When an opportunity contains multiple loans, in general, the profitability of the opportunity is impacted by the duration (maturity) of each loan within the opportunity. As a result, weighting each loan equally by using total net income and total equity to determine an opportunity's target without taking each loan's duration into consideration would misrepresent the profitability of the opportunity. The 'Scenario Weight' represents how PrecisionLender weights loans within an opportunity based on their duration. This figure is represented as a percentage. Utilizing information about the type of loan, the loan's maturity, and details from the loan's financial statement, we can determine the scenario weight for each loan within the opportunity.

Please note that these calculations only apply to opportunities.

Opportunities Without a Line of Credit

Calculation

  • Loan within the opportunity with the longest duration = 100%
  • Each remaining loan = (Length of Loan Duration / Length of Duration of the Longest Loan within the Opportunity) x 100%

For example, if there are 2 loans in an opportunity, a 60-month Commercial Installment and a 12-month Commercial Construction, then the scenario weights are:

  1. 60-month Commercial Installment = 100%
  2. 12-month Commercial Construction = 20%

 

Applied to Opportunity Return in PrecisionLender

Shows the financial statement for an opportunity with two term loans

  • This opportunity contains a
    • Commercial Real Estate - Investment
      • 5-year maturity 
      • Net Income = $9,443
      • Average Equity = $47,206
    • Commercial Installment
      • 7-year maturity
      • Net Income = $6,520
      • Average Equity = $36,221
  • Scenario Weight
    • Commercial Real Estate - Investment = (5 years/7 years) * 100% = 71.43%
    • Commercial Installment = 100%
  • Opportunity Return

=Weighted Net Income / Weighted Equity

=[($9,443 * .7143) + ($6,520 * 1)] / [($47,206 * .7143) + ($36,221 * 1)]

=$13,265.13/$69,940.25 (slight difference from financial statement due to rounding)

=18.97%

 

Opportunities with a Line of Credit

When the opportunity contains a line of credit, given that there is a probability that the line of credit may or may not be renewed once it reaches maturity, the expected renewal retention must be factored into the scenario weight.

Calculation

  • Loan within the opportunity with the longest duration = 100%
  • If a remaining loan is a line of credit, then weight = Summation of the initial weight with the probability that the scenario weight is renewed for each year remaining in the opportunity
    • Sum the following items
      • Initial Weight = (Line of Credit Duration / Length of Duration of the Longest Product in the Opportunity) x 100%
      • For each year remaining for the duration of the opportunity, multiply the expected renewal of the Line of Credit by the previous year’s weight
  • If a remaining loan is an installment loan, then weight = (Length of Loan Duration / Length of Duration of the Longest Loan within the Opportunity) x 100%

 

For example, if there are 2 loans in an opportunity, a 60-month Commercial Installment and a 12-month Line of Credit with a 50% expected renewal retention, then the scenario weights are:

  1. 60-month Commercial Installment = 100%
  2. 12-month Line of Credit
    • Initial Weight
      • Year 1 = (12 months / 60 months) * 100% = 20% 
    • Prior Year's Weight * Expected Renewal Retention
      • Year 2 = 20% * 50% = 10% 
      • Year 3 = 10% * 50% = 5%
      • Year 4 = 5% * 50% = 2.5%
      • Year 5 = 2.5% * 50% = 1.25%
    • Total Line of Credit Weight = 20% + 10% + 5% + 2.5% + 1.25% = 38.75%

 

Applied to Opportunity Return in PrecisionLender

scenarioWeightWithLOC.png

  • This opportunity contains a
    • Commercial Real Estate - Investment loan
      • 5-year maturity 
      • Net Income = $9,443
      • Average Equity = $47,206
    • Line of Credit
      • 1-year maturity
      • Net Income = $2,280
      • Average Equity = $12,000
      • Expected Renewal Retention = 75%
  • Scenario Weight
    • Commercial Real Estate - Investment = 100%
    • Line of Credit
      • Year 1: (1 year / 5 years) * 100% = 20%
      • Year 2: 20% * 75% = 15%
      • Year 3: 15% * 75% = 11.25%
      • Year 4: 11.25% * 75% = 8.4375%
      • Year 5: 8.4375% * 75% = 6.328%
      • Total Weight = 61.02%
  • Opportunity Return

=Weighted Net Income / Weighted Equity

=[($9,443 * 1) + ($2,280 * .6102)] / [($47,206 * 1) + ($12,000 * .6102)]

=$10,834.26 / $54,528.40 (slight difference from financial statement due to rounding)

=19.87%

  

Conversion Loans

Conversion Loans are recognized as having one combined maturity. If you’re pricing a single conversion loan, the combined maturity of both segments of the conversion loan represents the life of the opportunity. In this case, PrecisionLender uses a simple scenario weighting based on the maturity of the conversion loan. In other words, the denominator of the weighting is the total term of the two segments of the deal.

Calculation

Single Conversion Loan

  • Each loan = (Length of Loan Duration / Length of Conversion Loan Duration) x 100%

For example, if an opportunity contains a 24-month commercial construction loan that converts to 36-month permanent financing, then the total term of the conversion loan is 60 months, and the scenario weights are:

  1. 24-month construction loan = 40%
  2. 36-month permanent financing = 60%

Applied to Opportunity Return in PrecisionLender

The financial statement for a conversion loan is shown here

  • This opportunity contains a
    • Commercial Construction loan
      • 2-year maturity 
      • Net Income = $16,854
      • Average Equity = $89,688
    • Commercial Real Estate - Owner Occupied loan
      • 3-year maturity
      • Net Income = $10,293
      • Average Equity = $43,467
  • Scenario Weight
    • Commercial Construction = (2 years/5 years) * 100% = 40%
    • Commercial Real Estate = (3 years/5 years) * 100% = 60%
  • Opportunity Return

=Weighted Net Income / Weighted Equity

=[($16,854 * .40) + ($10,293 * .60)] / [($89,688 * .40) + ($43,467 * .60)]

=$12,917.40/$61,955.40

=20.85%

Additional Loans

If an opportunity contains a conversion loan, any additional loans will be weighted based on the loan with the longest maturity, since that loan represents the life of the opportunity.

For example, an opportunity contains a 24-month commercial construction loan converting to 36-month permanent financing, bringing the total term of the conversion loan to 60 months.

  • Adding a commercial installment with a 48-month maturity, the scenario weights for each loan are:

1. Commercial construction = (2 years/5 years) * 100% = 40%
2. Permanent financing = (3 years/5 years) * 100% = 60%
3. Commercial installment = (4 years/5 years) * 100% = 80%

Using the same example, an opportunity contains a 24-month commercial construction loan converting to 36-month permanent financing.

  • Adding a commercial installment with a 72-month maturity brings the life of the opportunity in this example to 72 months, and the scenario weights for each loan are:

1. Commercial construction = (2 years/6 years) * 100% = 33%
2. Permanent financing = (3 years/6 years) * 100% = 50%
3. Commercial installment = (6 years/6 years) * 100% = 100%