Tag Archives | real estate

Working Capital From Real Estate

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

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 which is conditioned for certain renewal requirements, and/or 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 delinquent taxes, tax liens, legal expenses, divorce settlements, environmental issues or 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 original bank loan was extended. 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. Bridge loans, interest only, twenty-five year amortizations, and escrowed payment reserves are some examples of the flexibility offered by an asset based real estate loan.

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.

See related articles: Mining the Balance Sheet for Working Capital

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Real Estate Outlook

The future of real estate over the next thirty-six to forty-eight months in the US will impact the financial markets, as well as the general economy. And, of course, the health of the markets and the economy will impact the real estate market during this time. The ULI and PriceWaterhouseCoopers put out an annual outlook for Real Estate entitled Emerging Trends in Real Estate®, which is available free on the ULI’s website.

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Working Capital from Real Estate

“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 which is conditioned for certain renewal requirements, and/or 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 at WikiCFO.com

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Operating Leases Going Away?

The FASB (Financial Accounting Standards Board) and the IASB (International Accounting Standards Board) are recommending that the use of operating leases be scrapped and that all leases be treated as capital leases. For over 40 years FAS 13 has been the standard. This step will change all that.

Under the proposed rules operating leases will be capitalized with both an asset and a liability account. Rent expense would go away and depreciation and interest expense would take it’s place.

Why is this important to a CFO? It’s the financial ratios! EBITDA no longer becomes useful in valuing a company. Your debt to equity ratio becomes inflated and the debt service coverage ratio becomes compressed. All you bank covenants will have to be modified to reflect the new presentation.

The question is: does this increased complexity add value to the process of evaluating the financial performance of a company? We will have to wait and see. Until July 2010 the accounting regulators are soliciting comments to their proposed changes. Implementation would not begin until 2011.

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Weakening in Commercial Real Estate Debt

Came across an interesting article in the WSJ recently. It appears that the underwriting standards of lenders for commercial property became somewhat lax over the last few years, much as they did for residential lenders. Granted, the commercial debt outstanding ($3.4 trillion) is somewhat smaller than residential property debt in the US ($11.2 trillion), but it’s larger than US consumer credit outstanding ($2.6 trillion).

What makes the weakening in commercial property debt worrisome is that roughly 50% of outstanding commercial debt is held by banks and the banks are heavily invested in this debt.

So many financial institutions may not be out of the woods yet, as assets they expected to be safer turn out not to be so, in a weakening economy with declining consumer spending.

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Residential Real Estate is Not Just a US Problem!

I recently returned from several weeks in Spain. When I left the U.S. I was focused on our economic problems. Though I had read about Europe’s issues, I didn’t think that they could be as bad as ours. I was wrong!

When we arrived in Madrid the first thing I noticed on the ride from the airport was the large number of cranes. When I looked closer I discovered that some projects either had been abandoned or were moving extremely slow.

As we traveled on to Seville and Granada a similar pattern emerged. During a cab ride I picked the brains of a Spaniard who spoke excellent English (since I can’t speak Spanish!). He confirmed that loose lending had resulted in numerous real estate projects being built. Furthermore, the rising fuel prices had put a dent in the locals purchasing power (gas is $8 – $9 per gallon in Spain). In fact, a week after we left Madrid the taxi drivers and then the truckers went on strike to protest the high taxes on fuel.

As we left Spain I had the feeling that this sub prime mess goes much deeper than the U.S. banking system. In addition, it might take much longer to work through the worlds economy.

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Economy may trail markets in recovery

While some believe that the financial markets may have seen the worst of the subprime credit meltdown, the worst may be yet to come in the ‘real’ economy. There’s an article worth reading in today’s WSJ that touches on this. Basically, the impact of the loss of household wealth in the form of rapidly declining home values coupled with the impact of banks tightening their lending and new construction all but dead will continue to limit economic growth.

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