Commercial Real Estate Debt in Distress - Tony Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Commercial Real Estate Debt in Distress - Tony Case Solution

Foreclosure

Drive property had the right of foreclosing and it had also taken the ownership that allowed it to take authority for less than 2 months. And without appointing the receiver; Schey would have been unable to know whether the cash flows of the property were as Burton reported or not. A location was not getting gas from the year 2001, which demonstrated the uncertainty related to the environmental risks.

The property was being sold through receivership and the proceeds of sales were not enough for covering the principal owed, the right to seek the deficiency judgment would be lost by Drive against Burton.

Discounted Payoff from FCSB

Modified rate of interest reduced from 6.0% to 4.0% before the maturity time could lead to the acceptance of the debt in complete amount by the lender.

Before the maturity, the recovery of the debt had led to the acceptance of loan’s amount in full but in time such period; increasing the maturity of the loan tended to incur an additional payment of interest. (LIBERTO, 2020).

Receivership

It provides an importance to the borrower and it also takes into consideration the terms proposed by him. The company would be able to make improvements in its financial health by appointing the receiver on the borrower’s behalf. By following this strategy; the company could easily get returns, which would enable the business to have an easy recovery from the losses incurred due to the default of the loans.

There is also an inclusion of additional cost, such as: the administration cost and the cost needed to receive the payments. Another cost that is involved is associated with the generation of the receipts of the loan, for the lender.

Past due principal and Interest

If a person has borrowed money and hasn’t paid the agreed amount then the tax must be filed by the borrower, whichin this case, is 6,000 per month.

The addition of past due payments include interest payment, and principle amount is added back in the outstanding balance amount, which tends to increase the burden related to the principle and interest payment of the loan.

(KAGAN, 2020).

Qualitative Analysis

Assumptions for Calculating the Expected Return of the Option Foreclosure

The duration of the process of foreclosure is 3 months.
The administrative and legal cost related to foreclosure is $50000.
Initial cost of distressed note is $465000.
No significant costs are related to the property’s environmental liabilities.
Net present value (NPV) of the optionis calculated as $575728.60.
Internal rate of rate is calculated to be70%.
The IRR is calculated by considering the 10% discount rate.

Assumptions for Calculating the Expected Return of the Option Receivership

The duration of the process of foreclosure is 3 months.
The administrative and legal cost related to receivership is $30000.
The initial cost of distressed note is $465000.
No significant costs are related to the property’s environmental liabilities.
Net present value (NPV) of the option is calculated as $613294.34.
Internal rate of rate is calculated as 74%.
The IRR is calculated by considering the 10% discount rate.

Assumptions for Calculating the Expected Return of the Option Discounted Payoff

The duration of the process of foreclosure is 3 months.
No administrative and legal cost are related to the receivership.
Initial cost of distressed note is $465000.
The accrued interest is 5.75% on the rent received.
Amount of the payoff is based on 75% LTV.
No significant cost is related to the property’s environmental liabilities.
Net present value (NPV) of the option is calculated as $470746.72.
Internal rate of rate is calculated as 63%.
The IRR is calculated by considering the 10% discount rate.

Assumptions for Calculating the Expected Return of the Option Past Due Principal and Interest

The duration of the foreclosure process is 3 months.
No administrative and legal cost are associated with receivership.
The initial cost of the distressed note is $465000.
Amount of the payoff is $6000 per month.
No significant costs are related to the property’s environmental liabilities.
Net present value of the option is calculated as $653527.94.
Internal rate of rate is calculated to be 78%
The IRR is calculated by considering the 10% discount rate.

RECOMMENDATION

Legal options would be helpful for the recovery of the payments. Appointment of the receiver and the foreclosure should be taken for the recovery of the potential loss. This could decrease the defaults by giving some authority to the third parties, so that they could be responsible or able to make decisions on the behalf of the higher authorities. If the loans are not paid on maturity then the Foreclosure would be applied to regain the property. And for achieving the rights of the sale; it was necessary to sell it to another buyer. The study determines that the default occurred due the performance of the borrower. It means that the economic fluctuations or the fluctuations in the financial sector were the reason for the higher inflation,which had also increased the interest rates in the economy. So the best option is the receivership because it would have a higher internal rate of return and also a higher net present value as compared to the other options. Receivership would be helpful for effectively handling the receipt of the cash flow. The main or the core purpose of receivership is to reduce the loss incurrences under the terms of the entity instead of the lender.........................

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Commercial Real Estate Debt in Distress – Tony Harvard Case Solution & Analysis