Tag Archives: assets

Casino.del.Sol.update

Cash is King, but Wrong Choices Can Bring Down a Contractor

You’ve heard the phrase a million times – “Cash is king.” But what are we trying to accomplish with cash? Does cash equal success? Profit? Stability? Does a lack of cash signal a problem? It all depends on your perspective.

Contractors are in a unique business where everything is based off of estimates, so revenue is recognized under the assumption that your estimates are accurate, although subject to change. For this reason you cannot afford to just focus on the profit/loss information driven by your income statement or WIP schedule.

We all know your jobs are typically not going to generate the EXACT amount of profit you estimated at bid day, so the income statement is just your “best guess” as of that day as to how your year is going. The list of why profit on jobs can fade is endless – requested change orders are performed but never approved by the owner, subcontractor issues, site conditions, weather, labor quality, project management, poor estimating, ambiguous bid specs, difficult owner, unexpected delays, etc. The point is that in addition to monitoring the status of all your jobs which will drive your profit, you must also be keenly aware of your cash position and cash flow, both now and on a projected basis.

Why should cash flow be targeted as a key measure of business performance? Because the income statement and balance sheet, although useful, have all kinds of potential biases as a result of the assumptions and estimates that are built into them. However, when you look at a company’s cash flow statement you are getting an indirect look into their bank account. In the end, cash does not lie.

As a former commercial loan officer, I had to continually advise business owners that even profitable companies can fail if they run out cash. Unfortunately, a strong income statement is not necessarily indicative of a financially healthy company. Contractors can fail from a lack of cash for a number of reasons:

  • Growing too fast without the appropriate equity or bank financing to keep up
  • Too many large projects undertaken at once with slow paying owners
  • Letting receivables get beyond 60-90 days past due
  • Working for owners with cash flow problems of their own
  • Bad debt that takes a long time to be recognized/written off
  • Purchased too much inventory or equipment using cash
  • Cash taken out of the business and loaned to shareholders/employees/other business interests
  • Excessive reliance on bank debt and leverage
  • Excessive distributions to shareholders
  • Excessive underbillings
  • Problems collecting retainage

Remember, every bank will have a limit they are willing to lend in order to support your business and cash flow needs. It’s up to you as the owner or chief financial officer to know your banking limits and compare those to your needs and identify solutions to make up any shortfalls. What are some ways you can help improve your cash position?

  • Forecast project cash flows when bidding new work to determine if there are periodic drains on cash for items like equipment or material purchases, mobilization, or peak labor periods and the delay in the outflow versus projected inflow (do you know how long the owner/GC typically pays after receipt of a submittal?).
  • Compare the project forecasts against your general cash flow forecasts to determine your cash flow needs and whether you have the available cash on hand or working capital line of credit to support the project. Be conservative in your assumptions.
  • Be sure to establish on ongoing dialogue with your banker around the size of your line of credit and understand how large of a line your bank is comfortable extending and the requirements to obtain that limit. Be sure they understand the seasonal nature of your business and cash flow cycle and that you may request an increase to your line at a time when you are cash rich and seemingly do not need the increase. It’s always better to ask for the increase before you actually need it. Typically banks do not charge a non-use fee for contractor bank lines so the additional credit limit should not come with much of a cost.
  • Discuss with your banker the ability to have a separate capital expenditure line of credit available for equipment purchases so you are not using your cash on hand or working capital line of credit to buy fixed assets.
  • Are you having a problem with getting your submittals approved the first time? This can cause unnecessary delays and impact your cash flow. Create a best practice in getting these to your owner/GC’s in a timely manner each month in the format required.
  • Are punch list items to blame for slow paying owners? Holding up retention? Again, this can often be avoided with a system of procedures to address them in a timely manner and keep the cash flowing.
  • While you need to keep your key suppliers happy, are you paying them faster than you are paid? Is this necessary? Can you work with your suppliers during a cash crunch to allow for extensions of time without an interruption of service or terms for new orders?
  • What role do your project managers play in getting paid by your client? Can they be more proactive and involved in the collection process?
  • How do you determine distributions or bonuses at year end and throughout the year? Do you analyze your cash on hand versus your cash flow forecasts to consider the impact of these items? Can they be accrued but not paid in order to conserve cash? How about deferring a portion of these payments? While we all want to reap the rewards of the most recent year, we also need to focus on the long term health of the “golden goose” so it can keep laying eggs, year after year.
  • Are you in the middle or beginning of a shareholder buyout plan? Can this be structured to be paid over time rather than cash out all at once? Are there provisions in your agreement to curtail payments in a given year if the company’s performance was below a certain target?

