Economics

By: Janet M. Dery, Esq.  

     In connection with each application for an SBA-guaranteed loan, a lender must obtain a completed and executed U.S. Small Business Administration (“SBA”) Statement of Personal History (SBA Form 912) from each proprietor, general partner, officer, director, LLC managing member, 20% owner, Trustor and manager of day-to-day operationsof the applicant.  A U.S. born or naturalized citizen will indicate his or her citizenship by checking “yes” to the question of whether such person is a U.S. citizen.  At times, however, a lender may receive a completed Statement of Personal History that indicates the principal is not a U.S. citizen.  In such cases, the lender must determine whether the business is still eligible for SBA-guaranteed financing.

      According to the SBA, financial assistance may be provided to “businesses that are 51% owned and controlled by persons who are not citizens of the US provided the persons are lawfully in the United States” (SOP 50 10 5(D), page 120, Section E). If the principal indicates on the Statement of Personal History that he or she is a lawful permanent resident alien (“LPR”), the lender must obtain proof of this fact. The proof should consist of the U.S. Citizenship and Immigration Services (“USCIS”) Form I-551 (commonly known as a “green card”), which will be in the form of either a Resident Alien Card or a Permanent Resident Card.   Lenders should verify the information on such form, including confirming that the applicable Card is not expired, as the form must be renewed every ten (10) years.   So long as the LPR status is verified by the lender, and subject to meeting all other SBA eligibility requirements, the business owned by such LPR will be eligible to receive SBA-guaranteed financing.

      If the principal is not an LPR, the lender must verify the principal’s status before it can consider making an SBA-guaranteed loan to the applicant business. Using the alien registration number supplied by the principal on the completed Statement of Personal History, the lender must submit to the SBA’s Sacramento Loan Processing Center a completed USCIS Form G-845 Document Verification Request, along with a copy of the principal’s USCIS documentation, and a signed and dated authorization statement from the principal, using verbiage set forth in SOP 50 10 5(D), authorizing the release of his or her status to the lender. Lenders should note that the Department of Homeland Security has recently revised USCIS Form G-845, and should be sure to use the version of the Form that indicates an expiration date of “01/31/2015″ in the upper right corner of the first page. The lender must insert “SBA-guaranteed loan” as the basis for the request in accordance with SOP 50 10 5(D), page 122, Section 5.a.(3).

     If the result of the status inquiry indicates that the principal is (i) a documented alien admitted to the U.S. for a specific purpose and for a temporary period of time, (ii) an asylee or refugee (person receiving temporary refuge) with LPR status, or (iii) an alien subject to the Immigration Reform and Control Act of 1986 (“IRCA”), the applicant business might be considered eligible, provided the following additional requirements (“Additional Requirements”) can be met:

1. the current management must have been operating the business for at least one year prior to the application date and/or the personal guaranties of the management will be a condition of the loan; and
2. there must be pledged collateral within the United States that is sufficient to pay the loan in full at any time during the term of the loan.

     Finally, if (i) a business is owned and managed by foreign nationals, foreign entities, or non-immigrant aliens, (ii) the business is not listed in Appendix 1 of the SOP 50 10 5(D), and (iii) the Additional Requirements can be met, the applicant business might be eligible for SBA-guaranteed financing. Such loan should be submitted to the SBA for general processing.

     Of course, a proposed loan must also meet all other SBA eligibility requirements to be eligible for SBA financing.

For more information on the eligibility of Non-U.S. Citizen owned businesses, please contact Janet at (215) 542-7070 orJDery@StarfieldSmith.com.

By Alan Mandeloff, CPA/PFS, CFP

     It is becoming clear that 2012 will be remembered as a year that marked a significant change in a nearly 30-year relationship between stocks and bonds. The longest bond market rally of modern times began in 1981, just as the prime rate topped out at 20.5 percent. Imagine a prime lending rate of 20.5 percent! Why were rates so astoundingly high? Because the Federal Reserve, in its attempt to stamp out double digit inflation, permitted short-term rates to rise until it was convinced that the inflation cycle was essentially dead. The spike in interest rates not only cooled inflation, but killed the bond market and left the Dow Jones Industrial Average at roughly the same level it attained in 1961. That is a lost double-decade. Once interest rates began to fall, they fell sharply and the markets for both stocks and bonds were off to the races.

     Interest rates today, of course, have come full circle from 1981 and are at astoundingly low levels. This is the main reason that over the last 30 years, bonds have outperformed stocks. Bond yields that were over 15 percent 30 years ago now sit at around 2 percent. Fears of inflation have been replaced by fears of deflation. During that period and, in particular, the last 10 years, stock market investors have had to endure sporadic periods of punishing volatility. The world is still in the midst of a painful de-leveraging process. Nevertheless, the global economy, with the help of central bankers, remains resilient. In fact, the S&P 500 now stands just 10 percent from its all-time high.   

