Get to Know a Lender - Small Business Loans Are Rising Fast

Good news has been sparse in the last couple of years.  There has been some stories of recovery, a return to profits for some big corporations, but not much for small business.  That good news comes from multinationals and investment banks, while we hope for the trickle-down to our part of the world.  But a couple of news stories on Reuters yesterday gave me my first real feeling of turning a corner.

The commercial vacancy list has possibly peaked - with some movement seen in small apartments according to the National Association of Realtors.  Currently, Retail space remains sluggish with the smallest decline in vacancies: one tenth of one percent this year.   The good news to pull from this news wreckage, is that while the movement was tiny, nearly imperceptible, it is movement in the right direction, which may be an indicator that the bottom of the decline has been reached.  Time to look for those tenants and buyers who will be taking up space in the next few years.  How do we know business space will be taken?  Because the other indicator to show signs of life are loans.

Small business loans are rising - fast.  Business loans are the real sign of growth, both for start ups and for existing businesses finally ready to expand.  The feeling of uncertainty that pervades the American landscape has prevented growth and hiring, even for businesses that had weathered this storm.  Paynet Inc. small business lending index released a report at the beginning of December, showing an increase in borrowing by US businesses.  It’s not a small increase, either - 19 percent over last year, and it’s been climbing for three months in a row so this isn’t simply a short term effect from recent actions taken by the Federal Reserve or the election results.

Since 2007 the small business lending rate has been higher at smaller, local banks than at the big players according to Aite Group, a Boston banking consultancy.   These local players have a great deal more latitude in loan approval, basing decisions on face-to-face meetings and a knowledge of the area business climate, rather than a formulaic criteria used by the large, multinational banks.
The index does not show what this lending is for, but it must be assumed that some or most of these small businesses are borrowing to expand, acquire capital equipment, raw materials, and with that come the inevitable hiring and expansion.  The trend so far has been to delay hiring new employees until the strain on the existing workforce becomes unbearable, but the hiring and growth will come, and they will need room to work.  Additionally, the same source showed that existing companies who already had loans were catching up on their payments - delinquencies are slowly but steadily falling.
With all these business expansion loans, which ones will be looking for additional commercial space?  Which ones need retail locations?  Internet research can give you broad trends for future planning, but it’s difficult to get that kind of fine-grain detail from reports.  To capitalize on the sudden uptick in business lending, you should know someone on the inside.

It’s time to put that local network to real use, making friends and alliances in key places, to benefit your livelihood.  Depending where you are, you may have a lot of options for Banks.  If your bank is a National / Global / Multinational bank, it may not be easy making friends with the staff, as so often those lending decisions are made far from your local branch office in a strip mall or grocery store.  But it’s still worth trying.
I don’t want to discourage looking to the Big Banks for help, but it may be worth your time to get to know your local, smaller bank.  Here in Houston, I have my choice of B of A, Wells Fargo, and Chase for my banking needs.  All very convenient for online purchases, transfers, and nifty rewards programs, but it isn’t the only game in town.  There is also Tradition Bank, with 6 locations in the West Houston Area, so small it’s not on Chase’s radar.  I bank at the main branch, where I can see the Vice President’s office from the lobby - that’s where the loan decision is made, not in a data bank in Kansas, but right here.

Many small businesses turn to smaller banks for their business loans - not only for a more personal experience, but also because some may not be quick to forgive taking overt risks in the recent past.  Tradition Bank, and the thousands like it, did not receive TARP funds, no taxpayer bailed them out, and they have proven a stability that the larger banks cannot provide.  Also, the loan officers will be in the same area code as you, so they will know a lot more about starting a business in the area.

Use online social networking, or even an old-fashioned face to face networking event, to get closer to some bank employees, and see if you can’t find a way to be the first one knocking on the door of a company about to be approved for their expansion loan.  We aren’t totally out of the woods yet, but this is a sign of progress.  With those record levels of vacancy, these first tenants are going to have a lot of choices.  Doing this little bit of extra work may make a huge difference on your vacancy rate.
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Visit http://www.abacus-financial.net We Purchase Distressed Commercial/Industrial property today.
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Abacus Financial – 213 260 4811

Distressed Commercial Markets & The 2010 Political Landscape

In the aftermath of the financial crisis, many distressed commercial real-estate investors expected a plethora of opportunities to arise from foreclosures on distressed properties. Unfortunately for many investors, a combination of factors, which includes the political landscape have created new pressures on banks, to hold onto properties and extend loans without foreclosing on properties.

