Q: Why do we not use UCA Cash Flow for debt service analysis instead of the Business Cash Flow formula presented on Slide 18 and used throughout the webcast?

A:  Properly, we should use UCA cash flow for the most thorough analysis of a borrower’s ability to service debt. In the interest of time and overall efficiency we use the "Business Cash Flow" proxy because it includes the key cash flow dynamics affecting “pass through” companies like the Limited Liability Company, Partnerships, and a Subchapter S corporation in the Schumacher family of companies.

In this instance, the results from the "Business Cash Flow" proxy are quite close to UCA results. In fact, the companies look slightly better using UCA than they do using the "cash flow" proxy; so we're safe in doing so.

Q: Where were the cash living expenses reported?

A:  Mr. Schumacher did not report either income or living expenses as components of his Personal Financial Statement. Rather, he included only balance sheet information. Please refer to pages 23 and 24 in the Fritz Schumacher financial package to review the assumptions we were forced to make to arrive at an estimate of living expenses.

When a potential guarantor or direct borrower does not provide this information, the lender or analyst must prepare an estimate of what they were likely to be. Keep in mind that living expenses are notoriously inaccurate regardless of how provided and equally difficult to verify.

Note that in the lending industry, we seldom ask for documentation of living expenses to support a guarantor's estimates primarily because of competitive pressures.

Q: If living expenses are not reported, is there a general rule on how to calculate an estimate?  

A: There is no hard and fast general rule for estimating living expenses and no readily available statistics that link disposable income levels to living expense amounts. Living expenses vary greatly by individual and family.

An option in estimating living expenses might be to build of the concept of disposable income, defined as the amount of money that households have available for spending and saving after income taxes have been accounted for.  In doing so, one can estimate the guarantor’s effective income tax rate (federal and state), estimate other taxes the individual is required to pay, and compile the individual’s annual debt service. After subtracting these items and estimated savings from gross income, the result could be considered as the amount available to cover the individual’s living expenses. Please be guided by your institution’s policy and practices in doing so.    

But also be aware that the present savings rate is in the four to five percent range, which means that very little disposable income is left over for other purposes, such as supporting company debt service in a crisis.

Q: What is a margin account as cited in the Slide 30 excerpt from Mr. Schumacher’s Personal Financial Statement?

A: A margin account is a line of credit from a brokerage firm. Funds advanced under the line are used by the borrower to buy equities or bonds through the brokerage firm. The equities and bonds acquired in this way then serve as collateral for the line of credit.

In selling the investments acquired in this way, the investor must repay the advance (usually from the sales proceeds) and will receive only the net proceeds of the transaction. Note also that the margin account calls for a specific equity or “margin” position to be maintained (similar to a maximum LTV on the purchased securities) at all times. If the market value of equities begins to fall, the lending broker may call for the line to be paid down or repaid in full immediately to preserve the agreed upon “margin” or LTV ratio.

Q: Where did the Fresno Properties’ net income, interest expense, and depreciation expense used in calculating the company’s Business Cash Income on Slide 20 come from? The figures don’t match what’s reported in the 2014 income statement.

A: In projecting Fresno’s 2015 Business Cash Income we added the impact of the acquisition of the new income-producing property to the 2014 results. In doing so, we added the incremental net income from the new property, interest expense on the new loan, and the depreciation expense on the newly-acquired building. The rationale and supporting math are presented on slide 19.

We further assumed that all other operating revenues and expenses would be unchanged in 2015.  

Q: For cash flow purposes, did you only use Mr. Schumacher’s percentage of ownership interest with the individual companies?

A: No. If Schumacher guarantees or bears direct responsibility as a partner for a line of credit or term loan, he is fully responsible for all of the debt. We therefore use all his available cash flow or ready cash support in measuring his financial strength in his role. Ownership percentage doesn't play a role when the owner provides a guarantee or is a general partner responsible for all debt.

Q: What about general partner and co-owner Luis Castillo’s cash flow?

A: We would have included our analysis of his support had information about him been available and encourage you to do the same. Our focus in the webcast is on the concepts and techniques for Global Cash Flow and all of the practices we reviewed would be applied in analyzing Mr. Castillo.

As you may have experienced, there is often one partner or co-owner that is the “money man” like Mr. Schumacher who represents the real financial strength while the other person often provides little more than managerial expertise.

Q: Is this a true case study and if so what were the results?

A: This is a true case study that we’ve re-named, scaled the numbers, and actually cleaned up a bit. The Schumacher real estate companies have fallen on hard times, but the operating companies have held up.

Q: Where does the partner’s share of liabilities on the K-1 come from?

A: The partner’s share of liabilities at year end reported in Part II / Line K on the partnership Schedule K-1 represent each partner’s pro rata share of the partnership’s total debt as reported on the company’s financial statements. The IRS requires that these items be reported annually and are used to limit the loss a partner can claim if called upon to pay the associated debt.

Please note that this “pro-rata share” reporting in no way reduces a general partner’s responsibility for a partnership’s entire debt.   

Q: What about the $4,112,432 capital Schumacher contributed to Sequoia Properties? Where could that have come from?

A: Drawing on only the information in the company statements and Mr. Schumacher’s Personal Financial Statements, it is unclear where he initially got the cash. It’s important to note that the contribution was a non-cash transaction in 2014. As explained in Footnote 4, Mr. Schumacher converted the entire $4,112,432 from a long-term loan to equity in 2014. This would indeed be a topic for further discussion with Mr. Schumacher since we have no information about the source of cash he used in making the original loan to the company.