THIS IS MY 113TH BLOG ON UNDERSTANDING MONEY
TOOLS
We’ll call this blog “divide and conquer”. Actually, if you are in business or
going to get involved in a new business this is a rather important blog with
lessons most should find valuable.
During years 2008 through 2011 it was the first time since 1929 that the
US financial system collapsed.
Banks were going under mainly because of loans to market value; the
government made banks call in loans from customers to shore up ratios.
Loans today are still being called immediately due and
payable, however more from a situation of one bank taking over another bank and
not adhering to current loans in place.
Some of the information within has been covered in my
previous blogs, but it doesn’t hurt to go over it again. I will also site one
of a couple situations that happened to me, so that the information is
accurate. First is to learn that
business is tough. If you have
money everyone will try to take it away from you whether it is legal or
illegal. Yes, there are tons of
scams in the world today, but don’t you think banks, investment advisors,
insurance companies, auto dealers, etc. want your money? In 2008 I could sight many examples of
banks calling in loans, taking over assets and then essentially giving the
assets to wealthy people, the top 1%.
They always favor their largest depositors.
We will begin with what happened in my situation in
2008. Briefly, a real estate land
development. Very conservative with a CITI Bank loan of no more than 50% to equity. We bought a 3350 acre ranch with cash
to develop. 10 years of work. Approvals and studies almost completed with a
start of 6600 quarter acre lots under contract with two major developers and a
contract with one of the world’s largest hotel chains on 39 acres for a hotel
and spa. Major golf designer under contract for 2, 18 hole golf courses.
You get the point; very nice and
financially solid. Then in 2008
CITI Bank called our loan due, although we were not nearly topped out on the
loan nor was it due. At the time no bank would, or could under new government
regulations loan money on private real estate land development. After 10 years of work and with
contracts in place we had two appraisals for $150 million net asset value, or 8
times the loan amount. We fought
the situation with a corporate Chapter 11 bankruptcy to buy time, however to no
avail. Eventuallywe needed to file Chapter 7, and lose all our money.
Okay, that was the situation, what did companies learn from
this and what are they doing now?
As noted, our loan was singular for the entire project. Although we had good contracts in
place, CITI Bank would not permit the division of any parcel of land for the
possibility of paying down the loan.
I continue to do periodic work for the major production public
home-builders and here is what they are doing. They form a ton of “LLC” corporations under their main “C”
corporation to protect their assets. As an example, the main corporation is the
“holding” company, holding separate divisions. Not only is each subdivision separate, but they may form
separate LLC’s for land development, construction, sales, etc. For instance if they are developing a
750 acre piece of land they may divide that parcel into 5 separate tracts, each
being a LLC. If they have problems
such as a lawsuit, title issue, bank issue, or such it doesn’t stop the entire
project. You can use similar
divisions with any type of company, perhaps adding different products to a
line. Bottom line, don’t
lose your company by letting the banks over-encumber the loan, 125% loan to
value is a norm. You can refinance
at various points of growth. Don’t
lose your company from placing your all assets under one company.
Protect your assets. Divide and conquer.