After the financial crisis the landscape was set for billions of dollars of distressed transaction.  The majority of the properties that experienced transactions in the few years prior to the meltdown at the end of 2008, are not able to attract refinancing, as the loan to value on these properties cannot reach a hurdle rate of 75%.  With properties dropping more than 50% in value and lending standards tightening on all properties, there is very little chance that banks will step up to the plate to refinance commercial real-estate.

With this in mind, many believe that banks would eventually foreclose on loans that are underwater, but this has not occurred.   Banks theoretically should take  properties from the borrowers and then investors would purchase the distressed properties  from the banks at distressed prices.   Over the course of the past 2 years, this phenomenon has not occurred.

Banks have not foreclosed at levels that were predicted by many market participants.  There are some who have forecasted foreclosures that are 90% higher than what has taken place to date in the commercial market space.  Only a small portion of loans have resulted in lenders taking possession through foreclosure.

What has occurred instead, is that banks have extended loans and delayed taking active.  Through numerous changes in regulations via Fannie and Freddie, lenders have restructured loans allowing current tenants the opportunity to stay within their current mortgages.  The technique is extending the process in the hopes that the market will eventually turn around, and the loans will then become profitable.  

Unfortunately, the market has been slow to turn around.  Although prices have climbed slightly from June through September of 2010, October was a disaster for the commercial real-estate markets.  According to Costar, the  national commercial real-estate index dropped 3.88% in October, giving back all the gains over the past few months.  Part of this has been to lack of interest at current prices, and a portion has been associated with the large increase in rates during the past couple of months.

The over lending that occurred from 2004-2008, has been blamed on overzealous bankers and brokers and there is very little sympathy for banking institutions.   There is however sympathy for the homeowner, with is why there have been so many programs set up to allow real-estate owners on both the commercial and residential  sectors to hold on to properties.

The bottom-line for banks foreclosing would mean writing off the loan and, for many banks writing off the loan means bankruptcy. Federal regulators know this and that’s why they have not pushed banks to resolve delinquent commercial mortgages. The Fed has turned a blind eye to questionable loan restructuring.   The Fed has recommended a balanced approach.  It is clear, that forcing banks to mark their portfolios to distressed values would trigger a wave of bank failures which the US economy could not handle.

Closing That Deal - What You Need To Know About Final Paperwork

Real estate investors are amidst the year-end scramble for a myriad of reasons. As an aforethought, it is wise to take a perfunctory look at one’s financial portfolio to be aware of what opportunities, advantages, and dangers lie ahead. For most, knowing the gains, losses, legal and tax implications of each assist in decision-making for the short and long terms. How to prepare for the unexpected phantom income gains will serve many, whether part of an LLC or Sub-Chapter S Corporation. There are more specific implications for those holding distressed commercial property or relinquished property due to short sale, foreclosure, or deed in lieu.

Phantom income arises when there is debt restructuring within a corporation which brings about tax liability void of cash flow. For property owners who purchased with leverage and face not only negative equity but an inevitable release of the building or land, the excess amount over what the lender has agreed to forgive is deemed a taxable gain, referred to as phantom income. As daunting as this scenario may seem, there is a way to circumvent the potential loss created by the “gain”.

By taking into account the current conditions and undervalued markets at large,  investors best option is to utilize the benefits inherent in a 1031 exchange by relinquishing the current distressed property and trade up to one that offers more cash flow. A lofty suggestion? The common sense is in the details. Financial forecasts and indicators show recovery in the commercial sector may not be realized for a few years. Typical advice is to buy-and-hold. By instituting this same modality, it offers a delay or removal of the phantom income gain, depending on the investment property chosen for the exchange and its ongoing performance. Let’s examine the idea from the lender’s perspective.  They are about to take back your property with nothing in return; add it to the thousands of others they have on their books. More than likely, the property needs improvements, needs tenants, and a Buyer who would be willing to pay more for it than it’s CMV. By engaging in a 1031 exchange, the lender gains an opportunity. Here’s how it works.