     What comes next? Everyone understands that, at some point, interest rates will rise. Sooner or later the Federal Reserve will be confident enough about the economy and will become less accommodative. 2012 may be the year and if so, it will mean that the 30-year declining interest rate trend will begin to reverse itself and stocks will very likely resume their normal place as an investment group that, over time, outperforms bonds. This may not necessarily be cause for celebration because it is possible that both investment groups may decline, but with stocks losing less.

     One thing is certain: change is near.

Alan Mandeloff, CPA/PFS, CFP is president of Citrin Cooperman Wealth Management, a registered investment advisory group that provides personal financial planning, investment management and insurance design and brokerage. Citrin Cooperman Wealth Management is an affiliate of accounting, tax and business consulting firm Citrin Cooperman. Alan can be reached at 215-545-4800 or amandeloff@ccwmlp.com.

By: Ethan W. Smith, Esq.  

     On April 2, 2012, the Small Business Administration published a “Direct Final Rule” in the Federal Register, (Vol. 77, No. 63, April 2, 2012) which provides much-anticipated clarification to the EPC rule set forth at 13 CFR 120.111. The Direct Final Rule is the product of, and SBA’s response to, the controversy surrounding the SBA’s 2011 change in its interpretation of the EPC rule as set forth in SOP 50 10 5(D), which purported to restrict SBA lenders from utilizing an EPC-OC structure for mixed-purpose loans that included use of proceeds by the OC for purposes other than working capital (such as business acquisition, purchase of intangible assets or goodwill). Since the effective date of SOP 50 10 5(D), Lenders have been struggling to comply with the EPC rule reinterpretation and have often been forced to split or restructure loans in order to comply with the rule reinterpretation set forth in the SOP, often to the detriment of both the Lenders and their borrower customers. The clarification SBA provided by the SBA makes the EPC rule consistent with industry practice as it existed prior to the issuance of SOP 50 10 5(D) in the Fall of 2011.

     The Direct Final Rule clarifies the EPC rule, stating that: “The practice of structuring a loan with the real estate held by an EPC that leases the real estate to the OC for operation of its business has become increasingly common. Further, it has come to SBA’s attention that many participating lenders have interpreted this rule to allow EPCs and OCs to borrow funds for the OC’s purchase of other assets for its use, including the purchase of stock or intangible assets (such as trademarks, copyrights, intellectual property, or goodwill), as long as the OC was a co-borrower with the EPC. SBA recognizes the need for this type of financing.” Federal Register Volume 77, Number 63 (Monday, April 2, 2012), page 19532. The Direct Final Rule allows the OC to utilize loan proceeds for “working capital and/or the purchase of other assets, including intangible assets,” provided that the OC is a co-borrower with the EPC on the loan. Federal Register Volume 77, Number 63 (Monday, April 2, 2012), page 19533 (to be codified at 13 CFR §120.111). The clarification provides Lenders with the ability to structure mixed-purpose loans for their borrowers without imposing undue hardship by either requiring the loan to be split into two loans or requiring that the loan be restructured.

      The Direct Final Rule will become effective on May 17, 2012, unless the SBA receives significant adverse comment in the next 30 days. Interestingly, even though the SBA states that this clarification brings the rule into conformance with long-standing industry practice, the rule states that it does not have any “retroactive effect.” Id. at page 19532. The lack of retroactive effect presents Lenders with some uncertainty regarding how Lenders should structure loans during the six-week period between the issuance of the rule and its effective date, as well as how the Agency will treat EPC-OC loans that were “improperly” structured during the last 6 months. Accordingly, because this clarification is not retroactive, the best practice for Lenders is to delay approval of mixed-purpose EPC-OC loans until after the May 17, 2012 effective date. Although it is unlikely that significant adverse comment will be received by the SBA, Lenders could potentially risk their guaranty by failing to wait for the Direct Final Rule to become effective.

For more information on the updated EPC rule and other SBA best practices, contact Ethan at ESmith@StarfieldSmith.com  or (215) 542-7070. 

By: Alan Mandeloff, CPA/PFS, CFP

     The stock market has gotten off to a very strong start in 2012, with the S&P 500 Index up more than 4% in the month of January. We believe this strong showing is the result of two major factors. First, investors remain vigilant in seeking alternatives to the anemic rates being offered for cash and short term fixed income investments. Second, earnings reports for the fourth quarter of 2011 indicated that companies continue to enjoy solid earnings. This makes the stock market, on the basis of price earnings multiples, look attractive. Also, guidance by companies about their future earnings was better than many expected.

