Debt instrument under which all or nearly all the cash flow generated by the rental income is paid to the lender. There is no stated interest rate.
Example: An office building was in financial distress because of a weak market. The building owner could not meet required mortgage payments from the rental income at the contract rate of interest. Rather than Foreclose (which may not help the lender because of the soft market), the lender agrees to convert the mortgage to a cash flow mortgage. Under this arrangement, all the property's Net Operating Income is paid to the lender for an agreed-upon period of time. Thus, the mortgage lender receives all the Cash Flow from the property.
Table 10 Statement of Cash Flow
Potential gross income $10,000
Less: Vacancy and collection allowance - 1,000
Add: Miscellaneous income + 500
Effective gross income $ 9,500
Less: Operating expenses - 3,000
Less: Replacement reserve - 500
Net operating income $ 6,000
Less: Interest - 4,000
Less: Principal payment - 500
Cash Flow $ 1,500
