MONEY 17 - LAND DEVELOPMENT #5

THIS IS MY 17^TH POST ON UNDERSTANDING MONEY TOOLS

Land Development Part 5

Let’s touch briefly upon some of the costs involved in land development. We have discussed work completed on Parcels 1 and 2.  Here are a few approximate costs involved. 

When the State Department of Transportation purchased land for the highway and interchange project a new survey needed to be completed.  Make sure you have a well-respected engineering firm complete this as errors cannot be afforded down the road.  The cost for a new survey was $10,000. Then, as previously mentioned, we brought in 130,000 cubic yards of clean dirt fill onto Parcel 1 and 10,000 cubic yards on Parcel 2.  This dirt delivered, graded out level after removing and storing topsoil and replacing at least 9-12” of topsoil ran about $15-20 per cubic yard.  That tallies up to about $2 million or more for Parcel 1 and about $175,000 for Parcel 2.

Let’s look at some figures to keep in mind when developing property. One acre is 43,560 sq. ft.  To raise one acre of land one foot higher to get the amount of fill you might need, divide 43,560 by 27 to convert square feet to cubic yards, and you get about 1,613 cubic yards. To bring in all utilities, pave site for parking, curbs, gutters, water, sewer (or an alternate to city sewer), fiber optics, etc. it is going to run about $200,000. for nice residential; this including soft and hard costs.  Then, add in original cost of land, financing charges and I hope you want to make a profit!

In Wisconsin it costs about $30 a linear foot to bring in sewer lines to the property.  The depth for sewer lines is about 8 feet. This will vary according to where your development is because of frost lines and other requirements. In this case we planned two scenarios for sewage.  One was to work with the City sewer and be accepted into a filing district, and work with the State and DNR to run lines under the highway. If permitted, running lines under the highway would run about $200 a linear foot.  Another solution is an alternative sewer system.   Siemans Corp. has a very good system, although not inexpensive.

As a back up plan we ran soil perc tests for septic and isolated certain areas on the project for this.  These ground sites cannot be compacted by heavy equipment.

Out West it is common to require archaeological studies to be completed.  If bones or artifacts are found from the land studies, these locations will be isolated and kept from development until removal of historical artifacts has been completed.

Also, in the Western states where you have dry conditions with “washes” these washes are natural and cannot normally be disturbed except with special permission by the Army Corp of Engineers and the Department of Natural Resources. Sometimes it can be of benefit to the development to re-contour the water flow and washes, but it may be quite expensive and is under the control of the government agencies to grant permission.

Check with the county or city/town you are working with to see if a “dust permit” is required.  Most places where it is dry like in the Western states a dust permit is required whether you are grading out a lot for a house or many acres for a development.  If it is a city lot it may be as easy as asking a neighbor if you could periodically use some water from a hose to keep the dust down.  On larger developments you will need to bring in water trucks.

To keep taxation to a minimum, what I like to do is form a Limited Liability Corporation that will give some legal protection for the acquisition of the land, the needed studies (soft costs) and the basic land improvement. The land would normally be in a lower real estate tax standing being designated agricultural 1 or 2.  Then, when it is time to build on the land another corporation will be formed and you can sell or transfer the land to that entity.  This enables a person or company to pay long term capital gains tax on the from the LLC you initially set up.  Current Federal Tax on long term capital gains with a hold over 12 months is 15%.  Once you start operating and building on the land normal corporate taxes will apply.

Also, leave the land as agriculture zoning or conditional zoning until everything is final with all parties as taxes will increase substantially once construction starts.

Studies, permit fees, etc. will vary depending on parts of the country and if you are only dealing with state and county regulations or have to meet town and city requirements.

MONEY 16 - LAND DEVELOPMENT #4

THIS IS MY 16^TH POST ON UNDERSTANDING MONEY TOOLS

Land Development Part 4

Now, we will go to Parcel 2 of the development we are analyzing. Again, go to www.premierewisconsinland.com and/or follow my dialogue.

This parcel is about 10 acres and quite narrow (about 250 feet).  It is situated between the road that is the entrance to the highway overpass and another road/street.  Because there is commercial on two sides of this site, the highest and best use is determined to be commercial/retail. The State purchased 2.5 acres for a park and ride near the west end, however politics with the town has entered the picture and the town doesn’t want to maintain the park and ride that the State will pay for thus preventing it to be completed at this time.   Again, be prepared for politics affecting your work! 

