I was wondering whether anyone can explain this to me. I’m doing this case study where a developer is building an apartment block which is almost complete but due to unforseen circumstances needs to sell this quickly. There’s a paragraph that says
“The seller’s opportunity rate is 30%. In other words, she expects to earn 30% after taxes on any equity coming out of this property or, conversely, would discount future cash flows from this property, if she holds it, at a 30% discount rate. On the other hand, she might be willing to take back financing in order to make the deal. She knows several investors who will buy second mortgages using a 18% discount rate. If she takes back a second mortgage at less than 18%, she will have to sell it at less than par. The developer’s basis upon completeion for tax purposes will be $18 million estimated as of six months from now which is as soon as he could resonably expect to complete the sale of the property.”
My understanding is (correct me if i’m wrong)
In this instance, a second mortgage mean she is taking another loan to pay off the first mortgage (bank loan) using the property as collaterial
The 18% discount rate is the interest rates that the second mortgage would be based on. However, if it is less than 18%, why would she be forced to sell at less than par value??
can someone please clarify please??
Thank you in advance
Chewy
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