Instructor Blog - Credit College - Commercial Real Estate

Q: On Slide 10, I don't believe the analytical statement is correct. The financial value of Schumacher's guarantee is also valued for his personal assets, that could be sold at a discount to help service debt.

A: The descriptive statement used the term "...in a crisis..." which forces our focus on his liquid personal assets. From reviewing Schumacher's balance sheet, it is apparent that $270,000 is the most he could access quickly in a crisis to support company debt service if the company ran into a cash flow crisis and could not do so.
Over a longer period of time, Schumacher could sell his residence and vacation home but the timing and the price are very uncertain. His ability to sell notes receivable from related parties and to sell his unlisted investments – all companies he owns – is highly uncertain if a crisis should hit any related party.
In a cash flow crisis, $270,000 is all we could expect him to provide in support of company debt service in a relatively short period of time. If the crisis continued for some period of time, he may or may not be able to sell liquid assets in sufficient quantity and within a sufficient time frame to ward off bankruptcy via the company's inability to service its debt.

Q: If you don't have access to three years of rent rolls, or they are inaccurate (mismanaged, etc.) do you still think of appraisal values as of limited use?

A: As a general rule, use whatever information is at your disposal that seems to you to best reflect actual operating events. Rent rolls and operating statements for an income producing property are very helpful because they are the facts on the ground, so to speak. But if you have no facts on the ground, then exercise your own judgment in determining if appraisal values make sense. It could be helpful, too, to seek a second opinion by touching base with local real estate agents and asking for their input and assessment about any issue or value that raises questions for you.