Banks prefer to lend to individuals that have formed LLC’s or Corporations. Forming a business entity shows the banks that you are serious about your new venture and that you are willing to take the correct steps to legally protect it. Don’t have an entity yet? That’s no problem, we can help get your business started correctly. 
By George Blackburne
A borrower can expect to pay between $2,000 and $4,500 for an appraisal, if he needs a commercial loan. Multifamily appraisals are slightly less. The reason why commercial real estate appraisals are so expensive is because each commercial property is unique. In addition, the appraiser has to perform an extensive rental comparable’s analysis, an income and operating cost analysis, a comparable sales analysis, and a cost analysis.
Commercial real estate appraisals can be quite extensive, as thick as thirty to fifty pages. The appraiser needs to determine, for example, if each lease provided to the appraiser reflects the current market rent of the property or whether the rental amount is out-of-date, meaning it is too high or too low. The lease might even be fraudulent. This can often only be determined by checking the rents of a number of similar properties nearby.
Did the borrower provide the appraiser with his actual operating expenses or did he fraudulently slip in some understated expense numbers, in order to make his net operating income look higher?
The appraiser also has to carefully analyze the cost of the commercial building’s construction, to help determine the fair market value of the building and to determine if the rental rate is reasonable.
Image if a developer could build an office building for just $1 million and lease it out for $1 million per year. Clearly something is wrong; otherwise, why aren’t capitalistic developers rushing to build competing office buildings? That lease for $1 million per year smells awfully fishy.
Whether the borrower pays $2,000 to $2,500 for a commercial appraisal or $4,000 to $4,500 for the appraisal depends on the qualifications of the appraiser.
It is the commercial lender who determines the minimum qualifications of the appraiser. If the loan amount is small, a bank may only require a General Certified Appraiser. If the loan amount is large, or if the property type is unusual (think movie complex), the bank will likely require a MAI appraiser.
A General Certified Appraiser is one who has been extensively training in the three approaches to value – the Income Approach, the Sales Comparison Approach, and the Cost Approach. In order to be awarded the General Certified Appraiser designation, the state will usually require a large number of training courses in the valuation of commercial property, will test the candidate extensively, and will require that he or she have a certain level of appraisal experience.
General Certified Appraisers are usually pretty good, and they typically charge between $2,000 to $2,500 for an appraisal of a commercial property valued up to $6 million or so. Small banks and hard money lenders are the commercial lenders who will most often require just a General Certified Appraiser.
Larger banks, when valuing commercial properties worth more than $6 million to $7 million or so, will usually require a MAI Appraisal.
MAI stands for Member, Appraisal Institute, a private, well-respected professional association. The Appraisal Institute defines a MAI Appraiser as an appraiser who is experienced in the valuation and evaluation of commercial, industrial, residential, and other types of properties, and who advise clients on real estate investment decisions.
MAI Appraisers are like the CPA’s of the appraisal industry. They are the top of the food chain. They are most highly trained and experienced commercial real estate appraisers in the industry.
MAI Appraisers will typically charge between $4,000 to $10,000 for an appraisal assignment. For most commercial property owners, borrowing from a bank, the MAI appraisal will cost you between $4,000 and $4,500.
Borrowers, brokers, and mortgage brokers should never order the appraisal themselves. If they do, the cheapest commercial lenders will NOT be able to use it.
Do you remember the Savings and Loan Crisis back in 1986, when over 1,000 S&L’s went bankrupt? They lost billions of dollars, in large part due to bad appraisals. Developers were ordering the appraisals themselves from crooked MAI appraisers. They would shop an appraisal assignment until a MAI Appraiser promised to bring in the appraisal at the value the developer wanted. The joke back in those days was that MAI stood for “Made As Instructed.”
The law that eventually cleaned up the appraisal industry was the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 – pronounced FIRREA (like diarrhea).
After the passage of FIRREA, state laws were passed to license and regulate real estate appraiser. The appraisal industry became far more professional and ethical, and the prestige of the Appraisal Institute itself recovered its lustrous reputation.
But let’s get back to the issue that a borrower or a broker must never order the appraisal themselves. Under FIRREA, it is illegal for an insured bank or savings and loan association to accept and use an appraisal ordered by a borrower or a broker.
It is too late? Are you stuck with a $2,000 or $4,000 appraisal that no bank will accept? My own hard money shop, Blackburne & Sons, will often accept commercial real estate appraisals ordered by competing lenders.
Venture capital firms are different from private investors in that they have raised capital from a number of high net worth individuals with the intent to make investments on their behalf into promising start up companies and expanding businesses so that they can ultimately take the business public via an IPO or sell the business for a substantial earnings multiple. There is not a single business that does not face any type of specific business risk that should be addressed within your business plan. You should showcase, within your business plan, how you’ll deal with an economic recession as it relates to remaining profitable and cash flow positive. The primary difference between private investors and venture capital firms is that these individuals tend to live in areas where there are a number of other high net worth individuals. In some instances, you may be able to finance your business through credit card receivables if you’re already in operation as an alternative to expensive equity capital financing.
