Daily Observation - Day 4 of the Plan

What Plan?

I have started this blog three times during the day with various headings, from It's over to It's over. First we thought the deal was to be resolved today with McCain and Bush taking the lead in a private White House Meeting, to Its Over the bailout is dead. We've been all over the map today from the time of the closing bell.

President Bush was smart by starting his meeting after Wall Street closed after the market in anticipation of the plan being accepted rose over 195 points. As I am writing this blog at 8:00 the latest news is that they are getting closer again, surprise the Presidential candidates are not a part of the evening caucuses, probably practicing for the "hopeful" upcoming Friday debate.

Again this evening I quote CNN to give you the flavor of the day.

Lawmakers bickered over competing counterproposals and hours of meetings between key lawmakers broke down without any progress late into the evening.

A meeting at the White House between President Bush, congressional leaders and the presidential candidates was meant to speed approval of an agreement. Instead, the session revealed deep divisions between Democrats and House Republicans.

As a result, House and Senate leaders and Treasury Secretary Henry Paulson rushed to Capitol Hill at 8 p.m. to try to hash out a deal.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., said the White House meeting was thrown off course when participants were blindsided by a new "core agreement" that emerged in the meeting that not many had seen before.

The principles the Democrats said had been agreed upon call for Congress to make $250 billion available immediately with $100 billion available, if needed, without requiring additional congressional approval, said two senior Democratic aides familiar with the negotiations. The second half of $350 billion would then become available by a special approval of Congress.

Tomorrow we should see some more heated debates, but before we close this evening lets not forget that WAMU was just taken over by the FDIC, with the assets being purchased by JP Morgan Chase. Can this get worst?

Daily Observations - Day 3 of the Plan

Today the market did not move as much as it has for the last couple of days. The market is starting to swallow the plan. As of this evening the Democrats are supposed to be very close to a legislative bill that they believe that all will be comfortable wth. At the same time President Bush has invited both Presidential Candidates to the White House tomorrow to receive the proposed changes.

Tonight I again quote CNN to bring to light the days "soap opera" I don't mean to make light of the seriousness of this economic issue but the debate and the lack of trust of the Senate Banking Committee is volatile to say the least.

Federal Reserve Chairman Ben Bernanke was back on Capitol Hill Wednesday, warning that the current financial crisis is the most significant in more than 60 years, and that even tougher times are ahead without quick Congressional approval of a controversial Wall Street bailout.

But members of the panel repeatedly asked Bernanke for arguments they could use to explain to angry voters back home why they voted for such a plan...."Credit will be restricted further. That's not just an inconvenience; that will affect spending and economic activity," he said in response to one question. "It will affect the unemployment rate. It will affect real incomes. It will affect everybody's standard of living."

"It's about the overall performance of the U.S. economy over perhaps a period of years," Bernanke added. "The choking up of credit is like taking away the life blood away from the economy."

But he said the primary problem is a drop in home prices, which sparked a rise in foreclosures that have cut the value of trillions of dollars of mortgage-backed securities to what he termed "fire sale" prices.

The lack of demand for those securities, in turn, forced banks and Wall Street firms to take $500 billion in charges that dug into the capital they use to make loans.

Bernanke said that when the government starts buying the mortgage-backed securities from the banks, it will provide a market that doesn't exist now, and allow the prices to rise from the current depressed levels to ones more justified by the fundamentals of the loans, most of which are not in default.

As President Bush addressed the Nation the congress was working through the evening to hammer out a compromise proposal.

This evening the following statement was issued. In a show of unity, House Speaker Nancy Pelosi, D-Calif., and Minority Leader, John Boehner, R.-Ohio, said Tuesday evening that they are working closely with the administration and "have made progress" on hammering out a deal.

Daily Observation - Day 2 of Hank' s Plan

What looked like a good economic plan is being questioned by everyone, from the man on the street to the Senators that are "attacking" the Fed Chairman, and the Secretary. Today the market could not get a handle on what was going on. We were all over the board, with no resolution in sight. The Bush Administration has called for an expedient response, but at this pace day 50 will be upon us.

Since this is the most exciting thing happening in commercial finance as of right now, I will again this evening quote some CNN articles. We are still in for some real swings in the market place.
Lets see what happens tomorrow, with a 504 point drop in two day of the INDU.