If time is taken to understand the cash flow needs of your business, the return on that investment in time can be considerable. In difficult times like these, it could likely mean the difference between success and failure. You must keep track of your effectiveness and timeliness in turning profit into cash. This will also allow you to see early warning signs of trouble and take appropriate action. Being able to proactively manage your cash needs is critical to the short and long term success of your business. Don’t forget though that you may experience times when you have good cash flow even without profit. Look at your statement of cash flows to determine the sources of your cash. A large reduction in A/R or increase to overbillings may boost your cash positions temporarily, but the income statement or backlog schedule may be painting a different picture. Be prudent with your funds as you determine how best to deploy you cash and always keep one eye on future needs.

Mike Marsella is a Surety Producer for MJ Insurance. www.mjinsurance.com

 

 

Multi-State Medical Office Building Portfolio

Healthcare Trust Of America Acquires 960,000 SF Multi-State Medical Office Building Portfolio

Scottsdale-based Healthcare Trust of America announced the execution of agreements to acquire a portfolio of nine medical office buildings in New York, Massachusetts, and Florida for approximately $196,645,000. Each closing is subject to the satisfaction of a number of conditions.

The 98% leased, nine-building Class A medical office portfolio consists of approximately 960,000 square feet of both on and off-campus MOBs with a weighted average remaining lease term of seven years. The portfolio includes both single-tenant and multi-tenant properties in Albany, N.Y.; North Adams, Mass.; and Temple Terrace, Fla.

The portfolio has an average building age of eight years and includes prominent tenants such as: Catholic Health East (Moody’s: ‘A1′), Health Quest (Moody’s: ‘A3′), The State University of New York (Moody’s: ‘Aa3′), Berkshire Health Systems (Fitch: ‘BBB+’), LabCorp of America (Moody’s: ‘Baa2′), US Oncology, and Community Care Physicians.

“This transaction continues our corporate focus to acquire high quality MOBs with significant occupancy and strong credit tenants located in strategic locations with dominant healthcare systems,” said Mark D. Engstrom, Executive Vice President of Acquisitions for HTA. “We have worked hard at establishing strong relationships in the healthcare industry. With such relationships we have been able to timely identify and act on opportunities to acquire quality portfolio assets.”

Since January 1, HTA has acquired approximately $344.5 million in medical office and health care related assets based on acquisition price. These acquisitions involve approximately 1.5 million square feet of gross leasable area, which is approximately 98 percent leased.

Estate Tax Laws Are In Flux - AZ Business Magazine Sept/Oct 2010

Estate Tax Laws Are In Flux — Start Strategizing Now

Let’s begin with a reasonably well-founded observation: The official repeal this year of estate taxes has seriously flawed most testamentary plans and created mild chaos for estate practitioners. Traditionally, estate planning attorneys have employed “word formula” dispositions phrased in terms of tax concepts for their drafted wills and trusts. For example, for people with larger estates, dispositions are divided into two categories:

One portion equal to the unused estate tax exemption often called the unified credit or the credit shelter trust for the benefit of a surviving spouse and descendents.

The other portion is allocated to equal the “optimum” marital deduction amount, usually expressed as the minimum amount necessary to reduce a person’s federal estate tax to zero.

In other cases, testators will cause a portion of their estate to equal the unused generation skipping tax (GST) exemption to pass in favor of or for the benefit of grandchildren. The word formula is applied because, historically, it has resulted in the optimal division or disposition of a decedent’s property.

Unfortunately, none of the above has any meaning if the concepts used to define them are no longer represented by federal statute. Accordingly, decedents of 2010 and their beneficiaries are confronted with impossible circumstances. An unintended outcome is the possible disinheritance of a surviving spouse or children.

Another interesting issue relates to existing generation-skipping trusts that are normally subject to GST on taxable distributions to “skip persons.” In
2010, none of the taxable distributions or “taxable terminations” will be subject to the tax. Possibly, the optimum outcome has arrived for GST trusts.

