Portfolio sale sequencing and remaining debt feasibility

The order of portfolio sales can change how much cash is released and whether the retained properties remain financeable. A strong property may produce attractive sale proceeds while removing the income that supports weaker assets. Test each proposed sale as a sequence of debt repayments, residual income and remaining constraints rather than adding independent property-equity estimates.

A historical SEC-filed portfolio disclosure illustrates release mechanics that consider the remaining pool. Its actual terms are more detailed than the model below. All prices, release rules and coverage requirements here are hypothetical; the model does not establish a right to sell or release collateral.

Define a simple common starting point

Assume three properties have values of $5 million, $3 million and $2 million, with annual accepted cash flow of $500,000, $240,000 and $100,000. Pool debt is $6 million, interest-only at 8%, so annual debt service is $480,000 and coverage is $840,000 ÷ $480,000 = 1.75x.

For this exercise, each property has a contractual allocated amount: A $3 million, B $1.8 million and C $1.2 million. A release requires 110% of the allocated amount as principal repayment, capped at current principal, and the remaining pool must have at least 1.25x DSCR. Assume remaining interest payments recalculate at 8% on the reduced balance. Selling costs are 3% of price. Ignore all other conditions and fees only to isolate sequencing.

Sell the strongest income contributor first

A sells for $5 million, producing $4.85 million after costs. Its initial release repayment is $3.3 million, leaving $2.7 million of debt. B and C retain $340,000 of annual cash flow; debt service is $216,000 and coverage is 1.574x. Cash released to the owner is $1.55 million.

If B is sold next for $3 million, net sale proceeds are $2.91 million. Its initial release repayment is $1.98 million, leaving $720,000 of debt against C. C’s $100,000 cash flow supports $57,600 of interest, or 1.736x coverage. The second sale releases $930,000. C remains with $720,000 debt.

Under this sequence and these assumptions, both residual tests pass. Total released cash from A and B is $2.48 million before other uses.

Reverse the same two sales

Now sell B first and A second, keeping the same prices, allocation rules and final retained property C. B produces $2.91 million after costs and requires $1.98 million principal repayment. Remaining debt is $4.02 million; A and C produce $600,000 annual cash flow against $321,600 interest, or 1.866x coverage. The first sale releases $930,000.

A then produces $4.85 million and requires $3.3 million repayment. Remaining debt is again $720,000 against C, with the same 1.736x coverage. A releases $1.55 million. Combined cash is $2.48 million, exactly the A-then-B result. Both sequences pass the assumed interim tests. With no timing changes, other costs or different conditions, reversing these same sales does not create extra aggregate sale cash or change the final collateral.

Add a dated liquidity requirement

Assume the first sale closes on day 0, the second on day 30, and $1.1 million of already-contracted capital work at retained property C must be paid on day 15. This obligation is outside the sale costs and accepted recurring cash-flow figures. Assume no opening unrestricted cash, no permitted early draw on second-sale proceeds and no other funding source.

A-first releases $1.55 million on day 0, pays the $1.1 million obligation on day 15 and retains $450,000. B’s day-30 sale then adds $930,000, leaving $1.38 million. B-first releases only $930,000 before day 15 and is $170,000 short when the same bill is due. It cannot execute the stated plan without changing payment timing or arranging a separate permitted source, even though final cash would also be $1.38 million if that temporary gap were funded at no cost.

The sequence decision is therefore driven by an interim cash constraint, not an invented difference in final sale arithmetic. If a bridge costs $10,000, B-first’s ultimate cash falls to $1.37 million; the cost must be included rather than treating the temporary funding as free. Record whether first-sale proceeds are actually released and permitted for the capital payment before relying on either path.

Introduce a residual-property downside

In a separate sensitivity, assume C’s accepted annual cash flow falls to $50,000 before the second sale. At $720,000 debt, annual interest remains $57,600 and coverage falls to 0.868x. The assumed 1.25x test permits only $50,000 ÷ 1.25 ÷ 0.08 = $500,000 remaining debt. An additional $220,000 principal cure is required at the second sale, if the actual documents permit that cure.

Both orders then release $2.26 million combined before the capital work, because both end with the same C and the same $500,000 debt. After the $1.1 million work, $1.16 million remains before any temporary-funding cost. A-first still has enough day-15 cash; B-first still needs the $170,000 timing solution. The residual-income cure and the interim liquidity test are separate constraints and must both be satisfied.

Preserve payment and principal mechanics

The model assumes an interest-only loan whose payment falls with principal. An amortizing loan may retain its scheduled payment after a partial repayment unless the agreement provides a recast. Use the actual payment rule for residual DSCR. Also separate principal release amounts from prepayment premiums, defeasance costs, accrued interest and other charges.

Do not let total principal repayments exceed the outstanding balance. When the last property is sold, use the actual final payoff demand rather than an uncapped multiple of its original allocation. The remaining loan and collateral must reconcile after every step.

Build a sequence ledger before committing

For each proposed sale, show date, price, costs, required repayment, retained income, retained value, debt service, residual tests and cash released. Include a delayed-sale case and a weaker-income case for assets expected to remain. Record the actual contractual approval path and unresolved conditions separately from the arithmetic.

The useful comparison is a set of feasible sequences with their retained risks and cash timing. That allows an owner to evaluate liquidity and portfolio quality together, rather than selling the most marketable property first and discovering later that the remaining debt cannot be supported.