Commercial Space

To Sell or Not to Sell a Note?

Recently, I replied to a post from someone that had sold a commercial building for $650,000. The buyer put $250,000 down and the seller agreed to hold a first mortgage note with a rate of 12% with 8 points financed into the deal. An attorney properly prepared the documents and the buyer has been paying well. The seller then began to receive many calls from people wanting to buy his note. He wanted to know if he should sell. Here was my reply to his question…

If the loan is performing, it sounds as if you are getting a strong yield at 12%, but you have to ask yourself what yield you would receive on the funds that you would receive if you sold the note. It’s primarily about “opportunity cost”. Can you deploy the capital for more than your current yield. One thing to keep in mind is the taxation hit you will take from the sale. The 8 points you grabbed up front are fully earned when the deal is signed, but it is amortized out over the loan term for accounting purposes. Once you sell it, however, those earnings will be charged in the period you sell it in spiking your yield, but perhaps causing you a tax hit. One other thing to consider is that most of the people wanting to buy your note and going to want to discount it. Another consideration is that, at a 12% note rate, the seller is probably going to refinance it as soon as possible to bring that rate down meaning that selling at a discount might be a poor move. If you feel that your payment stream will continue without an issue, I would strongly suggest holding on to it unless you get an obscenely great offer. Good luck!