Tag Archives | real estate

Working Capital From Real Estate

Working Capital From Real Estate: An Asset Based Lending Solution to Cash Shortfalls and Opportunities

Let’s look at an example of working capital from real estate. Moreover, look at an asset based lending solution to cash shortfalls and opportunities

Problem

Many companies own the land and buildings necessary to conduct the day-to-day operations of their business. Oftentimes, this valuable asset is included in traditional bank financing packages as the cornerstone of the credit facility. As long as the business progresses as the bank deems appropriate, and all loan and debt service coverage covenants remain in compliance, the real estate loan will serve to anchor the lending relationship.

Companies and/or individuals may also own commercial real estate which may provide an income stream or conversely, suffer from under-utilization and needed development. These transactions are typically financed by the banking community as a “onetime” advance. That advance is conditioned for certain renewal requirements. In addition, additional funding is triggered by developmental thresholds that have to be met. Additionally, the investment opportunity associated with these properties may require balance sheet leverage beyond what the bank is willing to tolerate.

More often than not, an adverse business or personal event occurs which places the commercial property owner in a position where cash is critical but not readily available. Such situations could involve the following:

  • Delinquent taxes
  • Tax liens
  • Legal expenses
  • Divorce settlements
  • Environmental issues
  • Any number of cash draining, unpleasant scenarios

In the first two examples cited above, the traditional bank lending relationship may deteriorate because of economic or bank regulation issues beyond the control of the borrower. The real estate may have appreciated in value since the bank extended the original bank loan. However, further leverage of that equity is not available from the bank because of payment default, covenant compliance or regulation issues with which the bank has to contend. In the third example, the bank is oftentimes prohibited by internal policy and regulators from extending credit for the purpose of satisfying such obligations.

Solution

There are companies within the asset based lending community that can provide necessary funding to alleviate the cash shortfalls caused by the aforementioned problems. The asset based lender is more willing to look to the current appraised value of the real estate collateral to insure repayment as opposed to cash flow and financial statement strength. While loan to value percentages may be somewhat less than those allowed by the banking community, the liberal repayment terms and lack of covenant and compliance requirements afford the borrower the opportunity to alleviate the cash shortage and retain possession and control of the assets important to the well-being of the business and his livelihood. Some examples of the flexibility offered by an asset based real estate loan include the following:

  • Bridge loans
  • Interest only
  • Twenty-five year amortizations
  • Escrowed payment reserves

When cash is critical, and the options become limited, the appraisal value equity in commercial real estate can provide an asset based loan to alleviate the problem.

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working capital from real estate
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working capital from real estate

See related articles: Mining the Balance Sheet for Working Capital

See Also:
Balance Sheet
Current Assets
Working Capital
Working Capital Analysis
Current Liabilities
How to collect accounts receivable
Factoring

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Limited Liability Limited Partnership (LLLP)

Limited Liability Limited Partnership (LLLP) Definition

A Limited Liability Limited Partnership or LLLP is a form of business that contains a group of general and limited partners. Generally, the general partners have a managerial interest in running the business; whereas the limited partners have solely a financial interest, or what they invested in the company. The difference between an LP and an LLLP is that the LLLP general partners receive limited liability under the law.

Limited Liability Limited Partnership (LLLP) Explained

The Limited Liability Limited Partnership agreement is not a widely used business form because it is new to the business environment. Many LLPs are not even aware the reduced liability that they can see for their general partners under the LLLP form. Some states do not allow the LLLP as an election yet. As a result, states have not established uniformity. Therefore, it makes it hard to make this election if the company works across several states. There are only a few industries that have adopted this form, like real estate companies and some television broadcasters like CNN.

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Limited Liability Limited Partnership

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Limited Liability Limited Partnership

See Also:
Limited Liability Company (LLC)
Limited Partnership
General Partnership
S Corporation

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Form 1098

Form 1098 Definition

The IRS uses the form 1098 for the purpose of gathering information upon an individual’s amount of interest payments and mortgage payments throughout the year. 1098 reporting is beneficial because it allows an individual to claim a 1098 deduction on the tax return.

Form 1098 Explanation

The 1098 form often times is there to help individuals realize their deductions. This is quite important because the form 1098 deduction will effectively reduce the amount of taxable income, meaning that the individual will not have to pay taxes on the interest and mortgage payments. The sorts of payments that are allowed are the mortgage payments on real estate, student loans, and vehicle loans. There is a 1098 IRS form for each of these items depending on what the individual is trying to claim as a 1098 deduction. There is even a 1098-t form which allows an individual to claim tuition fees as a deduction. Overall, the 1098 form is an effective way for individuals to reduce their amount of taxable income and save money.

form 1098

See Also:
401k
W2 Form
Form 1099
Deferred Income Tax
Marginal Tax Rate

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Commercial Agent

See Also:
Agency Costs
SKU
Lease Term
Logistics Chain
Gross Up

Commercial Agent Definition

Commercial agent is defined as a person who finds customers for a company who has hired the commercial agent. A commercial agent is both a job as well as a business. They find prospective customers for a variety of businesses, from commercial real estate companies to oil pipeline product manufacturers, so commercial agents function as independent salespeople. Commercial agent compensation is usually paid a commission for each product which they have sold.

Commercial Agent Explanation

Explained also as a private salesperson, a commercial agent is useful for many business to business companies which are trying to increase sales. Due to the fact that commercial agent fees are paid on the commission from each sale, they only form a cost after they have created client income. This makes commercial agents very useful: the only time they draw from company finances is when they contribute to them. The method commercial agents operate with ensures that they only increase firm value. There are exceptions to this, however, as with a commercial agent salary, signing fee, or maintenance fee for keeping agents on a project. Still, they often create less of a cost than a salaried salesperson.