Paulson, Bernanke urge immediate action on $700B plan - cite fear of meltdown. But senators from both sides voice more questions than support.

Lawmakers have criticized the Bush administration for asking for a "blank check." On Tuesday, Paulson and Bernanke argued that too many restrictions on the program would limit its effectiveness at a critical time.

"The financial markets are in quite fragile condition and without action they will surely get worse," Bernanke said. "This will be a major drag on the U.S. economy and be a major drag on the ability of the economy to recover."

While expressing concern about the economy, senators voiced wide-ranging doubts about the plan.

"You can't assure us this will work because you thought the other plans would work," Shelby said.

Paulson said he believes the new plan will address the root cause of the crisis because it attacks the credit crunch that has followed the collapse of the market for mortgage-backed assets held by banks and Wall Street firms.

"I share in your frustration, Senator" Paulson said. "This is not something I ever wanted to ask for. But it's much better than the alternative."

Some senators condemned the proposal as a bad idea, while others said they worried about taking fast action on such a momentous program.

The situation is fluid as Congress presses to craft a bill that addresses concerns from members of both parties. The key add-ons being debated are:

• Give the government an equity stake in the companies it helps
• Change the bankruptcy law so that judges can modify the mortgages of filers' primary residence
• Curb executive compensation on the companies participating in the bailout
• Impose oversight of the Treasury program
• Require the government to promote sustainable homeownership through loan modifications and use of the new HOPE for Homeowners Program on the mortgages underlying the assets it buys in the bailout.

Daily Observations - Day One of Hank's Plan

Because we are treading in uncharted waters of the next week I am going to be synthesizing the arguments for both the bailout and other proposals that are being raised. As the market starts to digest the 700B bailout stocks tumbled again today and oil spiked through to 130 a barrel, an unprecedented event.

The Bush administration is pushing for a "clean" bill to be passed quickly and not be loaded up with provisions that would deter companies from participating.

"[T]he whole world is watching to see if we can act quickly to shore up our markets and prevent damage to our capital markets, businesses, our housing sector, and retirement accounts," President Bush said.

At the same time that congressional leaders are seeking provisions to protect taxpayers and troubled borrowers, financial institutions are weighing in with what they want in the bill. On Sunday, the Financial Services Roundtable - a lobbying group representing the nation's banks - called on Congress to make the plan "broad enough to include different types of assets."

The Treasury has amended its original request to give it authority to buy up not just troubled mortgage assets, but troubled assets period.

"Removing troubled assets will begin to restore the strength of our financial system so it can again finance economic growth," according to a statement on the Treasury Web site.

From the above CNN articles quoted we can feel the flavor of the debate that is starting to ensue. The question remains can we get the bill though Congress by Friday without the "pork" and get it onto action immediately? If we can the markets will settle down.

Let see what happens tomorrow as we ride the crest of the financial wave.

Daily Observation - Hank's Plan

Rather than writing my own interpretation of what could happen this week with the new bill due and to be signed by Friday, I decided to let the experts speak for themselves. So from CNN the following was taken to represent the plan.

The $700 billion plan, the most sweeping intervention in the financial markets since the Great Depression, is aimed at stemming the credit crisis roiling Wall Street and threatening the global markets.

Here's what we know so far:

The plan: According to the administration's proposal, the federal government would buy up as much as $700 billion of illiquid mortgage assets at a deep discount from banks. The Treasury Department would run the program directly, unlike the savings and loan crisis of the 1990s when Congress created the Resolution Trust Company to spearhead a financial bailout.

"The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy," said Paulson.

This program is intended to fundamentally and comprehensively address the root cause of our financial system's stresses," according to a Treasury statement released Saturday. "As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to significantly damage our financial system and our economy, undermining job creation and income growth."

The plan would allow the Treasury to buy up mortgage-related assets.

The aim is for the government to buy the securities at a discount, hold onto them and then sell them for a profit.

This proposal has been compared to the Resolution Trust Corp., which was put in place during the savings and loan crisis to administer and sell assets from failed thrifts.

However, experts say the Treasury's plan is more akin to the Home Owners' Loan Corp., put in place in 1933 to stem foreclosures and help refinance defaulting mortgages and boost banks' liquidity.