For example’s sake, it is recommended that you elect to purchase a property via 1031 exchange that has 5-10 percent more value than your current property’s debt. The downpayment needed to purchase this property could be derived from your other assets to be used as collateral. Information from an article posted on realpropertycheck.com entitled “Negative Equity and How You Can Avoid Tax on Phantom Income from Relinquished Property”, details the benefits of using a Qualified Intermediary in this process. “You convey the property you want to relinquish to a QI before foreclosure. The lender then forecloses on the property, now owned by the QI, or accepts the deed in lieu of foreclosure.” As long as you can make a strong case to your lender about the better value and cash flow of the property designated for acquisition through the 1031, the lender should see the upside.

Always heed the advice from tax and legal experts before acting on any investment matter. Phantom income gain is a hidden oxymoron--ignoring its consequences guarantees a loss.

Your Old Building May Be More Green Than You Thought.

As companies close and move overseas, there is a glut of former corporate headquarters on the market.  From homebuilders to car dealerships, the large number of closures have left their mark on the commercial property landscape.  Adding to this are the number of companies that have moved from a location that may have been advantageous in an up-market (like California), and now are shopping for other locales that are willing to offer tax incentives and other concessions to attract their business (like Michigan).

The remaining structure can be a hard sell, particularly if it is easily identified with a particular industry – like for instance, the car dealership.  In better times, one could hope that your lot and building would be picked up by a similar business in the same industry, but in this market it would be wise to try and make the building attractive to a diverse array of businesses.   If you are holding a former company headquarters, what can you do to get that property on the radar of the buyers?  Beyond sprucing up the landscaping and slapping on a new coat of paint, it may be worth it to explore the possibility of getting your building Green certification.   

The term “Green Building” brings to mind very contemporary construction with leading-edge architecture and solar panels on the roof, but these flagship constructions can be misleading, giving the impression that only new construction can be certified as a Green Building.  The truth is that a new building is going to start at a disadvantage for all the new materials (new wood, new resources, and the carbon footprint of all fresh materials), whereas an older building that re-uses its existing resources will have a green advantage off the bat.

The best way to promote a building's environmental advantages, is to get Leadership in Energy & Environmental Design (LEED) Certification.  LEED is an international accrediting body working in conjunction with the US Green Building Council to improve the environmental impact of professional and residential buildings, from energy savings and water efficiency to the use of local resources in the construction or renovation.  It's a process very similar to Energy Star for household appliances.

Buildings are ranked on a 100 point scale, with a score of 40 points to be considered “Certified” all the way to the Platinum level of over 80 points.  Depending upon the building and the resources available, certification may be possible with only a few improvements.  IT services company Rackspace achieved Gold LEED levels with it's new headquarters, a former mall, by collecting rainwater to use for landscape irrigation and designating a front row of parking places for energy efficient vehicles.  They also received points for recycling the materials that were thrown out during renovation.

Demand for LEED cert buildings is high right now, with Green Building a hot topic, and many corporations only looking at certified buildings for possible relocation – and it may be cheaper than you thought.  Besides water usage and parking adjustments, much can be done with climate control and insulation.  A commercial property that can be re-insulated with  spray foam insulation can see an improvement of 60% in climate control costs, which will pay for itself in a few years on a building you own, but also allow for a higher value on a property for sale.

A commercial appraiser in San Antonio confirmed that even if the LEED certification doesn't increase the selling price of your property, it may result in a sale while others stagnate.  “In a market like this, just getting a buyer interested is a win.  A green building has a better chance of selling, while the other 99 are going to sit another year.”

