The same building priced two ways, with the forced-sale discount, costs, holding period and time value separated.
On the same building and the same loan, a consensual sale recovers far more than enforcement because it avoids the forced-sale discount and finishes sooner. On an 82.5 million defaulted office loan secured on a building worth 77.44 million, a cooperative sale returns a present value of 66.42 million, or 80.5 cents on the euro, against 46.42 million, 56.3 cents, for enforcement: a gap of 20.00 million, or 24.2 cents, almost all of it discount and delay.
Worked in full in The Real Estate Workout by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
In a consensual sale the borrower agrees to market the property with the lender's consent and hand over the proceeds. Nothing about the building changes. What changes is the buyer's view of the seller: a building sold by an owner who is cooperating, with access, data and a normal timetable, trades close to market value. A building sold out of enforcement carries the stigma of a distressed sale, a receiver who cannot answer every diligence question, and a calendar set by the court or the security agent. Every one of those differences is a number, and they are worth computing side by side, on the same discount rate, rather than arguing about which route “feels” cheaper.
The case is Harbour Quay, the broken office loan that runs through the book: an office bought at a 4.50 per cent yield whose market has moved to 6.65 per cent. The consensual sale uses the assumptions of Chapter 6.
| Input | Enforcement | Consensual sale |
|---|---|---|
| Net operating income today | 5.15 | 5.15 |
| Market yield today | 6.65% | 6.65% |
| Market value (income ÷ yield) | 77.44 | 77.44 |
| Loan outstanding, with accrued interest | 82.5 | 82.5 |
| Discount to market value | 18.0% | 3.0% |
| Years to cash | 2.25 | 0.9 |
| Transaction costs, share of gross | 5.5% | 2.5% |
| Holding costs a year, share of value | 2.1% | 2.1% |
| Lender's discount rate | 9.0% | 9.0% |
Loan to value is already 106.5 per cent. The sponsor's equity is gone, which is exactly why its cooperation cannot be assumed: it has nothing left to protect except its reputation and whatever the lender offers.
Gross proceeds = value × (1 − discount)
Net proceeds = gross − gross × costs − value × holding rate × years
Present value = net ÷ (1 + 9.0%)years
In Excel: =(B1*(1-B2)*(1-B3)-B1*B4*B5)/(1+B6)^B5
Enforcement. Gross proceeds are 77.44 × 0.82 = 63.50. Costs of 5.5 per cent take 3.49, and holding the building for 2.25 years at 2.1 per cent of value takes 3.66. Net proceeds are 56.35. Discounting over 2.25 years at 9.0 per cent (a factor of 0.8237) gives 46.42, a recovery of 56.3 per cent and a loss of 36.08.
Consensual sale. Gross proceeds are 77.44 × 0.97 = 75.12. Costs of 2.5 per cent take 1.88 and 0.9 years of holding costs take 1.46. Net proceeds are 71.78, discounted with a factor of 0.9254 to 66.42: a recovery of 80.5 per cent and a loss of 16.08.
| Source of the gap | Amount |
|---|---|
| Smaller discount to market value (75.12 against 63.50) | 11.62 |
| Lower transaction costs | 1.61 |
| Fewer months of holding costs | 2.20 |
| Earlier cash: less discounting | 4.57 |
| Present value gap | 20.00 |
The consensual sale is worth 43.1 per cent more than enforcement. The forced-sale discount is the largest item, but the calendar is worth more than a third of the gap once holding costs and discounting are added together: 2.20 plus 4.57, against 11.62 for the discount itself.
A consensual sale is not guaranteed to run to Chapter 6's timetable or price. The sensitivity shows how much room there is before it stops beating enforcement.
| Discount | Years | PV | Recovery | Lead |
|---|---|---|---|---|
| 3% | 0.9 | 66.42 | 80.5% | 20.00 |
| 3% | 1.5 | 62.22 | 75.4% | 15.80 |
| 8% | 0.9 | 62.93 | 76.3% | 16.51 |
| 8% | 1.5 | 58.90 | 71.4% | 12.48 |
| 13% | 0.9 | 59.43 | 72.0% | 13.02 |
| 13% | 1.5 | 55.58 | 67.4% | 9.16 |
The consensual sale only falls to the enforcement value if it sells at a 31.6 per cent discount, deeper than the forced sale itself, or takes 4.2 years at a 3 per cent discount. Going the other way, if a forced sale would cost 30 per cent rather than 18, enforcement falls to 39.19 (47.5 per cent) and the gap widens to 27.24. If enforcement could be done at a 10 per cent discount, the consensual sale still leads by 15.18.
Because the sponsor's equity is negative, it needs a reason to sign. The 20.00 million gap is the ceiling on what cooperation is worth to the lender; paid at completion, that is 21.62 million. Nobody pays that. A typical release or cooperation fee is a fraction of it: at 2 per cent of value, 1.55 million at completion, the present cost is 1.43 and the lender keeps 18.57 of the 20.00. The negotiation is over how the gap is split, not over whether the consensual route is better.
Comparing the two routes on gross sale price alone. That captures the 11.62 of discount and misses the 8.38 that comes from costs, holding and time, which is why committees routinely underpay for cooperation. The second mistake is to discount the routes at different rates, or to compare a consensual sale at today's value with an enforcement figure taken from an old valuation. Use one value, one rate and each route's own timetable.
A consensual sale still depends on the borrower behaving. Build in protections: a marketing timetable with milestones, the lender's approval of the agent and the price, and the right to switch to enforcement if a milestone is missed, so the clock lost is measured in months rather than years.
On Harbour Quay, cooperation is worth 20.00 million, or 24.2 cents on the euro, before anyone is paid for it. Price both routes on the same value and discount rate, then decide what share of that gap to offer. The free workbook for this case prices enforcement, extension, discounted payoff and consensual sale side by side. For the alternatives, see deed in lieu vs foreclosure and what a month of delay costs in an enforcement.
Buyers price the seller as well as the building. A cooperating owner offers access, data and a normal timetable, so the illustrative discount to market value is 3.0 per cent against 18.0 per cent in enforcement. On a building worth 77.44 million that alone is 11.62 million of gross proceeds, before costs and time are counted.
The ceiling is the present value gap between the two routes, 20.00 million in the Harbour Quay case. In practice the fee is a small share of it: a fee of 1.55 million paid at completion costs 1.43 million in present value and leaves the lender 18.57 million better off than enforcing.
Only when the consensual route goes badly wrong. On the Harbour Quay assumptions the consensual sale matches enforcement only if it sells at a 31.6 per cent discount, deeper than the forced sale, or takes 4.2 years. That is why lenders keep a right to switch to enforcement when marketing milestones are missed.
This article is one calculation from The Real Estate Workout. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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