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first trust deed in the amount of approximately $10-$11 million.”
In estimating the fair market value of the Marsh note, Mr.
Cronkite utilized two approaches: (1) An income approach,
discounting future interest income to present value at its
required yield; and (2) a market approach, discussing the loan
with Mr. Marsh, an alleged secondary loans expert.
With respect to the income approach, Mr. Cronkite explained
that the higher the inherent risk in an income stream, the higher
the required yield to be used in computing present value. The
portion of his report concerning selection of the required yield
to be employed here reads:
The appropriate yield for an investment in this
note was estimated based on a review of the May 1, 1991
Note Secured By Deed Of Trust, which stipulates that in
the event of default, the unpaid amounts will bear
interest at the Contract Rate plus 5% per annum. We
concluded that 15% was an appropriate yield on this
basis.
This 15-percent rate is then used in conjunction with a present
value formula to produce a $300,000 fair market value for the
subject note.
The section of Mr. Cronkite’s report addressing the market
approach references discussions with Mr. Marsh and then sets
forth the following:
According to Mr. Marsh, the $1,000,000 loan was
intended to be interim financing only. Harbor Village
intended to refinance its property, but encountered
environmental issues.
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