Commercial Agent Example

For example, Sayid is a commercial agent who specializes in commercial real estate deals. Rather than spending some of his time completing deals and the associated paperwork, Sayid chooses to focus his efforts on his expertise: finding and selling clients. He has chosen a career where he can maximize his efforts for as long as he can stay productive.

Sayid has recently found a client who wants to purchase several spaces in a strip center to create a large store which sells finely crafted rugs. Sayid wants to make this deal work for all parties. Then he can gain his commission while expanding his reputation.

He needs to do this quickly so that the customer can begin the process of opening their store. The problem with this is that the seller of real estate is taking longer than expected in hopes of finding a higher bid on the property.

Because Sayid is not an employee for the commercial real estate company, he can use methods which may not be available to an employee. Sayid enters the office of the real estate firm and speaks with the CEO of the company. Rather than acting as an employee, Sayid can negotiate on a different level because he is a contractor. He emphasizes that slowing on this deal will reduce his ability to find other buyers, causing total income for the real estate company to decrease. Sayid has more power of persuasion as a performance-based contractor than as an employee who takes salary and commission.

Sayid is able to complete the deal in a way that benefits both vendor and purchaser. He appreciates his position and realizes that he made the correct career decision when he began years ago.

commercial agent

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Capital Gains

See Also:
Tax Brackets
Marginal Tax Rate
Deferred Income Tax
Flat Tax Rates
Company Valuation

Capital Gains Definition

The capital gains definition is the proceeds from the sale of an asset. These gains can be realized from the sale of stocks, bonds, real estate, equipment, intangible assets, or other property. When the asset or property is sold, the capital gain is calculated by subtracting the asset’s book value from its selling price. If the selling price is higher than the book value, it is a capital gain.

It can also refer to an increase in the value of an asset. If the value of an asset increases while held, the increase in value above the asset’s purchase price is considered a capital gain. This gain is considered unrealized until the asset is sold.


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Capital Gains Equation

Capital Gains = Selling Price – Book Value

Losses

A capital loss is the loss incurred on the sale of an asset when the book value exceeds the selling price. Capital losses can occur from the sale of stocks, bonds, real estate, equipment, intangible assets, or other property. When the asset or property is sold, the capital loss is calculated by subtracting the asset’s book value from its selling price. If the book value is higher than the selling price, the company incurs a capital loss.

A capital loss can also refer to a decrease in the value of an asset. If the value of an asset decreases while held, the decrease in value below the asset’s purchase price is considered a capital loss. This loss is considered unrealized until the asset is sold.

Equation

Capital Loss = Selling Price – Book Value

Tax Rates

These gains are taxed according to a rate, called the capital gains tax rate, which may be different from the tax rate for regular income (depending on tax laws at the time). Long term capital gains are capital gains on assets held for more than one year. Short term capital gains are capital gains on assets held for less than one year.

Presently, in the U.S., long term capital gains tax rates are lower than regular income tax rates for individuals. Short term capital gains tax rates are the same as regular income tax rates for individuals. For companies, long term capital gains tax rates and short term capital gains tax rates are the same as regular income tax rates. In the U.S., the taxpayer may employ techniques to defer or reduce capital gains taxes.

capital gains

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Arm’s Length Transaction

See Also:
Accounting Principles
Accounting Concepts
Point of Sale (POS) Method
Working Capital From Real Estate
Which Bank to Choose?

Arm’s Length Transaction Definition

An arm’s length transaction or the arm’s length principle is a transaction that takes place between two completely unrelated parties. An arm’s length transaction also implies that the final transfer of assets or services will be valued at the fair market value.

Arm’s Length Transaction Meaning

Arm’s Length Transactions are important in the market because it is implied that these transactions will provide consistent and meaningful information. This differs if the two parties are related or are friends, who might provide a discount for the transfer of assets or services. An arm’s length sale is most often referred to in the real estate market where the fair market value must be determined at arm’s length. This is because the sale of one property affects the price of all the properties surrounding it. If the parties are related there will usually be a benefit for each party in the agreed upon price and drawing the agreed upon price away from the fair market value.

Arm’s Length Transaction Example

Bob is attempting to sell his house in the market and move away. His son Bernie lives in the same city. He would like to keep the house in the family as it has been for years. Bob has the house appraised and it is worth $350,000. However, his son has just entered into a job last year right out of college. Thus, he cannot afford the house at fair market value. Therefore, Bob decides that he will sell the house for $150,000. This is not an arm’s length transaction because the two parties are related. Furthermore, the agreed upon price was discounted well below the fair value. If Bob had sold to a complete stranger for $340,000 this would be arm’s length because they are unrelated. Even though the price is slightly below the appraisal the agreed upon price is the result of negotiations between the two parties.

arm's length transaction

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Accretion

Accretion Definition

Accretion is the increase through time of a natural asset like land or a financial asset. The increases occur through growth and multiplication like through the following:

Meaning

Businesses often use this type of accounting for the development of assets in the form of an accretion expense, or an increase in the present value as the asset draws closer to its final future value. It is also used in Mergers and Acquisitions (M&A) when discussing the earnings per share for the company using pro forma statements after the transaction takes place. In other words, these accounts for the synergies which are likely to be realized. In addition, it will feed directly into the combined entity’s bottom line. Accretion real estate is simply the development of land through the growth and development of land. This can be through the development of a shopping center or something simple like the growth of livestock through breeding.

accretion

See Also:
Depreciation
Asset Market Value vs Asset Book Value
Fixed Asset Turnover Analysis
Research and Development
Straight-Line Depreciation

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