Tag Archives: credit crunch

Small Business Year In Review

The Small Business Year In Review 2011 & Outlook For 2012

The Small Business Year In Review 2011 & Outlook For 2012

Being a part of a slow economic recovery can take its toll on anyone, especially those who are trying to maintain and grow a business. Particularly, small business owners have had a lot to overcome throughout 2011, including a credit crunch and general uncertainty about the future. Through it all, they’re heading into 2012 with an optimistic outlook. According to this infographic by Intuit, the company’s Small Business Surveys have tapped into how small business owners are reflecting on 2011 and how what they expect 2012 to bring.

Own your own company? How have you gotten through 2011, and what do you see on the horizon for 2012?

The Small Business Year in Review 2011, Outlook 2012 [INFOGRAPHIC]
via: The Small Business Year in Review 2011, Outlook 2012 [INFOGRAPHIC]
[stextbox id=”grey”]

Infographic Credits, courtesy of Intuit:

Source: Intuit
Designed by: Column Five

[/stextbox]

The idea of starting your own business can be frightening with the recession - AZ Business Magazine Nov/Dec 2010

6 Tips To Launching Your Own Business In A Down Economy

The idea of starting your own business can be frightening, particularly with the recession stubbornly choking the Arizona economy. However, by following a few tips for getting started, launching your own company doesn’t need to be scary.

In fact, there are a few advantages to launching a business during an economic downturn. Commercial space is available at extraordinarily good prices. Talented professionals are looking for work. Goods and services can be found at discounted prices. And, depending on your industry, competition may be scarce.

1. Practice Due Diligence
It’s critical to objectively evaluate your proposed venture. Asking yourself some hard questions may discourage you from pursuing your first venture, but that is not a negative or pessimistic approach. It’s a useful tool for evaluating your business. Start with these questions: Is there a genuine need for the product or service you are offering? Is that need already being met by established companies? If so, what improvement or unique feature are you bringing to the table? Do you have the necessary skills and resources to start your business? If not, are you prepared to bring in the people with the skills and capital that are needed, and possibly give up some ownership?

2. Prepare a Business Plan
Too often, entrepreneurs articulate a great idea and foresee success, but gloss over the hard work. That hard part is thinking through the idea for your business and writing it into a plan, including the steps you’ll need to take to implement your idea. Start with an outline and consult a book or online guide about writing business plans. It’s important that your end result is a completed plan that includes a budget for your business.

3. Determine Capital Requirements
Most small businesses are funded with the business owner’s own money and funds from family and friends. A venture capitalist or angel investor may provide the necessary capital in exchange for part ownership of your business. It’s critical to focus on the amount of money you will need to start and operate your business, including at each stage of the company’s development.

4. Create a Board of Advisers
Creating a network of advisers can be a tremendous asset to a start-up business. It’s helpful if that board consists of advisers with a diverse array of professional backgrounds. That diversity will ensure you receive insights from a wide range of perspectives. Good choices for advisers may include your attorney, accountant, suppliers, customers, bankers and realtors.

5. Tap Into Available Resources
There are myriad advisers, consultants and nonprofit agencies that will assist you in developing your business — marketing it, creating websites and raising capital — who work for free or a nominal fee. The Small Business Administration (SBA), for instance, is a valuable and cost-effective resource. Moreover, SCORE: Counselors to America’s Small Business, provides free advice and mentoring for small business owners. If you pay for a similar service, be sure to get recommendations from a trusted adviser. Then, check that company’s references.

6. Listen
The more you listen — the more you truly hear an adviser’s ideas — the more advice you will be able to translate into actionable plans for your company.

Still, while these recessionary times may present a good opportunity for entrepreneurs, there are several considerations to keep in mind.

Select an industry that is doing well, despite the recession. The health care industry, senior care and information technologies are financially better off than many other industries.

Choose a business sector with a bright future — Businesses that tap into growing consumer demand for green or sustainable products may be an avenue worth pursuing. There was a 41 percent increase in consumer purchases of green products and services from 2004 to 2009, according to the research firm Mintel. Moreover, there may be federal or state subsidies or tax credits available for green companies.

Select a company with low capital requirements. Home-based businesses with low start-up costs may be good choices, notably because the ongoing credit crunch will likely make it tough to get a loan to cover these expenses.

If you are considering starting your own business, you will be in good company. More than half the companies listed on the Fortune 500 in 2009 were launched during a recession, according to the Ewing Marion Kauffman Foundation.

