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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Get Out From Under The Negative Equity Or Almost Foreclosed Property.
Abacus Financial – 213 260 4811

IRS Lexicon COD Means You Pay Them Cash When You Give Up Something

In the normal world of commerce, “COD” means you GET something of value when you pay “cash on delivery”. As is often the case, the Internal Revenue Service has given a new meaning to “COD”. In their lexicon, COD means you pay them cash when you GIVE up something.

If you are the owner of commercial real estate financed with recourse debt and the value of the property is less than the mortgage amount, brace yourself for an introduction to the IRS version of COD. In the situation when the value of your property is less than the mortgage amount and you don’t have enough cash flow to pay the current principal and interest when due, you have four “traditional” options and one contrarian option.

First, you can raise new capital to subsidize the mortgage payments or to pay down the loan to a level than be serviced from current cash flow. The obvious peril in this case is that you may be throwing good money after bad. If the value of the property is more than 20% below the mortgage amount, it may be a very long time before the cash flow grows sufficiently to bring the property value back even with the mortgage amount. This option is less attractive given that in many markets values on certain commercial property types have declined 40% or more and rents are flat or declining while most expenses are rising. Add to that fact pattern the reality that in order to refinance your property at maturity  the property will need to be valued at 125 – 135% of the maturing mortgage amount, and you really have to challenge whether it makes sense to pour more money down a rat hole.

Second, if your lender is enlightened about the reality of property values and the length of time it is likely to take for property values to recover, you may be able to convince your lender to “write down” the loan amount. This is when you need to know all about the IRS version of COD, which is “cancellation of debt”. Whether your mortgage is recourse or non-recourse, the amount by which the loan is written down results in ordinary income to the owners. There are certain exceptions, such as bankruptcy and insolvency, to current recognition of COD income. However, if the property is owned by a pass-through entity, such as a partnership or limited liability company, the exceptions for bankruptcy or insolvency are applied at the partner or member level.

Third, you can capitulate to a foreclosure or do a voluntary deed-in-lieu (“DIL”) of foreclosure. In the common vernacular, you just hand the keys to the lender. However, the pain is not over and the IRS will be standing at the exit door to collect taxes on the COD and, in many cases, gain on sale. If the property was financed with recourse debt, the measure of the COD is the difference between the fair market value of the property and the debt balance. In addition, since a foreclosure or DIL is treated for tax purposes as a sale of the property, in the case of property financed with recourse debt you will have gain equal to the difference between the fair market value of the property and the adjusted tax basis of the property. In the case of property financed with non-recourse debt, a foreclosure is treated for tax purposes as a sale of the property for an amount equal to the debt amount and you will have taxable gain equal to the difference between the debt balance and the adjusted tax basis of the property/

Fourth,  the entity owning the property, either a partnership or limited liability company in most cases, may file a petition under Chapter 11 of the U.S. Bankruptcy Code. Debt cancelled in a Chapter 11 reorganization case is not included in your income if the debtor is under the jurisdiction of the court and the cancellation of debt is granted by the court or occurs as result of a plan approved by the court. For individual partners or LLC members, the bankruptcy exception to the recognition of COD applies at the partner or member level. Accordingly, if the partnership files for bankruptcy protection and achieves  cancellation of debt under the supervision of the bankruptcy, the COD income will still be included in the ordinary income of the partner or member unless the partner or member is insolvent or has filed a petition under Chapter 11. Given the cots of prosecuting a case in the Bankruptcy Court, the stigma associated with bankruptcy filings and the fact that the individual partners or members may still recognize ordinary income, the bankruptcy option may not be the best alternative.

Given the unattractive consequences of these traditional options to resolving distressed commercial real estate, a distressed borrower must ask what other options are available. There is at least one contrarian firm, Abacus Financial, LLC, that offers a compelling contrarian option. Abacus seeks to acquire well-located commercial real estate at a price  greater than the debt encumbering the property, regardless of the value of the underlying collateral. The silver lining for the distressed borrowers is that they are relieved of dealing with the day to day harassment by lenders, unpaid vendors and disgruntled investors AND they accomplish a sale at above market prices while realizing capital gains, rather than ordinary income. If this option is appealing, call one of Abacus’s seasoned acquisitions specialists at 213-260-4811 and visit their website at abacus-financial-net.

Before making any decision about how to resolve your distressed commercial real estate you should consult your attorneys and tax advisors and make a “reality check” on when you think the property may recover sufficient value to enable you to refinance without writing a huge check to your lender.