The mortgage plan is part of an extraordinary effort by the federal government to contain a financial crisis that has forced a major realignment on Wall Street and has started rippling out to Main Street.

Daily Observations - 100 Posts this Evening

Thank you for allowing me to reach this first milestone. 100 Posts on the blog that started with two readers and we are well over that. We usually have between 10 - 20 absolute new visitors every day, thank y0u for getting the word out.

For our 100th post I wanted to share with you our vision for the future. Within the next ninety days we will be launching the sale of our first book GET Your Loan Closed! with over 100 pages full of solid information that the average loan broker, client is most likely not aware of. The information has been gathered by interviewing bankers, and Business Development Officers over the last year as well as through our personal experience that we have gained over the last couple of years.

Secondly, as a gift to all of our loyal readers we are making available the Ten Secrets Lenders Do Not Want You to Know. Each one of these secrets corresponds with a chapter in the above mentioned book. If you provide us your complete contact information we will be delighted to send you the ten white reports over the next thirty days. I expect to have all the links and everything for production done within the next thirty days, to be able to deliver the white reports by October 1, providing our software provider comes through with the program I ordered.

Thirdly, We will be selling the Nationwide Commercial Loan Home Study Course which will offer you a chapter every two weeks on a specific segment of commercial finance. For example one chapter will deal exclusively with self storage loans, including corresponding questions and answers as well as financing examples for you to work through.

Lastly we offer each morning from 9:00 to 9:15 PST an "Energy Boost" Teleconference to get your day started right. If you want to join us for the free Energy boost please e-mail me at harlan@loanforbiz.com and I will be most delighted to give you all the log in information.

As I hope you can tell we are growing and will be offering even more benefits to you our loyal reader of this commercial loan broker blog. Please continue to tell your friends and co-workers about our blog.

Daily Observations - 501 C 3's

501 c3's - what are they and can we finance them.? A 501 C3 is the IRS designation for a Non-Profit Corporation. But can we finance a Non-Profit Organization?

If you remember a couple of weeks ago we talked at length of financing a Religious Organization, which is a 501 c-3, so the answer then is yes. But here's the next question that is asked of us many times during the month, Can I finance a 501 C3 through the SBA programs?

The answer is categorically NO. SBA allow financing for only profitable businesses, not non-profits. So how do you then finance a non-profit, the answer is as a straight commercial loan. The banks do finance non-profits as commercial loans providing that the cash flow is there. Many non-profits are backed by one or two major donors, and many times they are more than willing to personally guarantee the loan.

The problem we are seeing today is that the traditional lenders are also now shying away from any non-profits because they cannot guarantee their repayment source. As the economy changes donations for non-essential functions usually starts to deviate as well. As the lenders look to the repayment of a loan by steady donations they are starting to get scared of this type of lending.

There are lenders that still will lend to proven non-profits it just takes more digging to locate them. Don't give up, they are out there.

For more on non-profit lending visit loanforbiz.

Daily Observations - Rent vs. Own

As we talk to more and more commercial Realtors and brokers we are being asked to perform this simple but very effective analysis of rent versus ownership.

Traditionally when someone has been renting an apartment before they are able to buy their house this is a common financial analysis that the residential Realtors would do for their client. As a a matter of fact many of the MLS ( Multiple Listing Services ) offers the brokers and Realtors the program to do this anlaysis online for their clients.

However what I am talking about tonight is not residential but commercial. An analysis that is very eye-opening is for the owner tenant to compare their monthly lease obligation to the prospective debt service of acquiring the property. If a lessee can come up with the minimum ten percent to qualify for an SBA loan, the analysis will clearly show that it makes more sense economically to purchase the property rather than to pay rent every month,

At the end of the year all you have to show is rental expense on your profit and loss statement. If on the other hand you purchase the property you would in essence be paying yourself rent to cover the mortgage payment that your business is making. So you get the rental expense and if you hold the property as an individual and not in your business name you will get additional income and the interest write off as well to be used against your personal income, similar with your residential house.

As we are not tax accountants please check with your CPA and Attorney before investment in any property. My point in this blog tonight was to expose you to a new idea. With rates so low, and down payment so low now may be the opportune time to purchase your property for your business,

For more on SBA Loans visit loanforbiz.