Moreover, in 2009, an average of 558,000 new businesses were launched each month in the United States.

The trick to joining these ranks is to get started. There’s no better time than now, recession or not.

“The critical ingredient is getting off your butt and doing something,” Nolan Bushnell, founder of both Atari and Chuck E. Cheese, once said. “It’s as simple as that. A lot of people have ideas, but there are few who decide to do something about them now. Not tomorrow. Not next week. But today. The true entrepreneur is a doer, not a dreamer.”

Arizona Business Magazine Nov/Dec 2010

tax calculations

Tax Relief For Lenders May Help Commercial Real Estate Borrowers

The credit crunch is severely reducing the availability of financing and refinancing for commercial real estate. Many borrowers with loans maturing in the next few years, who originally expected to refinance their commercial mortgage loans before maturity, are now concerned that they will not be able to do so and will default when the mortgage becomes due.

This concern extends to all commercial real estate loans, even those secured with properties that have good cash flow. Anticipating the many challenges facing the commercial real estate industry, the U.S. Department of Treasury and the Internal Revenue Service have provided helpful tax guidance to remove some impediments for commercial mortgage loan refinancings. As a result, many commercial real estate borrowers may soon find it easier to renegotiate their commercial mortgage loans.

According to some estimates, roughly one-third of all commercial loans are held by investor pools known as Real Estate Mortgage Investment Conduits (REMICs). REMICs administer their day-to-day operations of the mortgage loan pools through servicers. These servicers also handle the modification and restructuring of defaulted loans, as well as foreclosure or similar conversion of defaulted mortgage loan property.

The Treasury and the IRS believe the loan pool administrators have developed and implemented procedures for monitoring both the status of the commercial properties securing the mortgage loans and the likelihood of borrowers being able to refinance their mortgage loans or sell the mortgaged property as the loans mature. They believe these administrators are able to foresee impending difficulties for a mortgage loan well in advance of any actual payment default.

Until now, despite being able to anticipate loan defaults, REMICs have been reluctant to renegotiate and restructure these mortgages for fear of losing certain favorable tax benefits that apply to them. Existing rules severely hamper the ability of a REMIC to modify any mortgages that it holds. These rules were drafted at a time when the government did not anticipate the challenges faced today by the mortgage industry.

The Treasury and the IRS have now issued some clarifying rules in anticipation of a rise in defaults of commercial real estate loans to give REMICs comfort that they will not face dire tax consequences when they modify commercial mortgages. The regulations say that “(t)hese changes will affect lenders, borrowers, servicers and sponsors of securitizations of mortgages.”

The relief is generally limited to commercial real estate loans and multifamily housing loans, and does not apply to single-family residential mortgages. The new rules will not affect commercial mortgages held by banks because the same tax rules do not apply to banks.

Specifically, the revised rules allow changes in collateral, guarantees, credit enhancements and changes to the nature of an obligation from nonrecourse to recourse without adverse tax consequences to the REMIC. One caveat is that the mortgage must continue to be principally secured by real property after giving effect to any releases, substitutions, additions or other alterations to the collateral. Under the old rules, the fair market value of the real property securing the mortgage would have had to have been at least 80 percent of the face amount of the mortgage at the time it was originated.

The new rules allow for retesting of the fair market value taking into account any reductions in the amount of the mortgage at the time of the modification. Another favorable new rule permits a more relaxed method for satisfying the principally secured test. As long as the fair market value of the real property that secures the loan immediately after the modification equals or exceeds the fair market value of the real property that secured the loan immediately before the modification, the test is satisfied.

According to the Treasury, all these changes are intended to “accommodate evolving commercial mortgage industry practices” and to allow for more loan modifications.

There are numerous other areas of uncertainty in tax law as they apply to loan modifications, which impede loan modifications in other circumstances. For now, it appears that the Treasury and the IRS are working hard to provide clarifying rules in many of these other areas, as well. For example, the Treasury has also asked for comments from tax practitioners and the industry about extending tax flexibility to loan revisions for properties held by other types of investment trusts.

Of course, loan modifications do not only affect lenders from a tax perspective. In many cases, the tax consequences of a loan modification also severely limit the borrower’s options and willingness to enter into a workout. Many borrowers modify their loans only to learn of the negative tax consequences and tax-efficient alternatives after the fact. Although tax consequences may be the tail wagging the dog, they are important considerations for both the lender and the borrower in any debt-workout situation.