There is a possibility with the park and ride location to be incorporated into the development package and provide more parking to satisfy the State’s requirements, and a win, win situation.

Another obstacle on the parcel is 60,000 sq. ft. designated isolated wetlands through mandated testing. What can we do?

With the “isolated” wetland situation the DNR and State actually takes that land away from your control.  There is a possibility to work with the State and DNR to purchase other land and give/dedicate that to the State in lieu of your land holding, usually on a 2 or 3 to 1 ratio in their favor. This is referred to as “mitigation”. Sounds peculiar, but the owner has lost control of his land.  If this can be accomplished, we can go ahead and incorporate this land into the building package as parking sites, not suitable to build upon.  Proper engineering and drains will need to be incorporated to drain this location under the road that is access to the highway and to the north into another small wetland area.

Normal strip centers are long and run 50-55 feet or more in width.  Walkways, parking and shipping transportation drops in the back of the stores will be planned for and laid out.  Deliveryshipping access in the rear of the building needs to be about 24 feet or wider.

On the eastern part of Parcel 2 we brought in clean fill after removing topsoil; approximately 10,000 cubic yards was delivered and graded out as that area was low, and then replaced with topsoil for farming usage until the market demand for retail and building returns.

Closer to the west end of this strip of land is a ditch for water run off that flows north under the highway and eventually to the Rock River, a larger Wisconsin river.  When the time comes for complete grade work and building our engineers will work with the DNR on alternatives for this.  It is not only the ditch that is important when planning out development, but the setbacks the government requires.

As obstacles arise work with people and find solutions for the best of all concerned, and avoid lengthy legal entanglements.

MONEY 15 - LAND DEVELOPMENT #3

THIS IS MY 15^TH POST ON UNDERSTANDING MONEY TOOLS

Land Development Part 3

In this segment we will take the basics of a development from the purchase to finish of land work to turn to a builder/developer using my development in Wisconsin as an example. Again, my blogs are meant to be educational and touch upon the business basics, not in detailed depth.  Please go to: www.premierewisconsinland.com

Or follow along as I describe the land and now it’s 4 parcels.

Two of the most important ingredients of land development are lots of luck and timing!

This aspect will be broken apart so each blog is not too long.

This project is a major interchange in Oconomowoc, Wis. about 30 miles west of Milwaukee near I-94 and combines two state highways. The land was purchased in the 1990s, and was chosen as one of three possible sites for a large interchange including 4 land highway and over pass; one of the largest projects in Wisconsin. The State Department of Transportation

(DOT) selected this land over the other two sites.  Over a year of work with the Department of Transportation was completed coordinating my land work with the State engineers, and then the project was postponed because of funding.  This is where staying power is necessary, as the unexpected seems to always occur. 

The land combined two farms. I took advantage of the DOT’s delays to take down all the barns, out buildings and one old farmhouse, leaving one farmhouse remaining.  The States will pay more for a house and residential lot than farmland, so best to leave something remaining on the land. The Department of Natural Resources (DNR) becomes involved from the onset if you do work on anything over one acre of land, or do major changes to land. With demolishing of buildings comply with State and local permits and standards.  I had to have the acidity of the concrete tested before burying the foundations!

In 2000 the State’s budget was met for the project and the engineering plans once again began.  I had a great law firm working on my behalf and in May, 2004, the State purchased the needed land of 60 acres with a mutually agreed upon price, rather than push the State into eminent domain, where they can take private land for the betterment of the public.

Now, you want to do several things at once:

-Hire a top civil engineering firm.

-Contract with a good public relations firm.

-Hire a market study to be completed that will help confirm optimum usage for land.

-Hire a top architectural firm for conceptual layout.

-Contract for soils tests including wetland studies.

-Contact Departments of Natural Resources and Army Corps of Engineers.

-Contact all utility departments including water, sewer, telephone, and cable companies for fiber optics.

-Stay in close contact and meetings with the State engineering department.

-Meet with the contracting company that wins the bid for the construction of the highway for the State.  You want a close relationship with this contracting firm.

Large projects take time.  This one took 3 years to finish the highway once ground was broken.  I coordinated a lot of land work at the same time.  Normally contractors for the State will have extra soil or fill that can be used for your own development. This may include crushed concrete for berms and other subsurface layers.

