Working at Workouts: Commercial Real Estate Debt in Distress Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Working at Workouts: Commercial Real Estate Debt in Distress Case Solution

Without appointing the receiver; Schey would be unable to know whether the cash flows of the property were as Burton reported. Due to the reason that the lock-box provision was not included in the original note; Burton was personally collecting the rent. In case the property would have been sold through receivership and the proceeds of sales wouldn’t have been enough for covering the principle owed; the right to seek the deficiency judgment would have been lost by the Drive against Burton.

Another drawback of the foreclosure is that under the G.U.S.T Trust Fund, the underground storage tanks were three on the property, which were being protected. A location was not getting gas since the year 2001, which demonstrated the uncertainty related to the environmental risk.

Discounted Payoff from FCSB:

Benefits:

There are various benefits of the discounted payoff from FCSB, such as: reduction in modified rate of interest from 6% to 4% before the maturity time, which in turn tends to lead towards the acceptance of the debt in complete amount by the lender, hence providing an aid in mitigating the risk of being defaulter.

Costs:

The cost associated to the discounted payoff from FCSB is the renewal of the debt before the maturity time, which in turn leads to the acceptance of loan amount in full but at the same time increases the loan’s time period, which in turn leads to additional payment of interest.

Receivership:

Benefits:

One of the considerable benefits of receivership is that it preserves property during the time required to prosecute the lawsuit. By appointing receivership on behalf of original borrower; the company would be able to recover from losses incurred due to the defaulted loans. It is one of the most feasible options, because it aims to overcome the losses under the terms of borrowers instead of lenders.

Costs:

The option would result in an additional cost,such as: administration cost as well as general cost related to the receiver of payments & to pay receipt of loan to lender. Thus, this extra cost would be the burden of the original borrowers instead of the intermediary.

Past due principal and Interest:

Benefits:

The benefits of the Past due principal and Interest is the delinquent property tax payment must be made by the borrower in the amount of 6,000 per month.

In contradiction to benefits, the cost of this option is the addition of past due payments, which includes:interest payment and principle amount that are added back to the outstanding balance amount, which tends to increase the burden related to the principle and interest payment of loan.

Quantitative Analysis

For the calculation of the expected returns of the option of Foreclosure; a number of assumptions are used, such as: the duration of process of foreclosure is 3 months, the administrative and legal cost related to foreclosure is $50000, which is due at the end of the foreclosure. The initial cost of distressed note is $465000.Furthermore, there are no significant costs relatedto the property’s environmental liabilities. The net present value of the option is calculated to be $575728.60; whereas, the internal rate of rate is calculated to be 70% by assuming the discount rate of 10%.

For the calculation of the expected returns of the option of receivership; a number of assumptions are used, such as: the duration of process of foreclosure is 3 months and the administrative and legal cost related to receivership is $30000. The initial cost of distressed note is $465000.Furthermore, there are no significant costs relatedto the property’s environmental liabilities. The net present value of the option is calculated to be $613294.34; whereas, the internal rate of rate is calculated to be 74% by assuming the discount rate of 10%.

For the calculation of the expected returns of the option of Discounted Payoff; a number of assumptions are used, such as: the duration of process of foreclosure is 3 months, there is no administrative and legal cost related to receivership. The initial cost of distressed note is $465000.The accrued interest is 5.75% on the rent received and the amount of the payoff is based on 75% LTV. Furthermore, there are no significant costs related to the property’s environmental liabilities. The net present value of the option is calculated to be $470746.72; whereas, the internal rate of rate is calculated to be 63% by assuming the discount rate of 10%.

For the calculation of the expected returns of the option of Past due principal and Interest, a number of assumptions are used, such as: the duration of process of foreclosure is 3 months, and there is no administrative and legal cost related to receivership. The initial cost of distressed note is $465000.The amount of the payoff is $6000 per month. Furthermore, there are no significant costs related to the property’s environmental liabilities. The net present value of the option is calculated to be $653527.94; whereas, the internal rate of rate is calculated to be 78% by assuming the discount rate of 10%.

Recommendation

Taking under consideration the evaluation and assessment of various option to overcome the potential losses through the loan default; the most feasible and viable option is receivership because of the highest internal rate of return& highest net present value. Furthermore, this option would help the company in handling the additional cost related to the debt as well as in an effective management of the receipts of cash flow under the high-generated value. The option of receivership provides strong basis as the core purpose of receivership is to overcome the losses under the terms of borrower instead of the lender.........................

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Working at Workouts: Commercial Real Estate Debt in Distress Harvard Case Solution & Analysis