Questions and Answers, Global cash Flow, October 5, 2010
Q: Given that the primary focus of repayment analysis is the capacity of the borrower, will the regulators be looking for a "primary source of repayment" that focuses on the borrower, rather than the cash flow Capacity of the subject property (even though as a practical matter, Primary repayment comes from property cash flow)?
A: Yes. Property cash flow contributes to borrower cash flow; however, the borrower is the obligor on all indebtedness. Fresno Properties LLC owns several properties, in addition to the proposed Shadelands Glen acquisition, and cash flow from the new property could easily be redirected to other financial needs within Fresno Properties.
Even if the borrower is a single asset entity, the borrower may still use up cash that comes into it from the property for reasons other than debt service.
Q: Is the "proxy for cash flow" the same as EBIDTA?
A: Our proxy for "cash flow" is not EBITDA. It is actually EBITDA minus distributions and loans to owners for all non Subchapter C corporations. For a C Corp, our proxy is really EBITDA minus loans to owners.
You should remember that our “cash flow” proxies do not take into consideration any balance sheet changes that supply or use cash. For that purpose we would utilize the UCA cash flow. However, for the most part, the related companies we used in the webcast, accrual cash flow was similar to UCA cash flow.
Q: Can you please explain again why depreciation was added back on slide on slide 24 since it is a non-cash item?
A: Our task in that portion of the webcast is to work from NOI to actual bottom line profit for the property. NOI is really EBITDA and, accordingly, we need to reduce it by interest expense and depreciation expense to arrive at profit before tax.
Q: What is the reason for the change in preliminary site costs (increase by $4.6MM in 2007 over 2006) for Sequoia properties?
A: Sequoia Properties is a real estate development company for the Taco Bell franchises run by Clovis Supply, the operating company. The increase in preliminary site costs most likely represents further expansion of Taco Bell locations. This expansion was financed by the increase in long term debt approved by the bank, and we might question the wisdom of that growth given the overall financial condition of this group of companies.
Q: What is the reason for the increase of nearly $4.2MM in partner's capital in 2007 over 2006 for Sequoia Properties?
A: As noted in Note 4 in the Sequoia Properties financial statements, during 2007, Mr. Schumacher converted $4.1 million of personal loans to Sequoia Properties from long term debt to equity.
Q: Regarding Sequoia Properties, what is reason for the increase in total assets from $25.3 million to $32.8 million?
A: The primary reason for the total asset increase was the growth in preliminary site costs which represent further expansion of the real estate development activities of Sequoia Properties.
Q: What is the best way to determine distributions and contributions with regard to S-Corps since this is not listed on the K-1?
A: Regarding distributions and/or contributions for a Subchapter S corporation, a reconciliation of net worth from one year to the next should reveal any funds distributed or contributed (in the form of equity) during the year. If the owner of a Subchapter S corporation contributed funds to the company in the form of loans, the difference in due to stockholder from one year to the next would reflect the amount of the loan.
Q: How were the living expenses calculated for Schumacher? We do understand that this was an estimate, but we just wanted to know if you had any standard way of estimating these expenses for guarantors?
A: For the purposes of the webcast, Mr. Schumacher’s personal living expenses were taken from his personal financial statement which was included in the downloaded material.
Establishing personal living expenses for our borrower is no doubt one of the most difficult areas that we must address in credit analysis. Frequently, the personal financial statement is incomplete, and we must discuss the amount of those expenses with our borrower in addition to using our personal observation of our client’s lifestyle.
Q: Given that the primary focus of repayment analysis is the capacity of the borrower, will the regulators be looking for a "primary source of repayment" that focuses on the borrower, rather than the cash flow Capacity of the subject property (even though as a practical matter, Primary repayment comes from property cash flow)?
A: Yes. Property cash flow contributes to borrower cash flow; however, the borrower is the obligor on all indebtedness. Fresno Properties LLC owns several properties, in addition to the proposed Shadelands Glen acquisition, and cash flow from the new property could easily be redirected to other financial needs within Fresno Properties.
Even if the borrower is a single asset entity, the borrower may still use up cash that comes into it from the property for reasons other than debt service.
Q: Is the "proxy for cash flow" the same as EBIDTA?
A: Our proxy for "cash flow" is not EBITDA. It is actually EBITDA minus distributions and loans to owners for all non Subchapter C corporations. For a C Corp, our proxy is really EBITDA minus loans to owners.
You should remember that our “cash flow” proxies do not take into consideration any balance sheet changes that supply or use cash. For that purpose we would utilize the UCA cash flow. However, for the most part, the related companies we used in the webcast, accrual cash flow was similar to UCA cash flow.
Q: Can you please explain again why depreciation was added back on slide on slide 24 since it is a non-cash item?
A: Our task in that portion of the webcast is to work from NOI to actual bottom line profit for the property. NOI is really EBITDA and, accordingly, we need to reduce it by interest expense and depreciation expense to arrive at profit before tax.
Q: What is the reason for the change in preliminary site costs (increase by $4.6MM in 2007 over 2006) for Sequoia properties?
A: Sequoia Properties is a real estate development company for the Taco Bell franchises run by Clovis Supply, the operating company. The increase in preliminary site costs most likely represents further expansion of Taco Bell locations. This expansion was financed by the increase in long term debt approved by the bank, and we might question the wisdom of that growth given the overall financial condition of this group of companies.
Q: What is the reason for the increase of nearly $4.2MM in partner's capital in 2007 over 2006 for Sequoia Properties?
A: As noted in Note 4 in the Sequoia Properties financial statements, during 2007, Mr. Schumacher converted $4.1 million of personal loans to Sequoia Properties from long term debt to equity.
Q: Regarding Sequoia Properties, what is reason for the increase in total assets from $25.3 million to $32.8 million?
A: The primary reason for the total asset increase was the growth in preliminary site costs which represent further expansion of the real estate development activities of Sequoia Properties.
Q: What is the best way to determine distributions and contributions with regard to S-Corps since this is not listed on the K-1?
A: Regarding distributions and/or contributions for a Subchapter S corporation, a reconciliation of net worth from one year to the next should reveal any funds distributed or contributed (in the form of equity) during the year. If the owner of a Subchapter S corporation contributed funds to the company in the form of loans, the difference in due to stockholder from one year to the next would reflect the amount of the loan.
Q: How were the living expenses calculated for Schumacher? We do understand that this was an estimate, but we just wanted to know if you had any standard way of estimating these expenses for guarantors?
A: For the purposes of the webcast, Mr. Schumacher’s personal living expenses were taken from his personal financial statement which was included in the downloaded material.
Establishing personal living expenses for our borrower is no doubt one of the most difficult areas that we must address in credit analysis. Frequently, the personal financial statement is incomplete, and we must discuss the amount of those expenses with our borrower in addition to using our personal observation of our client’s lifestyle.