Parcel 1 work:  This is approximately 35 acres and best suited for retail/commercial.  Nice residential lies to the east.  Neighborhoods are close-knit communities. As soon as construction starts the people may be up in arms; noise, development, dust, changes to the area. This is where a good public relations firm comes in.  Parcel 1 sloped to the north dropping about 6 feet from one end to the other.  After wetland studies were completed we were losing a few acres to wetlands, and these acres cannot be touched.  Sometimes this can be subtle, and not necessarily wet areas.  The DNR will look for wetland cabbage, cattails, or do acidity tests on the soil to make determinations. 

If you lose acreage because of wetland designation to the State, you can use it as a natural green belt as a certain amount of acreage will need to be dedicated for green belt. 

We eventually brought in 130,000 cubic yards of clean fill to this parcel after removing the topsoil and then graded  it to a 0-1% grade.  Then, replaced 9-12” of topsoil as mandated by the DNR. We want to hold this in agricultural zoning until the economy returns or until the land can be sold to a builder. Farming the land can keep your taxes low. Prematurely rezoning can be devastating from a real estate tax and cost standpoint.

We will continue from here with the next blog.

MONEY 14 - LAND DEVELOPMENT #2

THIS IS MY 14^TH POST ON UNDERSTANDING MONEY TOOLS

Land Development Part Two

Let’s take a simple subdivision of land.  Assume you have two acres zoned residential, the land has no water and sewer to site, but does have electrical, gas, and telephone.  The first step would be to meet with the city planning department if it is in a city, then the county planning office. From past experience my recommendation is to get all approvals in writing. As a case in point, a friend had a home in a town on over two acres with one acre minimum zoning.  In a meeting with the town planner they told him there was no problem dividing off one acre that would permit salability, and that also held true with the county.  After a division of the land, a new survey and the county approval, the town would not acknowledge the division and the lot became worthless. Get it in writing!

Continuing on, select and employ a civil engineer.  They can tell you the needed steps and assist.  You will need at a minimum a new survey that will be needed for the county and town or city. In addition, you may have to do soil studies, wetland studies and studies for the Environmental Protection Agency. Soil studies would be needed for approval of a septic system or alternative waste system.  You will also need to talk with any utility companies involved and perhaps the Department of Natural Resources when involving land in excess of one acre.

Some states have different regulatory laws.  In Arizona where I have developed land the Arizona Department of Real Estate requires a “Public Report” to be given to every buyer of a subdivision of 6 or more lots prior to contract with the buyer.  A potential buyer may “reserve” a lot, however he cannot go to contract without the Public Report.  Essentially, the Report presents all facts about the subdivision and has been filed with the Real Estate Commission.  Any change to a material fact requires the Report to be amended.

There are few large parcels of land being developed now because of the economy.  Even large developer/builders are looking for the bank owned developed lots and not developing land.  Builders also want to limit risk so they are buying small developments where they can get in and get out within a couple of years, unlike 7-10 years ago.

Let’s look at the basics of developing a larger amount of land. This can take 8-10 years and longer to get final approvals so you probably will have to work and budget through economic downturns or at least one recession. Another hurdle that you have no control over is politics, both from government sector and private sector.  A mayoral term is many times 4 years. You may be in favor with one mayor and set of commissioners, and then with a change in local government you run into new people to work with. They may be an obstacle to get final approvals for your subdivision, either halting it or slowing it down substantially.

For a large development procedures are the same to start as the small development except more people are going to be added to the “party”.  The subject property is contracted for sale with contingencies based upon what you want to accomplish and time frames. Most sellers will want additional non-refundable earnest money, or payments at certain periods as they are taking the property off the market.  A person starts with a market study and discussing the proposal with the city/town and county.  You, or a public relations firm, can start on the private sector feedback to see how welcome the project will be. To start, you will have a design/architectural firm who is familiar with this kind of project do a work up including layout, architectural design proposals and most likely a three dimensional plan that the layman can visually understand.  The better they can see the intent and the resultant taxes and benefits to the county/city the more likely you will get a nod toward approvals.

Typically, cities are more restrictive than counties.  If everything looks like a go you will need a good real estate law firm, accounting, civil engineering, public relations and real estate brokerage firms and more.  With good advice from these professional groups they should be guiding you as to what is needed to succeed in that particular environment.