Within the current environment, grandparents can literally transfer fortunes to grandchildren and be subject to a one-time 35 percent gift tax.

Caution is appropriate, however, because it is impossible to predict what Congress will do. From a constitutional perspective, retroactive legislation remains a risk. If Congress retroactively reinstated estate and GST tax law, which Sen. Max Baucus (D-Mont.) has formally pledged to accomplish, then the above identified actions would be problematic.

Reinstatement of the estate tax system, notwithstanding a valid constitutional argument, would represent a symbol of poor legislation, in this author’s opinion. Here’s why: Executors and trustees of estates created in 2010, as fiduciaries, must act on current law and distribute inherited assets in a timely fashion. Would it not be legally awkward for Congress to force executors and trustees to rescind those distributions and formally adjust all 2010 estate tax returns?

So given the testamentary chaos resulting from the political process, what can we expect? Many practitioners believe legislation will occur that will reinstate the 45 percent tax rate for estate and GST applications with a $3.5 million unified exemption for each spouse. But, if Congress fails to act this year, then beginning in 2011, we will face the imposition of a 55 percent tax rate and a $1 million unified exemption. Given the current federal budget crisis, inaction will produce higher tax revenue.

This uncertain environment may provide compelling reasons for proactive folks to act. Seek qualified help with your own estate planning issues now — not later.

Philanthropic causes are becoming more meaningful to us
Everyone has been affected in some way by the deep recession. As a result, nonprofit service demand is up, but contributions are down. However, more people are contributing their time and efforts to help others. Due to a strong philanthropic lobby and the generous nature of American values, Congress has not tinkered with key charitable planning techniques. Many creative planning options exist that can help one accomplish their nonprofit objectives and enjoy enormous tax and estate benefits.

Source: Coyote Financial

Trends in Estate Planning:
More families are seeking qualified help with their financial lives

Interestingly, the revolution in technology and communication has not changed the desire or need for a personal advisory (coaching) relationship with someone deemed competent and trustworthy. Technology may help you find the right person, but no substitute is yet available for a caring, personal relationship.

Opportunities in Estate Planning

  • A grantor retained annuity trust (GRAT) is an estate planning technique that allows one to utilize the currently low federal discount rate to transfer assets to the next generation in exchange for a note. All appreciation, above the interest payment, inures in favor of the next generation. Short-term, zeroed out GRATs have been popular, resulting in significant estate tax savings for many wealthy families. The House Ways and Means Committee has passed a bill designed to eliminate short-term GRATs and zeroed out techniques. President Obama has proposed (endorsed) similar legislation that would require a 10-year term and no zero out gifting for GRATs. The opportunity for short-term, zeroed out GRATs could disappear in the next several months.
  • Congress has pending legislation to limit fractional discounts for lack of control and marketability applicable to intra-family transfers. Historically, when assets are placed into properly drafted limited liability companies (LLCs) and family limited partnerships (FLPs), discounts on the transfers to children of financial units or limited units, respectively, apply. For the present, case law and court verdicts honor the integrity of fractional discounts. As in the proposed GRAT legislation, the new rules will not apply retroactively and will only take effect coincidental to formal enactment. Keep in mind that the Treasury Department is desperately seeking methods to raise revenue. The opportunity to sell, transfer or gift assets inclusive of a fractional discount, especially among family members, may disappear in the next several months.
  • In 1995, the federal discount rate represented 9.5 percent. Today, the rate ranges between 3.4 percent and 3.6 percent. The discount rate is indirectly associated with the applicable federal rate (AFR), which can be utilized on an “arms-length basis” to make loans to children. For example, the current mid-term intermediate rate equals 2.85 percent, whereas demand-note interest rates are currently less than 1 percent. The opportunity to initiate intra-family personal or business loans at de minimis interest rates could disappear in the next several years.
  • Since generation skipping taxes have been repealed for the 2010 tax year, and the federal gift tax rate has been reduced from 45 percent to 35 percent, the opportunity to transfer/gift assets to grandchildren is economically advantageous, as noted previously. The opportunity to transfer assets to grandchildren without the imposition of estate and generation skipping tax may disappear under new legislative regulations in the next several months.
  • Because of recent market conditions, the valuation of business and real estate assets has potentially decreased. Accordingly, the cost to sell or gift assets to the next generation is lower than it may have been in 2007. The opportunity to transfer assets to family members using low valuations may disappear in the next several years.
  • Source: Coyote Financial

    Arizona Business Magazine Sept/Oct 2010

    Using Personally Owned Life Insurance - AZ Business Magazine June 2010

    Using Personally Owned Life Insurance (POLI) As A Sinking Fund

    Affluent families and individuals, successful business owners, and those engaged in certain occupations, such as the medical or construction industry, all face similar challenges when choosing to invest: They have worked hard to accumulate wealth, and now they want to keep it.

