We can buy 1st lien position distressed notes (called “Non-Performing Notes (NPN)”) that are secured by commercial and residential income property. NPN represent an opportunity to realize at least 20% annualized yield by purchasing the NPN at deep discounts, providing funds for rehabilitating and repositioning the underlying real property with recasting the note to more affordable payment terms, and then refinancing or selling the repositioned, stabilized income property.
We gather together private financiers to form a group investment in great NPN opportunities, we handle the due diligence, we negotiate with the note holder and the debtor, we supervise the renovation and repositioning effort, and we handle the final disposition of the recast note by refinancing or selling the repositioned, stabilized property. We only consider NPN opportunities that provide at least net 20% annualized yield to our private financiers. Most NPN opportunities offer much higher yields, but we cannot say how high because of “Blue Sky” laws.
Here is a hypothetical example of the opportunity to invest in Non-Performing Notes:
We find a NPN and its underlying income property is distressed with low income and deferred maintenance.
1. The Current Operating Data is:
1.1. Gross Scheduled Income (GSI) $253,650
1.2. Vacancy and Credit Loss $0
1.3. Actual Rental Income (ARI) $253,650
1.4. Other Income $0
1.5. Effective Gross Income (EGI) $253,650
1.6. Gross Operating Expenses (GOE) –$152,190
1.7. Net Operating Income (NOI) $101,460
1.8. Capitalization Rate (CAP) ÷8.46%
1.9. Capitalized Property Value (CPV) $1,200,000
1.10. Apparent Equity –$600,000
2. The Non-Performing Note (NPN) parameters relative to CPV:
2.1. Unpaid Principal Balance (UPB) $1,800,000
2.2. Loan to Value Rate 150.00%
2.3. Annual Interest Rate 7.00%
2.4. Amortization Periods 360
2.5. Annual Debt Constant 7.9836%
2.6. Debt Coverage Ratio 0.7060
2.7. Annual Debt Service –$143,705
2.8. Annual Net Cash Flow –$42,245
The note service is $42,245 more than what the current Net Operating Income can service. The Debt Coverage Ratio (DCR) is 0.7060 (less than 1.00 is negative cash flow).
3. After Repositioning Operating Data:
3.1. Gross Scheduled Income (GSI) $360,000
3.2. Vacancy and Credit Loss $0
3.3. Actual Rental Income (ARI) $360,000
3.4. Other Income $0
3.5. Effective Gross Income (EGI) $360,000
3.6. Gross Operating Expenses (GOE) –$144,000
3.7. Net Operating Income (NOI) $216,000
3.8. Capitalization Rate (CAP) ÷8.94%
3.9. After Repositioning Value (ARV) $2,415,702
3.10. Protective Equity $724,702
4. The Recast Note Parameters relative to ARV:
4.1. Face Value $1,691,000
4.2. Loan to Value Rate 70.00%
4.3. Annual Interest Rate 6.00%
4.4. Amortization Periods 9,999
4.5. Annual Debt Constant 6.0000%
4.6. Debt Coverage Ratio 2.1289
4.7. Annual Debt Service –$101,460
4.8. Annual Net Cash Flow $114,540
By recasting (modifying) the note, we can offer the debtor relief in the form of debt service that the current Net Operating Income can pay, a repositioned strong Debt Coverage Ratio (DCR) of 2.13 (net positive cash flow), and 30% created equity. The repositioned DCR provides a very good protective cash flow margin to tolerate recessionary pressure on income and expenses.
You may have noticed that we don’t play gimmicks by compressing the CAP rate to expand the apparent property value. The After Repositioning Value (ARV) is actually based on a higher CAP rate than the currently Capitalized Property Value (CPV). After repositioning, the debtor can refinance or sell the property to redeem our note.
5. Note Purchase Parameters:
5.1. Reposition Units 60
5.2. Reposition Cost per Unit ×$6,000
5.3. Reposition Cost Total $360,000
5.4. Assignment Fee (5.00% TIF) $37,820
5.5. Note Purchase Price $358,579
5.6. Total Investment Funds (TIF) $756,399
5.7. TIF to UPB Rate 42.02%
5.8. TIF to CPV Rate 63.03%
5.9. TIF to ARV Rate 31.31%
We are a full service provider. We can manage this group investment on behalf of our private financiers for a nominal asset management fee.
6. The syndication parameters for this group investment:
6.1. Membership Units Reserved 1
6.2. Membership Units Sold +9
6.3. Membership Units Total 10
6.4. Membership Unit Price $85,155
6.5. Membership Unit Profit $92,460
6.6. Asset Management Fee $10,000
6.7. Membership Total Funds (MTF) $766,399
6.8. Membership Net Yield 108.58%
6.9. Membership Gross Yield 208.58%
6.10. Membership Cash Flow Reserved $10,146
6.11. Membership Cash Flow $91,314
6.12. Membership Cash Flow Yield 11.91%
The investment is protected by substantial equity that increases over the life of the repositioning project. The repositioning effort for 60 units will need about 6 months, plus another 6 months to establish a stabilized operation history. In one year, our private financiers have returned their initial investment, redeemed the note for over 100% profit, plus they received about 12% net yield on the cash flow during the project. This is a win-win-win solution for the creditor, debtor, and for our private financiers.
Contact us on our support page for more information.