Daily Observations - The Times They're Changing

Well I could not go tonight without commenting on what a very exciting day we all had. B of A buying Merrill with 48 hrs to make the buy decision, Lehman filing for Chapter 11, WAMU and AIG at the end of the day having their bonds downgraded to "junk" bonds, and who can forget the worst day since 09/11 for the Dow.

Now that I have your attention. It is our responsibility to keep our clients informed as to all the changes that are occurring in the financial markets, because lenders are changing their programs as fast as I can type today.

Today one lender changed a major program that they have been offering, Others are just not lending, clients should take the first deal that you can get done. Tell your clients to stop the shopping and tell them to take a loan when it is offered because tomorrow that same offer may be off the table. Try to convince your clients to get documents back to you asap, so you get the deals into underwriting, because every day a deal does not go into underwriting is another day that the lender may change their mind about the particular LOI they had offered your client.

For more good sound advice on loans visit our website at loanforbiz.

No Blog Tonight

Our Bi-Monthly newsletter Flash of Lightning was sent out instead. If you are not a registered reader of our bi-monthly newsletter and you would like to sign up, please e-mail me at harlan@loanforbiz.com.

Daily Observations - Mezzanine Financing

One of my M-Team members asked me to spend a bit of time discussing mezzanine financing. As I am not an expert in this area of fiance I have gleaned information from other sources. But the gist of the mez piece is that mez financing was originally utilized in the area of corporate finance and its only recently that the mez world as opened to the real estate world. Mez financing is now found in development deals, un-stabilized properties and even stabilized properties.


The purpose of the mez piece is to supply a missing piece of equity in the transaction. For example very simply if a bank needs 25% down, and the borrower only has 15% down the mez piece can account for the remaining 10%. But here's the catch, what do you lose if the deal goes bust, the entire project, because the mez piece is not only a debt component its also an equity component which is much easier to foreclose on due to the personal nature of the equity and not the realty nature.


As defined in Wikipedia, for whatever that's worth, "Mezzanine capital, in finance, refers to a subordinated debt or preferred equity instrument that represents a claim on a company's assets which is senior only to that of a company's common shareholders. Mezzanine financing can be structured either as debt (typically an unsecured and subordinated note) or preferred stock.

In real estate finance, mezzanine loans are often used by developers to secure supplementary financing for development projects (typically in cases where the primary mortgage or construction loan equity requirements are larger than 10%). These sorts of mezzanine loans are often collateralized by the stock of the development company rather than the developed property itself (as would be the case with a traditional mortgage). This allows the lender to engage in a more rapid seizure of underlying collateral in the event of default and foreclosure.

Standard mortgage foreclosure proceedings can take more than a year, whereas stock is a personal asset of the borrower and can be seized through a legal process taking as little as a few months"

For more on mezzanine financing access the Internet, for more on investment properties view loanforbiz.com.

Daily Observations - Three Strikes Rule

Tonight I want to briefly touch on 1031 exchanges and the identification policy.

A 1031 is a tax exchange where you can take your profit from one transaction and roll it into another purchase to avoid capital gains and further taxation. There are many very specific rules that are applied and conditions that have to be met.

As I am not an expert or profess to have anything but a cursory knowledge of the subject I want to stick with the aspect that we as financial brokers have to deal with. A client has the opportunity to identify up to three properties. If they are unable to close any of the identified properties the 1031 will not occur and the client will have a tax burden.

The three strikes rule is a very severe penalty for a client not being able to close on one of the three properties identified with the accomodator. My recommendation is that you first run the numbers on any property and get a lender to prequalify the property and buyer before they legally identify the property for for the accomodator. For once the property is prequalified and you know that there can be a lender identified that will close the loan then the client would feel more comfortable legally identifying the properties.

Read this blog in conjunction with the blog about the out of state borrowers and you can see the correlation very clearly.

For more on investment property visit loanforbiz.com.

Daily Observations - 25% Collateral Rule

Another very short but very important post tonight regarding SBA Loans.

As you are all aware there are two SBA Loans, one is the SBA 7A the other is the SBA 504 loan for the purchase of real estate as part of the transaction. This rule that I am going to elaborate on only applies to the SBA 7A loan and is not applicable to the SBA 504 loan.