    Wealthy investors are driven by the same concerns:
    Preservation: Given the choice between risky strategies or preserving what they have, most affluent investors will choose to preserve what they have.

    Liquidity: Without access to your money, wealth may not be maximized.

    Protection from creditors and frivolous lawsuits: The legal risk posed to affluent investors in today’s society is extraordinary.

    Control: Affluent investors value the flexibility that allows them to respond to changes in their personal and business lives.

    Taxes: Although we can’t be certain that taxes will go up, the odds suggest they will — perhaps significantly so. Mitigating the bite of the tax man is a top priority for wealthy investors.

    To address these concerns, affluent investors and their advisers have many investments to choose from, such as IRA and Roth IRAs, equities and mutual funds, tax-advantaged bonds, annuities and personally owned life insurance (POLI), to name a few. Each of these investments has advantages and disadvantages when addressing the concerns of affluent investors. But what is POLI? To answer this question, we need to look at life insurance in an entirely different way.

    Getting the most out of your investment type
    What if instead of shopping for the most death benefit for our premium payment dollars, we sought out the federal minimum required death benefit in our policy to keep our insurance costs low and our investment value high? What if we created a “sinking fund” by investing in personally owned life insurance to create a tax-advantaged retirement supplement plan, and much more?

    People often don’t recognize the value of permanent life insurance as an asset in their portfolios. Cash value life insurance offers much more than simple death protection.

    Consider the following asset characteristics:
    Qualified plan and annuity assets, in addition to being included in the taxable estate of an owner, are also subject to income in respect of decedent (IRD) at death. Seventy percent is an estimate of the combined impact of estate and IRD taxes, as well as credits given in the high net-worth decedent’s estate. The number can be higher or lower depending on the applicable marginal brackets.

    Death benefits of a life insurance policy are generally received income tax-free by the owner of the policy. In order to avoid estate inclusion, the death benefit must be received outside the estate, often by designating the “B” Trust as the contingent owner and beneficiary of a policy owned by a decedent. Certain types of split dollar and loan transactions used in conjunction with an irrevocable life insurance trust (ILIT) also can be used to exclude the death benefit from estate inclusion. These techniques may involve gift tax implications, such as using a portion of the annual gift tax exclusions.

    The benefits of POLI
    Structured properly, POLI allow unlimited contributions, tax-deferred accumulation, tax-free redistribution, tax-free withdrawals, total liquidity, no income or estate tax at death, and the possibility of asset protection. This is an extraordinary combination of benefits.

    Put simply, when structured properly the investor retains control of all the assets in a POLI account, including the right to terminate the account and withdrawal of the cash value. There is nothing “irrevocable” about a properly structured POLI contract. POLI, when properly structured, allows for nearly unlimited withdrawals after the first year at rates between 1 percent and 0 percent.

    Using POLI, unlimited after-tax deposits may be made by the investor to be deployed in the equity and fixed income markets in almost any combination. An additional benefit is that in many states, the assets in POLIs are creditor protected. Asset protection against the creditors of an insurance-based contract owner is a matter of state law. Some states offer no protection for annuities life insurance cash value, some offer some protection for a portion, and others offer complete protection (check with local counsel to determine the applicability of asset protection in a given jurisdiction). Finally, assets invested in POLI are removed from the investor’s estate, while still providing the investor control of the assets.

    Life insurance: A cautionary note
    Of course, federal tax law definition of “life insurance” limits your ability to pay certain high levels of premiums. In addition, if the cumulative premium payments exceed certain amounts specified under the Internal Revenue Code (IRC), your policy will become a Modified Endowment Contract (MEC). If your policy is a MEC, many benefits of POLI are removed.

