From the Future Equity Agreement example provided here, the property in La Jolla, CA. If the property is sold before the end of the term of the agreement, IRESE requires a fair compensation. In order to fairly compensate, the minimum property value is adjusted backward and the calculations are based on the adjusted property value. The adjusted minimum property value is calculated based on the orginal Future Equity Agreement value at the time of the origination discounted by an average rate of return for the property to the date of the termination.

For example, let’s assume that the property is sold in 3 years and the term of the Future Equity Agreement is 5 years with a minimum property value of $1,200,000, To discount the minimum property value of this Future Equity Agreement with a new term of 3 years, the value is adjusted down by average return rate of 6% per year to $1,067,996. Since the property is sold, the new minimum property value will be used to calculate the payoff.

Consider Scenario 1

If the derived property value is $900,000, the amount owed is $0 since the derived property value is less the derived strike price.

Consider Scenario 2 and 3

If derived property value is $1,200,000, the amount owed is $66,000 as shown in the table (50% of the difference between $1,200,000 and $1,067,996). And if derived property value is $1,400,000, the amount owed is $116,000 as shown in the table.