The Future of Retail Centers - Churches, Colleges, Medical

As the American economy has shifted from the glutton-rich to bargain basement investment shoppers, so too have our priorities. A “getting back to basics” mentality is not only sweeping through every household but can be seen in how we choose to spend our money today and tomorrow both in the public and private sectors. As the pendulum moved from one end of the speculative spectrum in 2007 to the other, a financial chokehold in 2009, we can look forward to 2011 bringing us nearer to a middle-ground balance. We should be saying goodbye to the bottom.

Economists and commercial retail forecasters from various markets across the country project a better year ahead. The demand for retail space fell due to business restructuring or closing doors, leaving millions unemployed and unable to feed consumer and investor confidence indexes through retail spending.  But 2010 initial fourth quarter retail spending is on the rise, drawing hope in transcending positive forecasts into reality for 2011. Notable financial experts and real estate investors responded to the Emerging Trends in Real Estate 2011 survey conducted recently by PwC US and the Urban Land Institute, “an era of less” leads to greater interest in “A” property, specifically in gateway coastal markets.  The report cited Washington D.C., New York, San Francisco, Austin, and Boston as the hottest markets. What makes better sense for businesses searching for ways to enhance their bottom-line than common-sense logistics?

In today’s market more than ever, cashflow is king. For the strong at heart and the long-term hold, the major cities of Florida, Las Vegas Nevada, and Phoenix Arizona have taken the greatest beating on price point but provide more for the dollar. During the Greater Phoenix Chamber of Commerce’s Economic Outlook 2011 breakfast meeting held in the Fall of 2010, local economist Elliot D. Pollack echoed the beliefs of many in the Southwest, “The commercial real estate market is at or near bottom…the recovery will be painfully slow.” He also added that both the job growth and population growth in the greater Phoenix metropolitan area should reach 2% while retail sales should increase by 8%.

As our economic recovery coast-to-coast continues at a slow yet steady pace, look for retail vacancy rates easing.  Rental rates will remain stagnant which will assist in easing the gap between Sellers’ list prices and Buyers’ less-than-savory offers. Cash Buyers will continue to fare best with the foreclosure market as lenders begin to see the properties move off their books only to be replaced by others but at a slower pace. Smart investments for the new year:

-location, location, location, central core properties with 6-7% cash flow

-leverage properties as these low mortgage rates may not be seen again

-retail centers with discount or 24-hour store to maintain and increase traffic

-buy or hold REITs

-buy land as the best deals are now but prepare to hold for awhile

Consider churches, colleges, and medical centers. Why? These enterprises offer stability and excellent opportunity for expansion as each niche brings a need. Due to recent personal adversity, more people are frequenting church. Our federal government has offered more grants and loans over the last few years so campus enrollment is up. Conversely, many colleges have a shortage in student housing.  Concerns over health care are well-founded as our national needs will continue to escalate, parallel to our aging population who are living longer though not necessarily better.

For retail, 2011 provides real estate investors and businesses the chance to find a need, create the niche, and move recovery forward—now.

Tiny Bubbles Make Larger Bursting Headlines

The big bubbles make national headlines, the tech bubble, the housing bubble – they are opportunities to make a large profit if you manage to time the market right, buying early and riding on the rapid growth which is usually not based on sound financing or market demand, but entirely on hype and/or panic.  Bubbles come and go, and while they are not a sound long-term strategy, they can provide short term relief.

Retail bubbles can provide tenants to a commercial property owner, even if it's for as long as a short bubble lasts – it's relief in a slowly recovering market.  Even after the bubble shows signs of collapse, there will be enough movement to capitalize on the trend. 

Take for example, the west coast frozen yogurt trend.  This is only one example, and this bubble is close to ending, but the end may still take a year or more.  Even if this business trend doesn't affect your region, the lessons can apply to the next trend. 

Starting in 2005, ice cream and frozen yogurt stores had a bright future.  A report from November of that year entitled U.S. Market for Ice Cream and Related Frozen Desserts, paints a rosy future for cold snacks. Citing the trend for Americans taste for $5 lattes, they set a $7 price point for a trendy treat.  From '06 to '09, the retail frozen yogurt growth patterns bucked all trends in a recessed economy.  By 2009, the largest competing chains, Pinkberry and Red Mango were locked what the locked in what the local papers called a Flavor War – each one introducing a new exotic flavor every month: green tea, pomegranate, and “Tangomonium”, fueled on Red Mango's part by a million dollar round of venture capital funding (yes, VC funding in April of 2009).

