10/10/11

Unique Commercial Property (Part II)

The businesses in operation are a drive-in theater and a flea-market. In 1958, there were over 4000 drive-ins in operation in the country, today there are only 367. Interestingly, the drive in theater industry has experienced some growth in the last several years as families seek out affordable, family entertainment. Who would of thought?

10/6/11 

Unique Commercial Property

Evolution within small business is an amazing process as businesses constantly adjust to cultural, social and technological changes. Thus was the case on a commercial note we recently purchased in a southeastern state. When the seller told me the type of business that was in operation, I was skeptical about the prospect of purchasing the note until I saw the property. It was evident the buyer on the note is committed to this enterprise and part of a track record of 60 years in business.

If I asked you to guess the type of enterprise tied to this note, I promise that although you would be very familiar with both of them (that's right, there are two separate and distinct businesses that share the same location) it's unlikely you'd answer correctly so I'll give you some hints and provide the answer tomorrow.

One of these businesses has always utilized the same location and has been in operation since the 1950's. The business model, although very simplistic, has no apparent nearby competition nor any on the horizon. Although both businesses share the same location, one operates during the day, the other at night. If you're over 40, there's a high probability you've frequented one of these businesses recently and the other during your lifetime. I think that should be enough information to get you thinking and I'm sure many of you already know the answer. Have a great day and look for the answer tomorrow.

10/01/11

0% Interest in definitely NOT in your best interest!

I recently received a request from a client for a cash offer on a note with a 0% interest rate. It reminded me of my first encounter with a 0% note when I was new to the business in 1997. A young woman called our office and told me she had a note to sell in nearby Otero county. She told me all about the property and the background of the transaction. She then began to provide the terms on the note, needless to say I was dumbfounded when she said it was a 0% loan. I have since seen more than my share of 0% notes and there seems to be a consistent pattern with these types of agreements which usually involves helping out a family member or friend. And then at some point in the future the need for cash arises and the note holder is forced to sell at a ridiculously large discount all because they were trying to help someone.

If you are a note holder or a soon to be note holder, be aware that an Investor's cash offer is based on a yield requirement and the interest rate on the note is a critical component in helping to meet a portion of that yield which helps soften the discount. 

The following example demonstrates how the interest rate affects the cash value of a note. In this example the property sold in October of 2006 for $250000 with $75000 down. The amount financed by the seller was $175,000 for 15 years. The buyer’s credit was average with several slow pays and one charge off. Despite the large down payment and five years of payment history the investor's yield requirement was 16% due primarily to marginal credit. In each example I’ve only changed the interest rate which changes the payment amount and the current balance, everything else is constant.

                             Example A                      Example B                          Example C                  Example D

Interest Rate                9%                                 7%                                     5%                                 0%

Payment                  1,774.97                         1,572.95                               1383.89                       972.22

Current Balance    $140,118.86                   $125,772.80                          $120,157.68              116,666.67 

Cash Offer            $106,000.00                    $93,900.00                           $82,600.00                    $58,000

Notice that the difference in the cash offer from 9% to 5% is over $23,000. I hope the difference in these cash offers is inspiring enough that the next time you write up an agreement you'll do your best to get as good an interest rate as your negotiation skills and state law allows. Oh... I almost forgot to tell you how the story ended in New Mexico. I gave her an apology first because of the discount size and proceeded to the quote. Originally she declined the offer however about 5 weeks later we received a typed letter (people used to do that before computers) from her saying that she had thought it over and realized what bad decision it had been to finance the property for the buyer at 0% and she wanted to sell the note and put it behind her. We close the transaction in about three weeks and hopefully she was able to use the cash to move on with her life.