Money Flow

State-Chartered Banks Are Still Lending Despite The Credit Crunch

The credit crunch is gripping much of the nation, but Arizona banks are still lending money and most are well-capitalized to weather tough economic times. The state’s core capitalization rate of 10.31 percent is well above the national average of 7.89 percent. That means Arizona banks have a good cushion to ride out the mortgage-induced banking crisis.

Arizona has approximately 83 banks, and of those 33 are state chartered. It also has roughly 58 credit unions and 26 are state chartered. Felecia Rotellini, superintendent of the Arizona Department of Financial Institutions, which oversees all state-chartered banks and credit unions, says state-chartered banks were not involved in subprime mortgage lending, so the mortgage meltdown is not impacting them. But capital drying up and lack of funds for borrowing, which precipitated the federal government’s $700 billion Wall Street rescue package, do impact state banks and make it more difficult for them to do business. Thus, state regulators across the country are closely monitoring the policies and proposals coming out of the U.S. Department of Treasury to make sure the advantages large national banks acquire from Treasury Chief Henry Paulson’s plan have equal impact on state community banks.

“As a result of subprime mortgages, foreclosures and the drop in property values, banks are seeing a reduction in profits and asset quality,” Rotellini says. “But I believe our state-chartered banks are well-managed and well-capitalized to weather the storm. It’s a matter of good management and reserves.”

In September, National Bank of Arizona’s strong capital position enabled it to acquire the FDIC-insured deposits of Silver State Bank’s Arizona offices in Tolleson, Chandler, Sun City and Scottsdale, after federal regulators took over the Nevada-based bank.

National Bank of Arizona’s plan is to merge all Silver State offices into its own nearby branch locations. National Bank of Arizona President and CEO Keith Maio says the bank is currently lending money to small and mid-sized businesses and for commercial real estate projects. But unlike a few months ago, the bank now has a stronger pre-leasing requirement on commercial real estate and a slightly higher credit quality hurdle for small business transactions. The bank also takes into consideration whether a prolonged economic downturn will significantly affect a business and whether management has the ability to maneuver a company through a protracted economic slump. Assessing management is critical, Maio says, because good managers have a solid business plan, they don’t look for excessive leverage and they can run a business successfully through good times and bad.

“Whether you’re an individual, business or bank, you can weather the storm if you have adequate capital,” Maio says. “Our goal is to work with customers the best we can while preserving our capital for future opportunities. That doesn’t mean we’re not making loans. It means we’re going to be judicious about capital. For the last eight to 10 years, there’s been too much leverage in both the business and consumer sectors and that’s what’s caused this financial crisis in its simplest form. Credit was too easy and too cheap. Now it’s harder to get and more expensive.”

The spiraling economic downturn has been a blessing in disguise for Bankers Trust Phoenix, a wholly-owned subsidiary of the $2.5 billion Midamerica Financial Corporation. The bank opened in January with $15 million in capital and a clean balance sheet, enabling it to build relationships with local real estate professionals and lend against high-quality assets that are strategically well-positioned to ride the economic upturn early in the next cycle.

“The fact that we missed the boom of the last several years has turned out to be an advantage for us,” says Patricia Rourke, president and CEO of Bankers Trust Phoenix. “As a newcomer in the market with no troubled credit and nothing in our portfolio, we were ready and able to lend when developers and real estate professionals were being turned away from other local banks.”

Harry Mateer, president and CEO of Altier Credit Union in Tempe, says credit unions have also been affected by the country’s financial crisis, but to a lesser degree. Credit unions have strict investment policy guidelines that prohibit them from entering into many of the lending areas of banks and other financial institutions. They focus on specific areas of lending, such as auto loans, home equity and credit cards.

“We’re currently seeing some liquidity shortages in the system,” Mateer says. “And I’ve heard this from other credit unions around the state, too. Members don’t have as much to save so there’s not a lot on deposit. Nevertheless, we’re focused on helping members in light of the economy and working with them when they have difficulties. People can still get loans, but we’ve changed our loan to value requirements to be a little more conservative. We’re now doing 80 percent loan to value, not 85 to 90 percent. And I think that’s what’s being done across all banks and credit unions.”

As a result of the mortgage-induced banking crisis, Arizona legislators passed a law during the 2008 legislative session (SB-1028) requiring all loan officers of mortgage companies in the state to be licensed after 2010. The Arizona Department of Financial Institutions is developing the licensing system for the state. Arizona has approximately 8,000 to 14,000 loan originators that will need to be licensed.