With everything looking good, the property is purchased with financing in place.

Next, we will continue with the development of the land.

MONEY 13 - LAND DEVELOPMENT #1

THIS IS MY 13^TH POST ON UNDERSTANDING MONEY TOOLS

Land Development Part One

This is one of the more complicated and lengthy components of the real estate business.  We’ll separate the topic into parts.

Land development or improvement takes raw land and develops the land to be ready to turn to a builder. The requirements will be different according to federal agencies, state, county and city laws, but each is strictly controlled and enforced.

I have been involved with three major developments.  One was a “registered” project with the Securities Exchange Commission and money was derived by selling shares publicly in the project. The other two master planned developments were private, and money came from a few investors.  One was accomplished with a private placement, or Reg. D Exempt with investors who have a high net worth, in excess of $1 million exclusive of home and cars. A good real estate lawyer can advise in this area and draft the legal “private placement memorandum”.  If the lawyer feels it wise he can send the memorandum to the state’s Securities Exchange Commission to have it “Blue Skyed” for approval. The other project I started and own with my brother; we are the only two investors. Most likely a Limited Liability Corporation will be formed to protect the assets and liabilities to some degree of the law.

To subdivide can be as simple as taking one parcel, perhaps an acre or two and dividing once or twice, or it can be complex encompassing thousands of acres with various zonings.  Time frames can take from a few months to many years.

If you don’t already own the land but are buying land to develop the first step is a market study, and talk with the officials on the county and city level about the necessary steps. At the federal and state level the procedures are more general and uniform from state to state. They get more individualized as you get to county and city governments.

Now, you decide a purchase is a good decision.  In today’s economy land development has pretty much come to a halt except for certain locales. The reasons for this are: 1) the number of people and companies that have lost their developments to banks has flooded the market with low priced land.  Banks called in lines of credit that were being used for land development starting in 2008.  Developers are competing with this low priced land coming out of banks.

2) Bank regulations are requiring a “performing loan” which means you or a company need to pay principal reduction and interest on the loan from day one.  Well, most banks and bank regulators have never been in real estate development, and this is impossible. Money needs to be used for the development of land until it is ready to turn to a builder, it is all out-go! At that time, you sell land or build, and with the profit from sales you then pay the bank.

3) With the retraction of the economy there is not the same need for housing expansion and commercial/retail development.  Many people are “upside down” on their current home mortgages, therefore they can’t afford to sell their homes to buy a new homes.  Others don’t want to take a chance in buying a new home in a subdivision until they sell their current home, and in most places it is hard to sell a home right now.  Also, it is much harder to qualify for a new mortgage today.

With commercial/retail, people have cut back on their buying habits, not spending as much money, and buying more on-line from the internet.  To get a loan for a commercial/retail development you would need to be 100% leased with strong tenants.

We will continue from here with more blogs on the topic of land development.

MONEY 12 - U.S. ECONOMY

THIS IS MY TWELFTH POST ON UNDERSTANDING MONEY TOOLS

THE ECONOMY

Recently a good friend wanted me to comment on a site going around on the internet by an accountant about our economy and the financially desperate situation we are in.  Bottom line, finances can’t add up in the long run.

Of course, I like to render my opinion on such things. With personal subjectivity on this topic, I don’t believe it greatly matters now who is president as we reached the point of financial “no return” to what we knew as “normalcy” in the US and the world. 

When did it appear to go overboard with no return? I would say 2005-6.  Two wars have been financially disastrous with some reports that total costs from these wars will add up to as much as $3.75 trillion by 2017, plus the most important loss, and that is the brave men who lost their lives and the injured.  Did our politicians learn nothing from history?  Did they not read books on wars, the length of wars, and the disastrous effect of long wars, written about people like Napoleon Bonaparte, Winston Churchill, Adolf Hitler and others?

We have such debt and future obligations of debt that we can never grow the economy and gross domestic product (GDP) fast enough to pay the interest on our debt let alone balance a budget and pay down debt.

The Federal Government can cut employment and expenses, however they will push the burden down the pyramid, and the next layer is to the states.  Then, the states will plead “no money” and push the burdens down to the counties and from there to the cities.  Already, you have cities in California and Pennsylvania that have declared bankruptcy. The entire US system has signed up for debt obligations of around $100 trillion dollars. As you cut jobs that decreases cash flowing through our economy resulting in lower GDP.

