When the terms of a mortgage loan are being finalized, you might have heard the term “proceeds of disposition.” This term essentially refers to any amount you get in the form of a payout. It includes proceeds from the sale of REO properties, noncash, and prepayment assets.
Aside from a solid repayment plan, the key to success for the original debtor is a smooth and speedy transition of title to the next holder of the ills. This is best accomplished by a well executed security plan, a robust legal defense, and a few savvy creditor management tools. But before you run out the door, read this.
To get a solid grasp of the state of the art in secured credit, you’ll need to familiarize yourself with the myriad ways that your lender can enforce a defaulted loan. One such strategy is the “take possession” or “deed” of the collateral. This type of conveyance is a formal process that takes place when a debtor defaults on a loan. It can be done via an official court order or through a streamlined online process. In either case, the parties involved will be well on their way to a better tomorrow. For example, a borrower who defaults on an auto loan can be forgiven the remaining balance if the auto is sold privately to a prospective purchaser on terms deemed reasonable by the borrower.
Prepayment asset sale
The net proceeds from the sale of a company’s assets are used to pay off debt. This includes pari passu debt and senior secured leveraged ratchets. A recent report from Fitch Ratings outlines multiple ways that lenders can divert funds from their borrowers and use them for other purposes.
The most important requirement is to reinvest the proceeds within a reasonable period of time. Borrowers can receive an additional six months’ grace period. If the reinvestment fails to materialize, then the lender must offer to prepay a large portion of the proceeds. Alternatively, if the loan has been rolled over, the lender may offer to buy back the outstanding notes. However, the lender will need to prove that the money was not taken by the buyer.
There are many ways to get around this requirement. One option is to reinvest the disposal proceeds in a diversified portfolio of other assets. Another option is to use the funds for other purposes, such as a dividend payout. Lastly, the lender may opt to reinvest the proceeds of an asset sale to fund a new venture, or to recoup losses from a prior operation. While this isn’t an uncommon practice, it’s not the norm. In fact, the majority of credit agreements are largely void of this type of activity.
Despite the myriad of esoteric rules of thumb, borrowers are typically forced to reinvest the net proceeds of a business sale in a relatively short period of time. This is not to say that a sale does not have its merits. As long as the sale does not occur in the midst of a recession, a reinvestment of the net proceeds of a business sale is not out of the question. Nonetheless, it is wise to consider all options before deciding to sell assets.
REO disposition proceeds
REO properties present an opportunity for cost-effective investments. They are usually sold on an as-is basis, without defective titles, and come lien-free. However, if there are any problems, it is up to the buyer to make the necessary repairs. Also, if the property is in an area with high concentrations of REOs, there is a risk that unauthorized occupants will seek cash for the keys.
To minimize risks, a quality-assurance program is necessary. This involves monitoring the controls that are in place for key business processes. A detailed analytics program can help confirm the controls are operating as intended.
Data integrity is essential. It is important to have an accurate understanding of the cost and time required for property upkeep. There is also a need to forecast costs, allowing for accurate cost-benefit analyses. If a servicer is able to forecast the expenses involved in holding a property, it can better estimate the cost of reselling the property.
The ability to forecast costs is crucial for REO servicers. These estimates enable them to perform cost-benefit analyses and complete NPV analysis. In addition, they are crucial to decisions regarding disposition channels. Servicers should have a robust systems platform to leverage to forecast hold times and estimate hold costs.
Capacity models are crucial for forecasting the future volume of REOs. These models should be enhanced to factor in leading indicators and internal and external data. An inventory of historical data can also be analyzed to predict future volumes.
Foreclosure challenges have slowed the arrival of new inventory. Regulatory scrutiny has also been a significant factor. These factors have created a stale, low-value market. The servicer must ensure that it has the tools and controls to address its risks and achieve operational excellence.
Investing in a quality-assurance program for REOs is an excellent way to mitigate risk. By ensuring the integrity of data and controlling key processes, a servicer can develop an efficient liquidation program. With the right processes, a servicer can improve the recovery and return on investment for their clients. Moreover, an alternative liquidation model can be utilized to benefit the community.
If you hold stock through an employee stock purchase plan (ESPP), you may have a question about whether you will pay ordinary income tax on the proceeds of your disposition. If you are waiting for a qualifying disposition, you will not have to pay ordinary income tax. However, you may have to pay capital gains taxes on some of the proceeds. You can find out more about the tax treatment of ESPP shares on your company’s employee stock purchase prospectus.
An ESPP offers a discount on stock. The amount of the discount is determined by the price per share times the number of shares purchased. This is a valuable benefit to holders. It can be beneficial to sell at a high discount, especially if you expect the price to increase.
The tax treatment of a qualifying disposition depends on the timeline of events. For example, if you purchase stock through an ESPP in December and exercise the option in May, you must hold the stock for a full year before selling it. Otherwise, you will be considered a disqualified disposition.
A qualified disposition is defined as a sale of shares within one year of the date of purchase. In order to qualify for a discount, you must have held the shares for a full year. If you do not, you must sell the stock for less than the price you paid.
If you do not hold the stock for a full year, you are exposed to the risk of single-stock concentration. You will also need to report the difference between the purchase price and the sale price as ordinary income.
You may also be subject to a higher tax rate if you sell the ESPP shares quickly. This is because the discount you receive on the shares is locked in. If you are planning to sell the ESPP shares soon, it is best to wait until you are able to sell them for a fair price.
There are a variety of factors that affect the tax treatment of an ESPP Qualifying Disposition. As a result, you should consult a tax expert before making any decisions.
Among many other things, David A. Grantham is a contributing author to UmassExtension West Vancouver Blo. He is a renowned expert on real estate in BC.
Born in North Vancouver, Louisiana, Dr. Grantham grew up in Lower Lonsdale. He then went on to complete his business degree at the University British Columbia. As of this writing, Grantham has completed over 100 projects, including the development of a high rise building in Vancouver.
He is a husband, father, son, brother, and friend. He was a dedicated outdoorsman and enjoyed sports such as hunting, fishing, scuba diving, and snow skiing. His wife, Alison Grantham, and their two daughters survived him. He is survived by his wife Alison Martin Grantham and two daughters.