Even with a funding round in Spring of '09, Orange County's OC Register newspaper has predicted that the bubble has popped.  Closures escalating throughout the western states, with Red Mango's flagship store closing in March 2010, and further closures of competing ventures Yogurt d'Lite and Wild Berries create a clear signal that this trend is ending.

Despite the bad news for the Frozen Yogurt entrepreneur and investor, this trend was a boon for the commercial property owner – particularly the strip mall.  2009 was a devastating year for strip malls and other commercial spaces, except for those who were able to ride the Frozen Yogurt wave, and were buoyed for a year while other property owners saw their losses mount.

In any economic situation, there are trends – some may be on the national level, some just local.  A bubble may run itself out through over saturation (like Frozen Yogurt), while others may see a regulatory change (like payday loan storefronts).   They are a cheap substitute for a long term tenant, for any kind of stable growth, but difficult times, short term rental income is better than nothing.

As a property owner, it's good to look for the emerging trends, and to cater to them as best you can.   So often with a bubble, one trendy opening will attract others in the same area.  It's common to find multiple storefronts in the same vertical space, all clustered around the same intersection. 

Are there trends in your property neighborhood?  Are there local businesses that have found a way to beat the stagnation?  If something around you looks like a bubble business, maybe you can bring some of that bubble income to your pocket. 

What You Need To Know About Unexpected Phantom Income Gains

Real estate investors are amidst the year-end scramble for a myriad of reasons. As an aforethought, it is wise to take a perfunctory look at one’s financial portfolio to be aware of what opportunities, advantages, and dangers lie ahead. For most, knowing the gains, losses, legal and tax implications of each assist in decision-making for the short and long terms. How to prepare for the unexpected phantom income gains will serve many, whether part of an LLC or Sub-Chapter S Corporation. There are more specific implications for those holding distressed commercial property or relinquished property due to short sale, foreclosure, or deed in lieu.

Phantom income arises when there is debt restructuring within a corporation which brings about tax liability void of cash flow. For property owners who purchased with leverage and face not only negative equity but an inevitable release of the building or land, the excess amount over what the lender has agreed to forgive is deemed a taxable gain, referred to as phantom income. As daunting as this scenario may seem, there is a way to circumvent the potential loss created by the “gain”.

By taking into account the current conditions and undervalued markets at large,  investors best option is to utilize the benefits inherent in a 1031 exchange by relinquishing the current distressed property and trade up to one that offers more cash flow. A lofty suggestion? The common sense is in the details. Financial forecasts and indicators show recovery in the commercial sector may not be realized for a few years. Typical advice is to buy-and-hold. By instituting this same modality, it offers a delay or removal of the phantom income gain, depending on the investment property chosen for the exchange and its ongoing performance. Let’s examine the idea from the lender’s perspective.  They are about to take back your property with nothing in return; add it to the thousands of others they have on their books. More than likely, the property needs improvements, needs tenants, and a Buyer who would be willing to pay more for it than it’s CMV. By engaging in a 1031 exchange, the lender gains an opportunity. Here’s how it works.

For example’s sake, it is recommended that you elect to purchase a property via 1031 exchange that has 5-10 percent more value than your current property’s debt. The downpayment needed to purchase this property could be derived from your other assets to be used as collateral. Information from an article posted on realpropertycheck.com entitled “Negative Equity and How You Can Avoid Tax on Phantom Income from Relinquished Property”, details the benefits of using a Qualified Intermediary in this process. “You convey the property you want to relinquish to a QI before foreclosure. The lender then forecloses on the property, now owned by the QI, or accepts the deed in lieu of foreclosure.” As long as you can make a strong case to your lender about the better value and cash flow of the property designated for acquisition through the 1031, the lender should see the upside.

Always heed the advice from tax and legal experts before acting on any investment matter. Phantom income gain is a hidden oxymoron--ignoring its consequences guarantees a loss.