The SBA requires the lender to take a lien against all available collateral as you pretty much know for straight business opportunities where there is no real estate as part of the transaction. But when there is real estate the subject property will usually suffice to meet the collateral requirement of the loan, and no additional collateral is deemed necessary,

However there is a twist and that's what tonight's blog is about. If you have any real estate that has 25% or greater equity the SBA requires, not recommends but requires that the property be pledges as additional collateral.

So if you do not want your real estate pledged in addition to the subject property real estate make sure that the equity position is less than 25% after applying all debt to your property. If on your application the SBA lender cannot see 25% equity after all debt has been subtracted the issue is then moot, and the real estate will remain free of any SBA related liens.

For more on SBA regulations visit loanforbiz.

Daily Observations - LOI's

That coveted LOI, for those who are reading this and are not sure what LOI stands for its the nomenclature/abbreviation for Letter of Intent. It's what every financial broker/banker wants to give to their clients as soon as possible. Its the basic term sheet for a deal that has been reviewed by the banks internal team. So whats the problem...Why am I writing in a cynical manner.

The reason is that certain lenders LOI's are not worth the paper that they are printed on while other lenders LOI's are EXTREMELY valuable. So what's a person to do when he gets an LOI? How do I know that the LOI I just received is backed by the good faith of the lending institution that issued it, or is the lender issuing LOI's on every project to satisfy the demand of the Business Development Officer?

The best advice I can give tonight is that if the LOI looks like it was produced in five minutes or less and the only change in the document is the name of the client and the name of the project, I would not hold a great deal of faith in that document. But on the other hand, if the terms are specific, there is a deposit request, additional conditions are proposed that only pertain to your loan request, that LOI is probably much stronger.

So what are you to do if you get a weak LOI? Well you can do exactly as I did today, I told the lender that issued the LOI that I was not impressed and could not recommend my client to even consider such a weak document to rely on. I asked them to re-write the LOI with some "meat" to the document and re-issue it. Guess What???

We got the new LOI this evening and I feel much more comfortable recommending to my client to pursue this lender.

For more on Small Business Loans visit loanforbiz.

Daily Observations - Out of State Borrowers

A very short post this evening.

Out of State Borrowers is getting next to impossible to find funding for.

If you are working with an out of state borrower you must make sure that everything is absolutely perfect for all the 5C's, and the only issue is the out of state borrower. Lenders are very leery of out of state borrowers in today's economic environment.

Lastly if you do represent an out of state borrower make sure that the property they are considering is in a major metropolitan area. This is for a couple of reasons. First of all the lender may feel more comfortable with a metropolitan property rather than a property that is in an outlining area.

Secondly, and more importantly is that metropolitan properties are located where there are more potential local lenders that may stretch their underwriting guidelines to include the out of state borrower if all other things are equal to local borrowers criteria and qualifications.

For more info on investment properties visit loanforbiz.

Earnouts

An earnout is a contractual arrangement in which the purchase price is stated in terms of a minimum, but where the Seller will be entitled to more money if the business reaches certain pre-agreed upon goals in the future. These goals are typically stated in terms of percentages of gross sales, rather than net sales, because expenses are easy to manipulate and thus net sales are too easily distorted.
Earnouts are a powerful tool that can be used in negotiations as a contingent element, which help the Seller and the Buyer reach a mutually agreeable value of the business. However, this is a very complicated contractual arrangement and should be prepared by an attorney who has expertise in setting up earnouts. In addition, the buyer and seller would be wise to have an experienced attorney review the document before entering into the agreement.
An earnout can be designed and written many different ways. For example:
1. An earnout may pertain to only specific products or services that were part of the business prior to the acquisition.
2. The earnout may only be applicable to revenue after the business surpasses a specified sales amount.
3. An earnout can also be based on units sold.
For the Seller, there are significant risks they must address when considering entering into an earnout agreement.
First, the Seller needs to be able to verify the numbers that the buyer submits once he or she has taken over the business. In addition, the Seller must also make sure that the buyer does not manipulate the sales of a particular product in order to avoid paying the earnout. Or, there is always the risk that the buyer will not report cash sales, or encourage customers to pay in cash so they can hide the income.
Using earnouts can be advantageous to getting a deal done. However, proper controls need to be in place to ensure nobody takes unfair advantage of the opportunity.

