mortgage secured by that property at a 7% interest rate, up to an amount of $950,000. (a) Does this present “positive” or “negative leverage,” and (b) why? (c) Do you think that the use of leverage, in this case, will increase the NPV of the investment for the equity investor in the property? (d) Why or why not?
4. Why is it that construction loans are almost always used to finance all or most of the construction costs in development investment, even when the investor has plenty of cash that could be used to pay for construction?
