Financial Analysis

Financial Analysis of Sale vs. No Sale of Little Neck

As is stated quite strongly in the interveners position statement, we do not believe that there is any legal basis for deviating the will of William Paine, since there is no evidence that the assets of the Trust cannot generate income for the beneficiaries.  That said, we realize that there are plenty of people who believe that deviating the will could be acceptable, and for whom the only thing that matters is what outcome generates the best financial return for the beneficiaries.  For that reason, we also offer this financial analysis of Sale vs. No Sale.  Since originally publishing this, we have also received an expert opinion.  Ken Swenson also had a nice rather more compact analysis in his recent letter to the editor and you can see him trying (and failing) to get an answer on the question of financial impact of year-round usage here.

When I get really inspired I will turn the chart into an interactive Java application so that visitors can enter their own assumptions and watch the chart change.  In the mean time, feel free to send comments on any assumptions you believe to be way off base.

Assumptions in “No Sale” scenario (top line in graph):

  • Tenants would be given long term leases (in this case 30 years) with no risk of rent increases above the CPI
  • The 143 housing units that are currently seasonal would stay seasonal
  • The wastewater loan would be paid off over 20 years with equal principal payments of $300,000 per year
  • A “sinking fund” for capital improvements (such as erosion control) is contributed to in the amount of $120,000 per year
  • A professional property manager is hired and charges 10% of the gross income

Assumptions in “Sale” scenario (middle line):

  • Sale proceeds of $24.8M, $3M of which is immediately committed to be spent and therefore is not part of the principal of the Trust.
  • Corpus value is adjusted for inflation each year through reinvestment
  • Corpus safely returns on average 2% over the rate of inflation (so 5% in an environment of 3% inflation)
  • Trust expenses of .4% or 40 basis points (includes legal and accounting)

Additional Assumptions to account for costs of Little Neck being year-round (bottom line):

  • Seasonal units converting to year-round contribute new students to the Ipswich School System at the rate of an average Ipswich household (.4 students per household)
  • Seasonal units converting to year-round contribute new year-round residents at the rate of an average Ipswich household (2.42 residents per household)
  • Costs to the town for municipal and school services generally increase at the rate of inflation (if costs were to increase at a higher rate – which has been the trend for health care and benefits – then the Sale scenarios would become even less attractive)
  • 143 units of seasonal housing convert to full time housing over a span of 20 years
  • New year-round residents create an incremental burden on the town budget of only 50% of a typical new resident (since they were already part time residents)

As you can see from the chart, the sale option generates a net benefit for a few years because of the $3M that is being taken off the top.  After that, it isn’t long before it becomes a drain on the town from then on (this is the point at which the asset has been effectively both “sold” and “wasted”).

For clarity, it should be understood that the long rising slope on the “No Sale” line represents the payoff of the wastewater loan.  The long declining slope on the “Sale” line represents the effect of the seasonal units converting to year-round usage (your guess is as good as mine how long this takes, but it is not a question of “if” but “when”).

Lastly, any financial analysis that purports to tell the future should be taken with a grain of salt.  The idea is not to claim that this is exactly what will happen, it is to show the disparity between the two alternatives using reasonable assumptions.  It should also be clear that we do not claim to be the current or future Feoffees, and cannot say with any certainty what the actual terms of a future lease might look like.  Again, the goal is simply to make assumptions that would appear to be attractive to the tenants and, if not, would find favor with the court.