A property is purchase for $15 million. Financing is obtained at a 75% loan-to-value ratio with total annual payments of $1,179,000. The property produces an NOI of $1,400,000. What is the equity dividend rate (ratio of first year cash flow to equity)?

Income from a mortgaged property is divided into two section, first the loan payment and the second one is dividend for equity holder. These value are decided according to their ratio in the property value.

In this question the value of $15 million is divided into equity portion and loan portion by 25% and 75% respectively.

As per given data

Total value of property = $15 million

Value associated with Loan = $15 million x 75% = $11.25 million

Value associated with Equity = $15 million x 25% = $3.75 million

Net operating Income = $1,400,000

Loan Payment = $1,179,000

The residual value from income after loan payment is associated with the equity.

Net Income = $1,400,000 - $1,179,000 = $221,000

The net Income amount is associated with equity. So, we can calculate the equity dividend rate as follow

Equity Dividend Rate = ($221,000 / $3,750,000) x 100 = 5.89%