Management Assessment, Competitive Forces, and Projected Performance
Q: Where did the 0.519 multiplier used in identifying taxes due on company income used on Slide 35 come from?
A: The 0.519 multiplier is the sum of the maximum state and federal personal income tax rates in 2015 comprised of a 12.3% maximum for the State of California and 39.6% maximum federal tax rate as defined by the IRS. As indicated on Slide 35, we used the multiplier to estimate taxes payable on company earnings. In doing so we determined that the company would need to provide the partners with $37,364 in distributions if the maximum marginal tax rates applied to the partners. Since the maximum marginal income tax rarely applies – in fact, Schumacher's effective personal income tax rate for federal taxation was 27.9% in 2015 rather than 39.6% - the $37.364 is an over-estimate of the amount of distributions necessary to satisfy his personal income tax obligation on company earnings.
Q: Please explain the difference between the Combined Companies Debt Service Coverage (DSC) and Global DSC?
A: The Combined Companies DSC is the combined or total business cash flow for the four companies controlled by Mr. Schumacher divided by the debt service for the four companies. The actual calculation is $695,966 divided by $3,347,019 using information on Slide 47. The result is a combined DSC of 0.21.
Global DSC is defined as combined business cash flow plus the value of Mr. Schumacher’s contribution to global cash flow (GCF). GCF is calculated by adding the $272,706 value of liquid assets held by Mr. Schumacher to the $695,966 combined business cash flow of the four companies for global cash flow of $968,672. The final step is to divide the $968,672 global cash flow by combined company debt service of $3,347,019. Global DSC is 0.29.
Q: What should be our approach in analyzing income producing property that has no performance numbers as in the case of smaller properties without good accounting records or new construction with no performance? Is it appropriate to then use reasonable stabilized numbers provided by an appraisal?
A: If appraisal numbers are all you have, you'll need to work with them. Note that it is always wise to check with others familiar with the market and knowledgeable in performance metrics to determine the suitability of stabilized numbers from an appraisal. Knowledgeable contacts like lending colleagues, real estate agents, contractors with whom you have a relationship, or other owners of income-producing property in the area may be able to provide input or clarification as to how reasonable stabilized values are.
In the absence of reliable historic performance measures, it's imperative to pursue these issues to your satisfaction before committing funds.