These are only the public sectors not being able to afford to operate as they have done in the past.  Look at corporations under-funded pension plans.  For many years corporations have taken money from their pensions for operating capital pledging in place their public stock.  When the stock market retreats and the stock drops from the stock’s original cost basis the pension is under-funded.

These corporations have lawyers draft pension plans leaving out “non-alienation language”.  This clause states that the trust shall not be able to be penetrated by outside entities except for the US Government.  A good example of a corporate pension falling to the wayside was Pabst Brewery in Milwaukee, Wisconsin.  The Pabst Brewery was failing, some say stripped of assets. Then, the pension money was taken, a class action suit followed by employees and past employees.  The employees lost in court, and their pensions and health care were gone.

As I remember in this situation the pension stated that the company would provide as long as the company could afford to do so.  As the company was folding, the pension money was taken, and the owners could do so within the framework of the law. A big question here is the moral and ethical obligations in the business world between the employer and employees.

Bottom line is that in the future everyone is going to have to compromise.  The rich will need to pay more in taxes, employees will not be able to get the same retirement benefits they did years back, cities and counties will not be able to offer some of the niceties they have in the past….wonderful care of public parks, golf courses, perhaps not the same degree of fire and police protection, etc. 

With cuts and no alternatives there will be more people seeking jobs.  We need to create higher paying jobs in the US, and start encouraging new and small business here, jobs that are not going overseas.  To do this the government needs to get a reality check on bank lending regulations and ease up, yet not going back to the 2002-4 lack of banking regulations.

No country has ever survived without major restructuring after debt to asset ratio exceeds a certain point, and that point has been exceeded by many countries including the US, Japan, France, Greece, Italy, Spain and so many more.

Cutting expenses and austere measures is kind of like medical surgery, when Greece cuts expenses its minor surgery and we don’t feel it, however when it happens in the US and to us, it is major surgery and painful even when the procedure is the same.

In the long run we may luck out from our Federal Reserve Bank buying our US debt obligations.  Perhaps the US will still be the safest place to put money and our US bonds will go up significantly in value thus making the Quantitative Easings (QE1, QE2, QE3) a great investment idea!

MONEY 11 - BANKING #3

THIS IS MY ELEVENTH POST ON UNDERSTANDING MONEY TOOLS

BANKING AND FINANCING 3

Money! Money! Money!  Let’s take a broader look at money, financing and our government policies.

The Federal Reserve has done a couple of things to supposedly help restore our economy. First, we’ve had two Quantitative Easings (QE 1 and 2) and are coming out with a third round (QE 3) for $800 billion. This is expected to place more money into the US economy.  Secondly, the Federal Reserve has become the biggest buyer of our US debt (bonds), even bigger than countries like China, England, Germany and Russia.  This is to artificially keep our interest rates very low through 2015.

Government economics is quite complex, but I am going to simplify some things so you can have an overall understanding, if you don’t already.

QE 1-3 is meant to place more money into society through banks and then have the banks lend the money out. This also weakens the dollar as there are more dollars in circulation, thus we pay back our bonds (debt) with cheaper money.  Now here is the kicker, we have given the banks billions of dollars to assist the middle class with small company loans and to help with mortgage financing, but have not placed any mandates that they do this. What I have seen is that the big banks which get this money, lend it to big corporations taking jobs overseas, and they are investing the money for their own business and bottom line.  It is keeping our potential recovery in bay. So with these billions we have not created jobs here in the US, and international organizations like OPEC (oil producing countries) keep the price of oil high to offset getting paid in cheaper dollars.  This adds to inflation, and therefore, inflation now exceeds our rate of growth in salaries in the US. Some inflation is good if it is created here like our housing prices, which would give people an incentive to buy things rather than sit on their money.

What is GDP?  It stands for Gross Domestic Product and is the increase or decrease of goods and services in the US over a set time period.  Here’s an example: if we have $1 that circulates 5 times in a year’s period for goods and services, the GDP is 5.  If we put more money in circulation from the government it should help our economy grow, but the money needs to hit the streets.  If companies take jobs overseas and are permitted to book their profits here, but keep their dollars abroad in overseas accounts, it does not help us here, except for the stock market.  Corporate tax rates should be dropped from 35%, however I question whether it will help much as so few big corporations pay that rate anyway.  The money needs to flow for risk lending to small businesses and start up businesses.  Small business owners will employ Americans, and those Americans will spend the money here.