     Given the January performance, it would be easy for investors to become overconfident about the direction of the stock market. It has been well publicized that the average retail investor has refrained from participating in the strong recovery, as the scary days of early 2009 when the market bottomed out are not yet a distant memory. If strong monthly performances, like the one we just experienced, become more common, the retail investor will not be able to stay on the sidelines any longer. All too often, however, that investor decides to make an appearance in the market at the worst possible time. In that scenario the one who benefits is the one who is happy to sell his or her stocks at inflated prices to the unwitting newcomer.

     How can the average investor avoid falling into this trap? Quite simply, by having an investment strategy that appropriately allocates dollars between the various asset classes. Knowing how to allocate is not always easy. A good investment manager knows his or her client’s financial situation and fashions a model accordingly. The model has to be monitored and periodically re-balanced. In an overwhelming number of instances, it is a mistake to completely abandon stocks in favor of cash and/or bonds. If an investor was smart (or lucky) enough to be out of the stock market during the period leading up to March of 2009, the strong likelihood is that he or she would not have known when to redeploy cash into stocks. 

     By keeping investment dollars diversely allocated an investor has the best chance to keep strong months, like the one we just enjoyed, in his or her proper perspective.

Alan Mandeloff, CPA/PFS, CFP is president of Citrin Cooperman Wealth Management, a registered investment adviser that provides personal financial planning, investment management and insurance design and brokerage. Citrin Cooperman Wealth Management is an affiliate of accounting, tax and business consulting firm Citrin Cooperman. Alan can be reached at 215-545-4800 or amandeloff@ccwmlp.com. 

By Bruce J. Coin, Director, Bruce Coin Consulting, Inc.

     While much of the focus this year will be on the national election, it is clear that cautious optimism now abounds.  Many, but not all, of the carefully monitored economic barometers are confirming a continued but modest growth. At their January meeting the “Fed” left interest rates unchanged and commented that “the expectation is that the fed funds rate will remain exceptionally low until late in 2014. This bodes well for business and the commercial real estate industry that are substantially dependent on financing.

     As the economy expands and commercial real estate receives increased investor and lender attention a real concern is the way that Discounted Cash Flow analysis are used to analyze income properties.

     In the mid1980’s appraisers, analysts and investors started using a 10 year income and expense analysis to estimate the value of an income property and its potential IRR.  The projection process is known as a Discounted Cash Flow Analysis or DCF for short.

     The ever increasing availability and use of computers and “canned” programs such as the early Lotus and more recent Argus facilitated increased use of the analysis.  The problem is that no one has changed how these have been done for years and it’s time to recognize that “garbage in” produces “garbage out” i.e. the reliability of the analysis is only as good as the assumptions used to generate the analysis. 

     The benefit of performing a DCF, as opposed to using a single stabilized year approach (using a “cap rate”) and capitalizing the stabilized net operating income into value, is that a DCF analysis permits its creator to consider and estimate virtually every income, vacancy, expense and capital item on a year by year basis over a forecasted “holding” period, typically ten years although they can be applied to longer and shorter periods. In uncertain times a five year analysis may be more reliable.

     One problem associated with running a canned program to create and perform DCF calculations is often the un-admitted but true lack of a deep understanding of how to properly use the program by its author.  As a result, many analysts allow the program to perform any number of tasks without giving the amount of individual and meticulous instructions that the case warrants. When that occurs the preprogrammed formulas take over and produce results that often are not truly reflective of the intent.  In addition, these preprogrammed formulas and calculations often use built in averages and standard formulas that have not been overridden by the analyst who is really the “programmer”.

     The use of an Excel spread sheet, where line by line and year by year figures must be estimated and individually entered may be a more reliable way to perform a DCF especially when the property is encumbered by multiple leases.  Going line by line will make the analyst think more about the future actions of individual tenants and leases.

     I have recently informally reviewed the DCF analyses in the appraisals of over seventy five income properties in twenty seven states with a concentration in multitenant office buildings.  I have been astounded to see many commercial appraisers continuing to estimate that rents and expenses of multitenant properties will still escalate on a straight line basis over a 10 year holding period using annual escallation factors of 2.5 to 3 percent in their DCF analyses.  They are obviously ignoring the lessons of the past 4 years and the post WWII history of recessions.

     Since WWII, recessions have occurred in a range of two to ten years with two and ten year hiatus being atypical.  Most occur every four to eight years and often close to national elections.  If one is projecting a DCF with a ten year holding period (and how good is anyone’s “crystal ball” forecasting after three or four years anyway?) don’t you think it would be prudent to assume that a recession is going to occur within that time frame?  When recessions occur, property vacancy rates increase, rents go flat or actually decline while most operating expenses continue to increase.

     Where are the true professionals that recognize this and adjust their forecasts accordingly?  It is long overdue that the almost rote thinking of how these forecasts have been performed needs to be changed.

      Now, when a DCF is being created, prudence suggests (and I submit demands) that it incorporate forecasts that do not simply project everything increasing at the rate of 3% over the next 10 years and reflect more sophistication that includes consideration of future economic downturns and recessions.