Daily Observations - Religious Organizations Con't

Last night we discussed the basics of funding a religious organization. Tonight I will go into more detail about the organizational structure.

Since we are dealing with a non-profit organization, the first thing we have to see is the bylaws and the organizational documentation of the organization. Each non-profit has filed articles of incorporation with the State in which they are formed. The articles of incorporation will spell out with significant detail who has the right to make any decisions regarding any expenditure of funds.

In addition to the articles of incorporation, the organizations by-laws and charter will then specify exactly how the voting rights of the organization are established. For example can one person make a decision that binds the organization or does the vote have to go to the entire membership. All these are very important questions that you as their financial broker must understand and be able to discuss thoroughly with them.

The funding of a loan is a very expensive proposition because usually the loan is needed to either acquire a piece of property, a building or to refinance an existing debt. Getting working capital is almost impossible. So therefore each obligation undertaken must be significant.

The next area that must be understood is that of the membership. Who makes up the membership of the organization, how long has the organization been in existence, is the membership growing or declining, and is there a significant portion of the membership that makes up most of the donations or are the donations spread around equally among the members. These are only a few of the questions that you will have to raise and be comfortable asking as well as getting the answers to.

Tomorrow night we will continue with more areas to examine.

Daily Observations - Religious Organizations

Can we finance your Church, Synagogue, Mosque etc.? Well it depends. Tonight's blog will deal with the financing of these non-profit organizations. Most non-profits are deemed that way for tax purposes and as such are known as 501 C-3's. There are other IRS code numbers as well depending on the type of non-profit but for our discussion tonight just be aware that they are known as 501 C-3's.

So the question begs of itself how can a non-profit get financed? First of all the financing for this type of organization will be completely different than a financing for a profit organization. The documentation for a Church loan is very different because the Church or affiliated organization does not want to show a profit. If they show a profit they can theoretically lose their non-profit status.

So if you understand this at the outset you have a leg up on your competition that may be going after the same client. The key to the smooth financing is to understand how a Church, Synagogue, or other religious organization gets their capital to run their daily operations. By understanding the source of their monies you can structure a loan to meet their fiscal needs. Most organizations meet their fiscal obligations through donations. If you can document the donations, see the trend in the donation and be able to extrapolate future "earnings", a case can be made for the loan.

The other major point to remember is that there are a limited amount of lenders that specialize in this particular area. The reason is that NO ONE WANTS TO FORECLOSE AGAINST GOD, this thought must never be forgotten when dealing in this arena.

For more on Church and Synagogue loans visit loanforbiz.com.

Daily Observations - Asset Versus Stock

When selling a business, there are two major transfer vehicles. The asset sale, or a stock sale. My goal this evening is to share with you a very brief discussion on the differences. As a financial broker it is not your responsibility to determine whether the sale is going to be an asset one or stock sale.

The role of the financial broker is strictly to locate funds for the transfer of the business, whether the sale is an asset or stock one. The business intermediary, sellers financial consultant, tax advisor, and or attorney are the decision makers in this process.

Both the asset sale as well as the stock sale have very specific tax liability as well as legal liability implications. With the stock sale, all liability that was against the original Corporation is now transferred to the new corporation. Hence, the new buyer is 100% liable for all previous lawsuits, as well as future lawsuits that may even be derived prior to the transfer of the business.

An asset sale, unlike the stock sale presents no liability for past actions prior to the date of transference. Both asset sale and a stock sales have specific requirements as to notice, bulk sale transfer, and other escrow requirements.

There are certain times where a stock sale will be the only logical solution as it relates to the transfer of the company. For example, we are dealing with a client right now who has numerous government contracts that would not transfer to the new buyer if the sale was an asset one.

Generally speaking, most small businesses are transferred as an asset sale, with the new buyer starting fresh, changing the name, as well as the image. On the other hand, most large businesses that are transferred are done as a stock sale.

In conclusion, please be aware that there are separate purchase agreements for an asset sale as well as a stock sale. The covenants are very different in each of these two sales. To learn more about these differences read the purchase agreeements.

For more information on the sale of businesses, and the financing of them, visit loanforbiz.com.