Let’s return to the residential real estate market.  Real estate is a huge industry, and we need to get people wanting and able to buy new homes.  If people can’t sell their existing homes they can’t buy a new home; if they don’t have stable good jobs they can’t get financing.

In the early 1990s there was a recession.  Trying to pull us out of recession the government encouraged home buying.  Fannie Mae and Freddie Mac were packaging loans and these mortgages were sold, mostly to Wall Street investment banking firms. What was the driving force?… Wall Street, wanting more mortgage loans, similar to the years 2003-2006. In my opinion people should be able to buy a home, especially in their family growth years when they have children and pets. A great deal of the current banking debacle has been blamed on the “corrupt” people in the US falsely filling out financial statements. Actually, I differ in thinking.  We had recovered from recession after 9/11/2001, bank financing was easy, but unemployment was 4.5% and people had good paying jobs and work.  Families with both husband and wife working were making let’s say $80,000 for the household and times were good.  Then, in 2007 people started losing jobs, companies weren’t paying the same salaries they had been, people were under employed and therefore they lost their homes.  Wealthy people also walked from their homes as the home was no longer a good investment and appreciating.

What was happening?  As a good friend of mine, Gene, says, “none of the ‘isms’ work.”  By this, he means because of human nature including desire for power, greed and more money, communism, socialism and capitalism don’t work.  Relating this to residential real estate Wall Street was packaging mortgage derivatives as fast as they could buy the packages, and placing pressure on Fannie Mae and Freddie Mac for more mortgages.  Then, the mortgages were falsely rated and Wall Street banks peddled them worldwide. If they were A rated many countries banks like Germany could leverage their purchases 30:1.  I have heard that at one point there was $100 trillion in mortgages out in the world, many falsely rated.  This created the banking mess in the US as well as across Europe. 

Where are we heading?  This is my opinion. I don’t think we are going have to worry about inflation for several years like many people thought as the buying public lacks buying enthusiasm and there is not money circulating. The greatest fear is more deflation, or the loss of values and assets.  People, banks and companies are hoarding trillions of dollars.  The Euro Union is in poor financial shape also and is attempting what we are, buying their own debt to keep interest rates low, trying to cut debt and spending and praying!  Their currencies will remain in parity for the most part with the US.  We are going to have a financial cliff to overcome in 2013.  We’ll see what happens first with the presidential elections.  What we certainly need to do is get Congress to work together with whomever is president and watch out for the American people and the middle class, and this needs loosening up money from the big banks and get money in circulation.

With the Federal Reserve continuing to buy US debt, perhaps our treasuries would become so desired world wide that they would rise significantly in price and prove that this was a smart move and the US would make a great deal of money.

Greed, control, lack of cooperation working together on the government’s part, the lack of ethics, the desire for control and power has destroyed Milton Friedman’s “free market theory”.  We need some significant changes to our current systems to get out of debt and move this economy forward.

MONEY 10 - BANKING #2

THIS IS MY TENTH POST ON UNDERSTANDING MONEY TOOLS

BANKING AND FINANCING 2

Money! Money! Money!  This is a topic that you never want to touch upon when you’ve had a scotch or a couple glasses of wine! Outrage will win!

So, you want to start a new small business, retail store, manufacturing, etc.  You need money for starting the business and operating capital.  The first type of loan that pops to mind is a “line of credit”.  A line of credit is for a certain amount of money, at an interest rate that might fluctuate with a standard such as prime, discount rate, London Inter-Bank Rate, etc., for a fixed period of time.  The bank normally wants your corporation, if you have a corporation, to sign and then also wants personal guarantees to the loan.

Lines of credit are very difficult to obtain, and a bank normally doesn’t want to have the line any greater than the assets you currently hold in the bank.  So what you are doing is essentially borrowing the money from yourself.  Any risk lending from a bank is history.

