# Need help on calculations, please - Posted by Tom Way

Posted by Randy on August 23, 2003 at 11:50:04:

Most investors would want a better rate of return than 7%. I calculated your interest only payment at \$1050.00 for the term of 120 mos. On \$180k. If that is correct assuming an investor wanting 12% return the note would be discounted to \$127,184.62.

This is all subject to the investor?s desired rate of return, remember you?re not offering a bank CD here; there is risk any investor must calculate and discount accordingly. In my experience there would not be a premium rather a discount? sorry if I burst your bubble.

Need help on calculations, please - Posted by Tom Way

Posted by Tom Way on August 20, 2003 at 10:01:46:

I just sold an 11 unit brick apartment building (10,000 square feet) in Huntington, WV. It is in an excellent location near the 140 acre Ritter Park.
My question is, "What is my paper that I carried back worth? What should I ask for it in an ad in the newspaper?"
The Note is a 2nd Mortgage for \$180,000 at seven (7) percent interest only for ten (10) years. The balloon is for \$180,000 at the end of ten years.
There is no “seasoning” as the note is only one month old.
The note is 50% Loan to Value of the \$360,000 appraised property.
The buyers have excellent credit and have an annual salaried income of \$230,000/year.
At seven percent, it seems that in the interest rate environment I could get a premium for this note. Is that true in your opinion? How do I price it and how do I describe it in writing in a newspaper ad?

Tom

What’s My Note Worth??? - Posted by David Butler

Posted by David Butler on August 24, 2003 at 14:22:15:

Hello Tom,

Randy’s made some excellent comments, perhaps the most relevant (in light of your questions) being that the private cash flow market is also known essentially as the “discounted note industry”.

But here’s some additional important information to consider…

A note secured by a multi-family residential property of more than four units units, is generally treated as a “commercial note” in both traditional and private financing markets. And generally, junior position “commercial” notes have little to no market for them, especially if “green”. Like many things, there are exceptions… but those exceptions are generally based on offsetting circumstances that offer compelling reasons why such a note may be attractive to some private note buyers.

That’s why it is always critical to provide sufficient information to any prospective buyer right up front - a great deal of which is missing here (also discussed extensively in previous discussion threads related to “commercial notes” and also to “2nds”, “seconds”, and “junior” position notes.

One plus you do have is that the property securing in the note is multi-family residential. If a junior note is to be sold, those types of properties generally see the most activity from the note-buying community.

Some of the more vital information you need to show here though along with some generic guidelines you’ll want to consider as factors effecting pricing decision…

Is appraisal current? (Less than six months old?)
Purchase price Payor paid for the property?

(Are the two compatible? If not, why not?)

Down Payment Payor made at closing? (Minimum 15% down usually required; 25% preferred)

Payor Credit score? (Minimum 640 generally required on junior commercial paper, unless property shows strong operating history… more below).

Operating History of Property past three to five years (or life of property if less than three years old)?

Average Net Operating Income over time of operating history?

Balance, Rate, Terms, and Status of underlying senior debt?

Combined Loan-To-Value (CLTV) of both senior and junior liens when added together?

(Maximum Combined Investment-To-Value for commercial is generally in the 65% to 70% range; so senior debt would have to obviously represent less than 65% LTV)

Debt Coverage Ratio? (traditional lending markets like to see 1.2 minimum on senior debt. Private markets generally look for 1.4 to 1.6. Junior paper generally requires 1.4 to 2.0. And these ratios are based on amortizing loans. Different investors use different yardsticks - my personal preference is 240 months, at comparable market rate for similar loan. Here, I would be calculating DCR using 9% amortized over 240 months. The annual debt service under this formula, combined with the annual debt service on the senior note, would then be compared to that 1.4 ratio on the low end of generally acceptable debt coverage ratio. So, if the annual combined debt service on the property is, say, \$32,000 per year; I’d want to see a minimum average net operating income (income after expenses, but before debt service) in the neighborhood of \$44,800 from this property.

Also, at this point in time, the private note markets generally are looking for yields in the 12% to 14% range on senior position paper. Premium paper may only be discounted to yield 11% occasionally, but the most common yield I’ve seen over the past year tends to run about 14% average.

With junior paper, in most cases you’ll be looking at yield requirements in the 18% to as much as 30% range - depending on the answers to the questions I’ve posed above.

All that being said - it is worth noting that the private cash flow markets do offer a wide variety of investment philosophies, and flexible parameters. We explain this in large degree in a previouis post related to “fair market value” as opposed to “investment value”, some time back. You may wish to use the “Search Archives” feature at the top of this Forum to look into the details of those concepts.

The point being, is that you may very well find an investor who may require less than an 11% yield on your note, especially one who is in your local area. This is frequently the case - either because the fellow is too dumb to know better; or because he is smart enough to know why he can pay that price and still feels he is getting exactly what he needs to get out of his investment!

Okay… hope that helps give you some better perspective on the relative value of your note, and best wishes for satisfying your objectives. Speaking of which…

Why are you selling now?
How much cash do you need?

David P. Butler