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Cash Equivalency Adjustment

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GroundSwell

Sophomore Member
Joined
Apr 6, 2003
Professional Status
Certified General Appraiser
State
California
OK... my head is going to explode trying to figure this out. Any help is greatly appreciated.

Subject has existing note that must be assumed (hefty pre-payment penalty). Initial loan was for $1,911,142 and it commenced January 1, 2013. Interest rate is 7.0% with a 20-year term. Monthly payment is $14,874. Existing balance as of today is $1,675,441.

This is an owner/user deal and I'm assuming SBA financing with a 4.50% interest rate and 20-year term. I'll spare the details, but I'm coming up with a $310,000 adjustment, but I'm not very confident about my methodology. Again, any input would be greatly appreciated.
 

KHS445

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Joined
Aug 20, 2011
Professional Status
Appraiser Trainee
State
Michigan
I would need to look at and at least consider the time value of money and possible tax implications as much of the difference is deductible interest. How big is the prepayment and does it run the life of the loan or does it decline with time/balance? What is the difference between the prepayment penalty and the adjustment number you have calculated? Your adjustment calculation is 18.5% of the current balance of the loan. In 25 years of banking and 15 years of appraising I have never seen a prepayment penalty that was 18.5% of the loan balance, nor have I seen one that runs the entire length of the loan. Is the loan truly a fixed rate for the entire term? Another consideration would be seller financing at a lesser rate with the seller assuming some of the rate risk, but spreading it over the life of the loan.

You would have to check with a tax advisor, but could the buyer assume the loan and then refinance and take the prepayment penalty as an expense. Are there issues with the buyer's credit, payment ability, down payment, etc.? The reason I ask is maybe the buyer has issues and the only way they can purchase the property is via assumption or seller financing.
 

GroundSwell

Sophomore Member
Joined
Apr 6, 2003
Professional Status
Certified General Appraiser
State
California
Great questions. I should have mentioned that the note is private money. Reportedly, prepayment penalty is $700,000 and it runs for 10 years (about 5.75 years remaining). Very unusual, but then again... it's private money.
 
Last edited:

Howard Klahr

Senior Member
Joined
Oct 4, 2004
Professional Status
Certified General Appraiser
State
Florida
In 25 years of banking and 15 years of appraising I have never seen a prepayment penalty that was 18.5% of the loan balance, nor have I seen one that runs the entire length of the loan.
Not stating that the adjustment stated by the OP is correct, but, there have been a few periods where the current rates have declined to such a level that the defeasance prepayment penalty could be that large.
 
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