How about a credit card for your store or business offered by your bank?  Banks wanting your daily cash deposits and other business will normally grant your business a card with a limit to $25-35,000, and perhaps an interest rate around 11-12%.  Credit cards are not secured by assets, so they have risk of default on any balance owed. Here are some games banks are playing.  They get your business, offer the credit card, let’s assume with $35,000 as a limit.  For business you use the card and make your monthly payments on time.  All of a sudden the bank drops the amount available to you,  let’s say to $25,000, this triggers a lowering of your personal credit score, and because of the lower credit score, they raise your interest rate to perhaps 20-30% interest.  Now, it is harder for you to pay off the balance because of high interest, and you are trapped, and it hurts your business.  You wonder why we have business problems today!

Let me give you an example where financing changes closed a successful business I helped start. The company was called Auto Source, Ltd., started in 1986 in Denver, Colorado.  Our concept was to lease vehicles to people with one flat fee, $500, and we sourced our cars and trucks directly from the major car companies and their dealers fleet departments.  Being straight forward and honest with customers about pricing we were able to hire some top managers from auto dealers.  Our financing was at a low rate from one of the large banks.  All of a sudden the major car companies started to build financing into their pricing to protect their dealers, the 1% or 2% interest.  Well, we couldn’t compete with traditional bank financing rates and finally closed our doors.

Qualifying for money has become very difficult in the past 5 to 6 years, as we have discussed.  Also, the financial analysis banks use has changed.  For my generation of people it was always build assets, when you need money you can borrow on your assets or sell some off.  Today, banks look heavily at income statements and give little regard to assets on a balance sheet. Yes, hard assets have been devalued, however what happens to the individual who thinks he has job stability with his corporation and a good income and the company decides to down size and sever many jobs? No income and can’t pay the mortgage and bills.

Private financing has always been an option.  The ground rules here have changed, too.  First, let me tell you that there is no such thing as the “trickle down” theory for money from the rich. Many individuals and private money sources are looking at returns of 25% and greater to make a loan, and/or a percentage of your business.  Most times you will lose your business under these financials conditions or be tied to miserable constraints. Venture capital firms fall into this group.

Here is another personal situation that went from success to losing the business. I am relating personal experiences to you in hopes that similar things will not happen to you.  I have written business plans and helped finance two restaurants, one in Denver and on in Durango, Colorado. The fine continental food restaurant in Durango is what I will address. I had two other partners whom I had known previously, and then we took on another partner who was a lawyer and CPA who brought in the majority of the money and had 62% of the corporation, my side retained 38% and a management agreement for operations.  I knew what could happen and discussed potential events with my partners.  To a tee, what I said could happen, did happen.  After 3 months in business we were very successful and above pro-forma.  The controlling partners abrogated our management contract, kicked us out, flipped the restaurant to a new name and corporation and continued on.  Not the smartest, but not the dumbest person in the world I did the logical and sue.  Ever try to sue a “lawyer” representing himself and being out of state?  Finally, after more thousands of dollars wasted chasing him, I wrote it off. Another story to toughen oneself, but you can’t have too many!  Lesson to be learned is best to use the services of a good lawyer and accountant, but don’t take them in as partners as they will in many cases protect themselves first.

MONEY 9 - BANKING #1

THIS IS MY NINTH POST ON UNDERSTANDING MONEY TOOLS

BANKING AND FINANCING

Money! Money! Money!  We’ll cover this complex area in two or three separate parts.  So far with my writings some friends have said, “boring”,  “boring”!  I wish I could make them more exciting.  I am intending to be educational and helpful, quick and not at a very academic level so most people can get some good from them. Don’t repeat the mistakes I’ve made in my business life.  I’ll sight more life examples of what has happened to me in my 42 years in the business world.

Almost every business has three key ingredients; a product or service, management or employees and money/capitalization/funding. I believe money is probably the most important. Most people fail in business because they start out under funded, and/or the start up takes longer than expected in most cases and they run short of money.

Let’s start with real estate funding.  If it is residential, commercial or industrial interview banks and select a bank where policies in place will meet your needs for a long term investment in real estate.  Don’t forget banks look out for themselves!  In the last few years banking regulations have become tough.  The paper work and documentation for the loans is incredible.  We went from easy lending to overly restrictive lending practices, and it is greatly hurting the economic recovery in this country. If the loan isn’t right for you it is best to turn it down rather than get into a miserable situation later on.  Ask the bank if they will retain the note and deed of trust or mortgage, or will they sell the loan. You might end up with a bank you never wanted as a “partner”.

For residential loans go to your bank or mortgage broker and get “pre-qualified”. What if you need more assistance and money?

