I want to give you $5,000 of my building as a gift. My building cash flows $400,000 after debt service. I built the building for $15,000,000 with 80% leverage so I put $3,000,000 down.
Do you get .16% of cash flow (5000/3,000,000), or $640 or do you get .03% of cash flow (5000/15,000,000) or $133?
My parents always taught me that there's no free lunch. What's up with your building and why you gifting it to me?
This is a very weird hypothetical with weird numbers. Did someone ask this on an assignment or in an interview?
Someone asked me this hypothetically, I phrased it vague because it was phrased vaguely to me.
A
Idk why what they paid for it has anything to do with this? Wouldn't the building technically be worth more or less than PP due to depreciation?
The more I think about this the more awful this question is.
The answer is that it's more of a hassle than anything of value.
Real answer is getting it appraised and giving a commensurate proportion of the appraised value as a portion of your equity in the deal. Although the appraisal will cost more than $5k for a ~$15 million property, so again, it's silly and not worth it.
I'd say it's the $5K / ($3M + amortized principal) of the owner's equity.
This is the correct answer. You’re gifting a portion of the building that generates cash flow, not a portion of the cash flow.
Also like everyone said, this thread is dumb.
I disagree, I would view this as a recapitalization with a loan assumption.
The way the question is phrased: what the owner "bought in" for ($3mm) has nothing to do with the value of the building today. I interpret the question as:
I want to give you $5,000 of equity in my building as a gift. The missing variable is the current value of the building. Assuming the building is worth $20,000,000 today, that would be a 0.025% ownership stake in the property. Assuming no amortization, the lender still owns $12,000,000 of the property which would be a 60% stake. OP owns $3,000,000 of his original equity, plus an additional $4,995,000 of appreciation, which would be a 39.975% ownership stake.
As far as the cash flows go, it depends on the agreed upon structure, but assuming its pro rata and the lender has 0 participation in profits, then i would view the equity ownership as $8,000,000 with OP owning 99.9375% and the $5,000 holder owning 0.0625% of the equity, and i would split profits accordingly.
The only value of the building that matters is the value at the time of recapitalization.
That's probably not the purpose of the question. And they're certainly not reading that far into things based on how it's worded.
You don't have the right to give away a portion of the liabilities, you only have a right to give away a portion of the equity. Now, you might say you're giving them a percentage interest in the building equal to x% of the total asset value, which would give them a claim to x% of the CFaDS. But this just comes down to semantics between the two parties as to how the % is determined, which is why this is a stupid question.
This is like the real estate version of Rubin's Vase.
Qui repellat sed rerum nesciunt qui. Et laboriosam tempora debitis qui animi. Accusantium rerum molestiae ut repudiandae perspiciatis.
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