Instructor Blog - Global Cash Flow

Q: How would you estimate a guarantor's personal living expenses?

A: A guarantor will often provide rough estimates of his or her living expenses, which we always accept with a healthy dose of skepticism since the expense estimates are never supported with underlying documentation. In the face of this uncertainty, it becomes important to know the guarantor’s life style and be able to characterize that lifestyle as extravagant, conservative, or somewhere between the two. Your lifestyle assessment becomes an important influencing factor in estimate living expenses.

Moving forward with this basic degree of uncertainty, we can first identify the individual’s personal cash flow using information presented on the Form 1040 personal tax return. We then reduce that amount by our estimate of taxes, medical expenses, charitable contributions, and other expenditures we witness or can extract from the tax return. We might describe the result as adjusted personal cash flow available. We can further adjust this amount by required debt service plus estimated savings and investment (2018 average savings rate was 6%). The residual amount can be considered cash flow available for personal living expense.

The list can become quite extensive and calls on us to “Know Our Customer” beyond the regulatory sense through observation and conversation. That kind of familiarity is a strong source of information in determine what expenses go on the “cash flow adjustments” list. There are no tried and true databases or formulas to define personal living expenses. Personal living expenses are driven by personal financial priorities and discipline that we must come to know.

Q: Do you take into consideration a guarantor’s marital status as well as how many dependents are reported on their Form 1040 in defining personal living expense?

A: Consider the marital and dependent headcount as criteria in determining personal living expenses. Each person becomes another financial reduction to personal cash flow based on what you’ve observed in the family’s lifestyle. Your familiarity with the individual and your assessment of their lifestyle will be valuable in determining an actual amount.

Q: With Luis Castillo having 50% ownership of Fresno Properties, shouldn’t Castillo’s cash flow be included in the Global cash flow calculation?

A: Yes, if Mr. Castillo stands as a guarantor of LLC debt. We have no indication that he has taken on that role and have therefore not included his surplus personal cash flow or liquid assets in constructing Fresno Properties’ global cash flow.  

Q: If Mr. Castillo does not guarantee the loan, would Sequoia Properties’ cash flow and debt be adjusted to 50% given that Schumacher has only a 50% ownership interest?

A: No. Mr. Schumacher has signed an unlimited personal guarantee and is therefore responsible for all of Fresno Properties’ debt. Note also that if Mr. Castillo signs an unlimited personal guarantee, he is also responsible for all of Fresno Properties’ debt. The net effect is that an unlimited guarantee better protects the lender in the event the borrower is unable to satisfy its indebtedness.