For commercial/industrial do banks require a pro-forma or budget analysis?  If so, for one year or up to three years?  Pro-formas give you a discipline to work through project income and expenses, and force you to focus, but I’ve never seen one right on the money for accuracy.

From my personal experience, here are examples of the good, the bad and the ugly. Let’s start with the best.  I was living in Denver, owned various real estate and the economy deteriorated because of the oil and gas industry going down from about 1985 until the early 1990s, a long recession with significant devaluations.  I had to sell a property at a loss in 1989 and it was “upside down” to the mortgage.  I hope this never happens to you. I had to borrow money from my bank to close on the property and payoff the loan; I owed money at closing.  I owned other real estate but it was not salable for enough money to pay off this loan.  This “wonderful bank” knew my circumstances, worked nicely with me on money and it was a “win, win” situation until 1993 when the economy recovered and I could liquidate real estate and pay the loan plus interest back to the bank. This is an example of a good bank that was willing to work with a person. This was Mid-State Bank in Denver, Colorado, and 2 years ago.  I am not sure if they have the same working policies in place today.

Now, let’s look at the bad.  I had a high-end rental property in Arizona.  The property had appreciated significantly so I took a second loan on the property with a 5 year note and deed of trust.  I had the loan on auto-deduct with the bank, as well as with my first note and deed of trust, so I was never one day late on payment. The loan was coming due so I went to the bank and asked for a short term renewal as I couldn’t come up with that amount of money at the time. The bank said they would not do anything for me and stated that “within 90 days you will no longer own the property as we will foreclose”.  I have never been treated over those few weeks so rudely in all my business life. I would have preferred dealing with the Mafia as that is how I was treated.  This bank is Meridian Bank out of Minneapolis and has offices around the Phoenix area. I knew other developers who had loans with this banking institution and they said similar things to me.  It is my subjective opinion, but I would never deal with them! The outcome in this situation was that the appraisal was quite a bit higher than the loans and I did come up with the payment to satisfy them.  This is a prime example that no matter how high a credit score, no matter how heavy a balance sheet, no matter how good an income statement the bank did not want to work with customers.

Now, let’s take a look at the ugly.  I have been involved in three major master planned communities in real estate. One being a very large tract of land on 3,350 acres with all water rights started in 2001 in Chino, AZ.  Over an 8 year period we were annexed into the town, approved for 6,600 units plus a huge new downtown area, hotel site, golf courses, etc. We had accomplished a great deal, but only had preliminary approval on our first quarter acre lots.  We paid cash for the ranch and structured a working line of credit for a significant amount of money, an adequate amount to reach final approval to sell lots to home builders.

Our line of credit was with CITI Bank.  In 2008 they informed us that financially they were in trouble and our line of credit, not near its high, was due and payable.  Please note that in these lines of credit there is wording that states that if a property should decrease in value, if the note holders financial positions should change or for just about any other reason they want, they can call a loan due and payable. This is a good example where a person did a good job, was near their financial projections, however beyond the person’s control the outside financial environment changed; the banking system was collapsing and banking regulations and parameters totally changed.

Remember that the banks’ lawyers draft the wording very one-sided to protect only on party, the bank.  In this case, we filed Chapter 11 against creditors and won the case for an extension to obtain new financing.  Our debt on the property was only 12% to the appraised market value, or net assets of about $150 million. During the 9 month reprieve period we were allotted we were not able to obtain a new loan, as banking and financing has changed.  We lost the property, all our money in the property and of course the 8 years we put into working on the project.  That is why I am referring to this as an ugly experience; hard to believe.  Loans now need to be “performing loans” which essentially means there needs to be enough positive cash flow from the property to service the loan, interest payments and reduction of principle.  When developing land for lots this is impossible as you run negative cash flow until you can sell final lots.

This is why there is little land development happening.  What real estate development there is today is with large companies that can work with Wall Street on bonds and other debt instruments, or pledge their public stock for loans. Most new building now is on lots that have been taken over in bank foreclosures, or lots owned by small builders needing to sell their holdings mandated by banks.

For the Arizona development go to Google and search for the Bond Ranch, Del Rio Springs, LLC, Chino, AZ.

For my Wisconsin project that is on the market, please go to www. premierewisconsinland.com.

Next we will talk more about banking, business credit cards, private fianancing and real situations.