Unlocking Liquidity

Steve Johnson is an experienced real estate developer and investor. With more than 25 years of real estate transactions behind him, Johnson knows the value of being able to act quickly when the right deal presents itself.

To satisfy this need for immediate liquidity, Johnson has established and funded a money market account with a balance of $5 million. The money market account allows him to write a check to secure a property quickly. He currently earns an annual return of 3% on the deposit.

While having quick access to this liquidity is important, Johnson is concerned that the rate of return on the deposit is less than adequate. That’s especially so when he needs to draw on the MMA and deploy the cash into a real estate deal for a period of 3 to 6 months.

The question is, how does he maximize his return on capital while maintaining ready access to liquidity for his real estate investments?

That’s why he decided to talk to his Contango advisor about his options.

In speaking with his advisor, Steve confirmed that

• He needs ready access to liquidity for investments in his real estate development business.
• He draws down $3 million on average for a period of up to 6 months.
• He wants to maximize his return on his investment assets when they are not being deployed into real estate.
• He wants to minimize the potential loss of investment capital.

Johnson’s advisor and banker together present an analysis of the possible scenarios.

	Scenario Description	Investment Principal ($)	Rate of Return	Net Return ($)	Scenario Notes
Scenario #1	Fully Invested	5,000,000	3.00%	150,000	Current pre-tax return with no use of liquidity -- i.e., fully invested in MMA for entire year
Scenario #2	Partially Invested	2,000,000	3.00%	30,000	Assumes $3 million has been deployed elsewhere for 180 days
		5,000,000	3.00%	52,500	$5 million fully invested for 180 days
			1.65%	82,500	Annual pre-tax return on $5 million with short term deployment of liquidity
Scenario #3	Fully invested* with use of $3 million ILOC	5,000,000	7.30%	365,000	Proposed tax equivalent return, assuming 35% federal tax bracket
				(107,250)	Annual borrowing cost on $3 million for 180 days at LIBOR + 200 bps
			5.16%	257,750	Pre-tax return; there'd likely be tax advantages of this structure that would enhance this return
* Managed portfolio with fixed-income bias

The information presented here is purely indicative and does not constitute a credit approval.

Scenarios 2 & 3 from the table are the most realistic. Scenario 2 shows the return that Johnson currently earns, and Scenario 3 shows how Contango can maximize his returns via active portfolio management while still providing the necessary liquidity using a Contango Investment Line of Credit (ILOC).

With an ILOC, Johnson’s investment portfolio can continue to grow and generate investment returns that exceed his current strategy. In this way, he can obtain the ready liquidity he needs without disturbing his long-term investment strategy.

ILOCs tie a conventional revolving line of credit, provided by one of Contango’s affiliate banks, to a Contango investment management account. The line provides immediate liquidity, with the amount available for borrowing dependent upon the value of the eligible assets in the investment management account. Assets eligible for collateral include cash, equities, fixed-income securities, mutual funds and exchange traded funds.

To apply for an ILOC, Johnson:

• Provided Contango Credit Services with a current personal financial statement.
• Provided his most recently filed tax return.
• Pledged a portfolio of eligible collateral that he put together with the help of his Contango advisor.

Once the ILOC is approved, Johnson and his advisor are ready with an integrated solution to:

• Maximize investment returns on his liquid assets.
• Provide immediate access to liquidity for investments in real estate.
• Preserve investment capital.

To learn whether an Investment Line of Credit can help you, please contact your local wealth manager.