“Over the past few years, there’s been a breakdown in education and training of loan originators in Arizona who explain nontraditional loan products to consumers,” Rotellini says. “A lot of borrowers got into a loan product they didn’t understand and couldn’t afford over the lifetime of the loan, and the loan originators didn’t carry out a loan transaction that was suitable for the borrower. Loan originators also made more commission on option ARM (adjustable rate mortgage) products that over time yield higher interest rates, so conventional loans and FHA loans fell out of favor.”

The Department of Financial Institutions recently investigated a case that resulted in a Phoenix man losing his home. The man was put into an option ARM product with a teaser rate he could afford, even though he would have qualified for a VA loan. In time, the loan adjusted to a higher interest rate and the man couldn’t afford to make his house payments. When the man complained, the loan officer threatened to harm him, so the Department of Financial Institutions intervened. Unfortunately, it was too late. The man had no money to refinance, his credit was destroyed and he lost his home.

“Requiring loan originators to be licensed raises the level of accountability,” Rotellini says. “It’s going to improve the whole mortgage-lending experience for consumers and provide assurance that the loans they enter into will not default and are legitimate. Of course interest-only products will still be available, but they will no longer be abused.”

luxuryrealestate

Housing Crash is Hurting The Valley’s Luxury Real Estate Market

A meticulous five-bedroom, remodeled home sits nestled in one of Paradise Valley’s most beautiful neighborhoods. But the most remarkable thing about this home is not its one-acre lot, new flooring or up-to-date kitchen. It’s the “For Sale” sign that has graced the front yard for two years.

Two years, two different realty companies and several price reductions later, the home finally is generating some energy and a contract is in the works. But, according to information from Coldwell Banker’s luxury home experts with The Walt Danley Group, that never would have happened if the price hadn’t dropped 20 percent in one year and 40 percent from the time it first went on the market.

This scenario is playing out to varying degrees throughout the Valley’s high-end home submarkets, from the Biltmore area to Paradise Valley to North Scottsdale. Real estate professionals say that while wealthy clients clearly are insulated from some of the economic hardships that face production-home buyers, they are not completely immune from them.

Inventory is high, homes are sitting on the market longer and Realtors must convince sellers to lower their expectations on price.

“What’s happening in the marketplace,” says Sandra Wilken of Sandra Wilken Luxury Properties, “is we are trying to get our sellers to be extremely realistic on their list price. The ridiculous prices of three years ago are not going to happen.”

In 2007, Wilken says buyers in Paradise Valley purchased 133 properties worth $2 million or more. The most expensive home sold for $8.8 million. This year, 62 homes have been sold in that range, with the highest fetching $7.62 million.

Information from the Arizona Regional Multiple Listing Service in two high-end zip codes, Paradise Valley’s 85253 and North Scottsdale’s 85256, shows inventory climbing through 2007 and the first half of 2008 compared to accepted offers. The average price for a property sold in Paradise Valley in September 2006 was $2.328 million. This past August it was $1.606 million.

Break it down
It is important to understand that in the luxury home market, different segments are performing in different ways.

Buyers who can afford a $2 million to $4 million home, or higher, are more insulated from current market conditions.

Tom Fisher calls them “program buyers,” successful and affluent business people who are on track to build homes that some call “family resorts.”

Fisher, owner of Fisher Custom Homes, builds houses that start at $2 million. His clients’ income or cash flow often is tied to the stock market, and while that has bred caution in their spending, in his experience it hasn’t derailed many building plans.

Walt Danley agrees there still is activity in the high-end market, but poor economic conditions fostered by sub-prime lending have, in a sense, trickled up.

Credit crunch
Credit in the form of jumbo loans, or loans for more than $417,000, has dried up as well. Several years ago, buyers could purchase a $1 million home with as little as 5 percent down, says Dean Bloxom, president of iMortgage Services in Phoenix. Some banks asked for 10 percent on $2 million.

Today, loans are available but banks want at least 20 percent down, and clear, documented evidence of someone’s assets and income — a correction that should have happened earlier, Bloxom says.

There are indications the market may pick up some velocity, says Cionne McCarthy, an agent with Russ Lyon Sotheby’s International Realty.

The Luxury Home Tour, which showcases homes in Paradise Valley and the Arcadia and Biltmore districts, recently released figures that show homes in August spent less time on the market.