    An “optimized” life insurance policy involves several elements. First, the contract should pass one of two tests for the definition of life insurance, thus avoiding status as a MEC under IRC 72, which generally limits the amount of cash value or contributions relative to the amount of death benefit. To exceed these limits causes distributions to be taxable. Second, in order to avoid estate inclusions, the death benefit must be owned outside the estate.

    These are highly sophisticated and complex investments, and you should discuss whether a POLI is right for you with a knowledgeable team of financial, legal and tax professionals.

    Arizona Business Magazine June 2010

    credit unions transformation

    The ACULA Has Transformed Over The Decades

    In the 75 years since the formation of the Arizona Credit Union League & Affiliates, the organization’s role has changed markedly as its membership soared. Actually, the first credit union law in Arizona was introduced, passed by the Legislature and signed by the governor in 1929. Thus, Arizona became the 29th state to enact a credit union bill.

    Even before credit unions were officially recognized and regulated by the state, a mutual investment group known as Pyramid was launched in Tucson in 1925. Once the Arizona law was passed in 1929, Pyramid Credit Union received one of the first — some say the first — charter to formally operate as a credit union.

    Five years later in November 1934, the Arizona Credit Union League, as it was then called, was formed. By 1948, there were 25 credit unions in the state with 3,000 members and almost half a million dollars in assets. Today, 56 Arizona credit unions represent about 1.6 million members, with assets in excess of $11 billion.

    Initially, the league focused on organizing new credit unions throughout the state. In the early years, there were just a few state-chartered credit unions. Scott Earl, president and CEO of the Arizona Credit Union League & Affiliates, tells how the league’s efforts fostered growth.

    “Field reps would arrange meetings with employer groups,” Earl says. “They’d be driving down the road looking for parking lots outside of businesses. If a lot of cars were parked there, they’d put credit union charter applications on the hoods of the cars. I don’t know how many organizations were created as a result during those years, but I’m sure many were.”

    Gary Plank, who retired as president and CEO of the league in 2007, recalls being an organizer when he entered the credit union profession in Iowa in 1966.

    “We felt the best way was to talk to the management of the company to see if we could generate interest in a credit union for the good of their employees,” Plank says.

    The largest Iowa credit union back then had assets of about $7 million. Today, the assets of that same credit union exceed $1 billion, Plank says.

    Plank says two factors triggered the phenomenal growth of credit unions: the addition of share-draft checking so direct deposits, including Social Security benefits, could be accepted; and a decision by the federal government to insure savings accounts.

    Indeed, as credit unions grew, officials saw the need to offer more products and services, such as debit and credit cards, individual retirement accounts and first and second mortgages.

    “The league was the incubator for a lot of these products and services, helping individual credit unions along the way,” Earl says. “An outgrowth of that cooperation is shared branching.”

    Under shared branching, credit unions join networks that enable their members to transact business from virtually anywhere in the country where a joint operating logo is displayed.

    “Shared branching addresses one of the competitive disadvantages credit unions had, which was a lack of convenient locations,” Earl says.

    In the 1990s, the league’s role shifted dramatically, becoming more of an advocate for credit union legislation at the state and federal levels. In other words — lobbying.

    “We put a great deal of resources into that today,” Earl says.

    Services the league provides include consulting, governmental affairs activities, regulatory compliance, legal, human resources, education, communications, publications and public relations. The league works in cooperation with Credit Union National Association (CUNA), U.S. Central Credit Union, the World Council of Credit Unions and the CUNA Mutual Group.

    Having the support of the league and national and international credit union organizations is helping Arizona credit unions cope with the current recession. Though a few mergers have taken place, Earl says they are not the result of the economic downturn.

    “Almost always when a merger occurs it’s to provide better service to the members,” he says.

    Yet, the economy is having an impact on credit unions. Many of its members — average Arizonans — have defaulted on loans or gone into bankruptcy. The good news, Earl says, is that credit unions have been reworking those loans to help their members get through difficult times.

    “The challenge for the league,” says Earl, “is to find new efficiencies for credit unions to collaborate so they can provide better products and services to their members. We have to keep looking for ways for credit unions to work together.”

    Credit unions, which are not-for-profit operations, have good capital and strong reserves, Earl says.

    “We built those reserves for a rainy day,” he adds. “And for a lot of consumers, it’s pouring rain. But we will be around. We’ll be just fine and will continue to be of greater service to citizens.”

