Investing in a perpetual payment agreement?

Question

Hello,

I recently found a maintenance payment agreement offered up as an investment, and I was curious about how it works. There's not really a loan/principal balance, amortization, etc., and payments are required under a perpetual agreement and are CPI-adjusted each year.

Has anyone seen anything like this? What are y'all's thoughts on valuing/bidding and doing due diligence on something like this?

CA

James Mc Ree · Answer

At the highest level, it is an agreement that one party pays the other a fixed amount for maintenance. For example, a husband might pay $1,000/yr towards wife's house maintenance in a divorce settlement for some period of time, perpetuity in your case. The agreement specifies how the payment is to occur, where it goes, what qualifies for reimbursement, etc.

All of the details about how the specific payment agreement works are in the agreement. You need to read that to answer your question.

You also need to read what they are offering and how the agreement has been performing. I haven't seen these as investment opportunities, but theoretically, if an agreement was to pay $5,000/yr and only $1,000/yr was being drawn; sale of the agreement for 10 years would allow the buyer to bank and invest the difference. You need to read the details of that agreement closely to understand what you are getting yourself into

I have to think harder on how a perpetual agreement would work as an investment since it would outlast the buyer. Perpetual could mean beyond the beneficiary which could obligate your heirs to their heirs. Read carefully before you invest.

Bruce Lynn · Answer

Cemetary?   What kind of property is it?   I would definately run something like that by local attorney and if property related, preferably one that is board certified in real estate law to look over that.

Also is it performing?....great history of payments?

One thing also to consider is your exit strategy.  Easy to buy perhaps, but maybe not much of a market for resale.

Another advice from a great investor...Warren Buffet....buy what you know and understand.   One of my attorneys also told me that in a deal I brought to him for review that was kind of weird.

Chris Seveney · Answer

As others mentioned, need more information as to what the agreement is in order to give it any price idea.

Patrick Roberts · Answer

The only perpetual fixed income instruments im aware of are royalties and certain government bonds, like the ones the british govt used to issue (I dont think these are still in existence). That being said, you would value it as a stream of cashflows using a discount rate (basic DCF modeling), just like any other cashflow stream. It's basically a terminal value.

As far as estimating the risk associated with it, well that entirely depends on the structure, counterparties, and whatever other variables. Could be anything.

Investing in a perpetual payment agreement?

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