From Aug. 8 to Sept. 6, homes spent an average of 151 days on the market, compared to an average of 223 days between August 2007 and August 2008.

CDRates

CD Rates Inching Higher Again

Bank-issued certificates of deposit rates are inching up, but if your one-year CD is maturing, you’re probably not going to like what’s being offered. That’s because CD rates took a dramatic drop in the past year as the Federal Reserve marched through a series of reductions starting last summer. The downward spiral was triggered by a belt-tightening credit crunch and a pervasive housing downslide.

Rates plunged as much as 325 basis points in the past year, dropping to as low as 2 percent from 5.25 percent.

Early last summer, it was not uncommon to see banks offering 5 percent interest or more on certificates of deposit. Then came the steady stream of rate cuts, and CDs were paying in the neighborhood of 2 percent. Now we’re seeing rates flirting with 3 percent, and teasers that are a tempting couple of percentage points higher.

Does the move to higher ground indicate that an economic turnaround has begun? Not necessarily, say banking experts.

“Rates are down considerably from what a consumer could have gotten last summer,” says Herb Kaufman, professor of finance and vice chair of the Department of Finance at Arizona State University’s W. P. Carey School of Business. “Now they’ve come back a little bit. They’re trending up as banks try to rebuild their deposit base and retain the deposits they have.”

Kaufman and Rick Robinson, regional investment manager for Wells Fargo Wealth Management Group, agree that one of the reasons for the modest increase is the perception that the Fed is not likely to reduce interest rates anytime soon. Another factor is inflation.

Robinson says the Fed is taking a wait-and-see approach to determine how the economy responds to seven rate cuts and whether inflation will remain somewhat subdued or will increase.

Kaufman notes that inflation, fueled by gasoline and food prices, appears to be accelerating.

“As that happens — and the feds are very conscious of that — you can expect banks will have to reflect the rise in inflation with their CD rates,” Kaufman says.

A significant improvement in the credit market adds to the likelihood of CD rates continuing to drift upward through summer, Kaufman says. He expects to see CD rates somewhat higher than they were last spring.

Is the inching up of CD rates a good or bad sign for the economy?

“I’d say it’s a little bit of a good sign,” Kaufman says. “It wouldn’t happen if the Feds weren’t comfortable with the credit market. Concerns have eased. Banks are comfortable to bid up rates, which means some of the constipation in the credit market has eased.”

The rise in interest rates could be tied to various factors.

“It’s usually a signal that the economy is beginning to do well or that the Federal Reserve wants to slow down the economy,” Robinson says. “Or it could mean that interest rates go higher because of supply and demand, because of inflationary pressures.”

But Robinson cautions: “A small uptick in rates is not a signal that we’re out of the woods or that economic growth is turning around. I still think it will be subdued in the second half of 2008. We expected low growth for the first portion of this year, and we expect to pick up the pace slightly in the second half.”

Another word of caution for investors: “Some banks might offer teaser rates of 5 percent for three months,” Robinson says, “but when it matures and resets, the rate will be consistent with what other banks are offering. Any bank in Arizona must remain competitive with the bank on the opposite corner.”

The creep upward of CD rates is a good sign for aging investors who rely on income from these investments to maintain their lifestyle. Conversely, the drastic decrease in rates since last summer was hurtful, especially for seniors.

“There is less money in their pocket,” Robinson says. “As their CDs matured, if they reinvested their money they’re more likely earning less than they earned previously. They have less to live on.”

Kaufman, too, says the increase is a good sign for retirees, so long as the rise does not pose a threat to economic recovery. Because of the roller-coaster ride the stock market has been on, some investors seeking a safe haven switched to CDs covered by the FDIC.

The collapse of investment bank Bear Stearns & Co. in March spawned some movement to CDs and safer, less volatile investments, including government-backed bonds. Robinson calls it “a flight to quality.”

“In the summer of 2007, banks went through a confidence crisis,” Robinson says. “Investors were worried. Some banks experienced an outflow of deposits, given investor concerns over their viability. That concern seems to have lessened. As the crisis grows longer, more information becomes available, which lessens the panic. People can understand the viability of their institution.”

The reason for the subtle increase in CD rates is anybody’s guess.

“Some banks might be willing to take a loss on deposits to shore up their capital base,” Robinson says. “They may want to increase deposits because they see opportunities to make loans. There are myriad reasons why rates go up, fluctuating in small increments of five to 10 basis points. It could be strategic or market related.”