    The "B" Word 2008

    The “B” Word-Bankruptcy isn’t always a bad thing

    The word “bankruptcy” sends chills down the spines of many business owners and executives as they envision certain financial demise.

    b_word 2008

    But bankruptcy is no longer the frightening phenomenon it once may have been, particularly in the business realm. Chapter 11 bankruptcy has become an extremely useful business tool for a company to reorganize its operations, accomplish a sale of assets, obtain new financing or achieve a capital restructure.

    The following are examples of challenges a business often faces:

    • A new business has not quite met revenue expectations.
    • The equity structure is outdated or unworkable.
    • The business owns excess real property it wants to sell or the business wants to acquire additional property.
    • The business has been threatened with litigation.
    • The business wants to refinance, but the lender has expressed concern about financial or other issues.
    • The owners of the business want to merge with another entity.

    The most common use of the Chapter 11 bankruptcy process is one designed to restructure the company’s balance sheet. A company that wants to extend or refinance onerous debt, eliminate burdensome contracts or leases, and/or bring in new capital can generally accomplish these goals by a Chapter 11 filing that provides these opportunities and a temporary safe haven.

    But Chapter 11 isn’t just for severely financially distressed entities. There are myriad other business reasons for filing a bankruptcy. For example, bankruptcy may be a good alternative for a client who owns some troubled properties and other healthy ones. Structuring a “roll up” and then using the bankruptcy process to propose a long-term solution can provide the necessary and ultimate protection for the distressed properties. Other common business transactions such as sales, mergers and acquisitions may be accomplished in a more beneficial fashion for all parties under the protective umbrella of Chapter 11.

    A general knowledge of bankruptcy and the benefits it can provide will arm business owners, management and their advisors with a repertoire of creative solutions to meet business challenges and attain the companies’ ultimate goals.

    An overview
    The purpose of a Chapter 11 bankruptcy is to reorganize. It may include restructuring debt, altering operations, eliminating equity, selling assets or any combination of these things. The reorganization is accomplished through a document called a “plan of reorganization” in which the debtor describes how it intends to pay creditors or treat equity interests. Creditors and equity interests have the opportunity to vote in favor of or against the plan. The aim is to have the plan confirmed by the bankruptcy court, at which time it becomes a binding contract on all affected parties.

    A Chapter 11 proceeding is commenced quite easily by filing a simple two-page “petition” with the bankruptcy court. At the time of the filing, an “estate” is created and all assets owned by the debtor prior to the filing are considered to be property of that estate. The debtor is referred to as the “debtor in possession” (DIP). Filing of the case triggers an immediate imposition of an injunction called an “automatic stay.” The stay prevents creditors from proceeding with any action against the DIP, and entitles the DIP some “breathing room” while assets are marshaled or while a reorganization is being developed.

    In many respects, the general operations of a business continue in Chapter 11 as they did prior to the filing. The DIP can continue to buy inventory, produce products and sell merchandise as long as the transactions are in the ordinary course and scope of business. Nevertheless, certain actions such as the payment of pre-petition debt, the use of cash proceeds that may be subject to a lien, and the sale of major assets are prohibited unless the bankruptcy court approves them.

    The plan of reorganization sets forth the means for payments to the company’s creditors. The general rule is that all claimants on the same level must be treated equally and must be paid in full before the next level can receive payment. Other provisions include financing arrangements or capital contributions and the composition of the company’s management.

    cover_october_2008

    The final step is plan “confirmation” by the bankruptcy court. In order for the DIP to confirm a plan, it must obtainthe affirmative vote of all the classes of creditors it has proposed. However, the bankruptcy code permits the DIP to confirm a plan even if it doesn’t have all the needed votes, as long as the plan complies with certain specific sections of the code. Once the plan is confirmed, a bindingcontractbetween the debtor and its creditors is created and the debtor emerges from bankruptcy. All previous obligations to and claims by creditors are discharged and are replaced by therepayment orother obligations created by the plan. The “reorganized” debtor can have a fresh start.

    Of course, there are many specifics and nuances to each bankruptcy case. For a comprehensive read on bankruptcy, you can download this guide at www.jsslaw.com/publications.aspx.

    Carolyn Johnsen is a member of Jennings Strouss & Salmon. She can be reached at 602-262-5906 or cjohnsen@jsslaw.com