Angel investors usually have a net worth of $500,000 to $1,000,000 although this number may be higher in selected metropolitan areas. It should be noted that venture capital firms will typically take 30 days to 60 days to make a decision as it relates to the capital that you need. Most angel investors are prepared to make their investment decision within two weeks of receiving your proposal. In any document that is specific for a angel investor or venture capital firm should have appropriate disclosures as it relates to the risks associated with business which should be drafted by an attorney. When you’re developing your business plan for an angel investor or venture capital firm, it is extremely important that you dismiss your emotions in the product or services that you is that you sell.
We recommend that you have your attorney present during your first meeting in order to make sure that the individual is a legitimate investor or venture capital firm that is willing to make a significant investment into your business. It should also be noted that there are firms out there that can introduce you to angel investors or syndicated individual investment groups when you are seeking private equity capital.
The primary difference between an individual investor and a venture capital firm is the amount of capital that they are willing to provide you with as it relates to making an equity investment into your firm. As such, if you are seeking less than $5,000,000 then it may be in your better interest to work with an angel investor rather than a large scale investment firm.
Matthew Deutsch is a prominent business plan writer. His work has been included in nine books pertaining to this subject. Additionally, Mr. Deutsch has written extensively on subjects regarding entrepreneurship, small business lending, angel investing, and other related topics.
Article Source: https://EzineArticles.com/expert/Matthew_Deutsch/636374
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Angel investors do not usually provide loans unless there is a substantial interest rate associated with this type of financing. There are many industries that are less risky and therefore more attractive to angel investors that allow them to provide equity capital to promising ventures. There are a number of strings attached to working with private funding sources that provide capital in both the form of debt or equity capital. Private investors may include hard money lenders that want to generate a high interest rate from property based loans.
Entrepreneurship is the fastest growing new field of study in American higher education. This has been primarily due to the fact that given the job climate many people are looking to crate their own jobs rather than looking to find employment at a third party firm.
If you have a private placement memorandum drafted then you can use to a PPM broker to sell your securities third-party as it relates to raising either debt or equity capital. As it relates to real estate, owner-occupied properties are typically not funded through equity financing. Prior seeking any type of financing, you should become very well educated as to how the process works so that you can get the best deal possible. You need to thoroughly consider whether or not your business is appropriate for the current market as it relates to raising capital. You should take the viewpoint of a type of third-party funding source when you are determining whether or not you need third party investment.
Never give up too much equity in your business to a third party as it relates to working with a venture capital firm, angel investor, or private equity firm. It should be noted that your private funding source should considered to be accredited. An accredited investor has an income exceeding $200,000 per year if they are not married or $300,000 per year if they are married. An attorney should be closely to inform you of the specific laws that are related to raising capital from a private source as you will need to remain within the letter of law as it pertains to these matters. However, you should not spend an exorbitant amount of money as it relates to having the counsel that you need in order to raise capital.
In conclusion, raising capital is an expensive process and it comes with substantial risks. You can anticipate that 3% to 5% of the capital you raise will be associated with costs pertaining to obtaining this type of financing.
Matthew Deutsch is a prominent business plan writer. His work has been included in nine books pertaining to this subject. Additionally, Mr. Deutsch has written extensively on subjects regarding entrepreneurship, small business lending, angel investing, and other related topics.
Article Source: https://EzineArticles.com/expert/Matthew_Deutsch/636374
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Getting your startup funded is not a small challenge. It’s even harder when your startup is at an early stage when there is no “field” proof that could indicate the chances of its success, like a working product, happy customers, steady income etc. in the early stage of a startup, founders need to prove investors that the company doesn’t only have a great product with a clear market fit, but they need to show as well they are capable of leading the company through the next stages and ultimately to success. As a preparation for the meetings with potential investors, it is not sufficient to only master the business plan and intimately understand the business model, but to also work hard and prepare for the conversation itself with the investors. What does it mean? First, you need to know and understand the potential questions that investors could ask, and be prepared to answer them thoroughly, to the point and impressively. Those will include personal questions on your resume, as well as technology, business and financing questions. Most likely it would be around 20 questions; here are some examples:
1. How complicated is your technology? How is it protected? Is it easy to copy it?
Especially in a technology venture, protection from theft and copy is very important and provides security with investors, who can ensure that this is significant technological innovation. In case the specified product requires heavy quality assurance tests, software validations, licensing authorization or regulatory approvals, it is recommended to start those at the very early stage of the project, since it is likely they will require time due their nature. Any kind of such an approval will increase the value and prestige of the company to the investors.
2. How many months are required for each stage of the development process?
Some of the ideas and projects have a short window of opportunity for market penetration. In such cases, in it important to show the startup can complete the development stages in a rather short amount of time (months), without contradicting that though the development is fairly quick, it will still be relatively difficult to copy the product.
3. Who are the competitors?
When the need/market size for a certain product exists, chances are there are already a few companies trying to fulfill it. Therefore, it is important to show that there is actuall competition out there, and do not try to avoid or hide this subject.
Show your advantages and unique value proposition compared to your competitors. Don’t claim your product is perfect – it is highly unlikely.
It is important to show the founders know how to take advantage of their product or service unique values over the competitor’s one, and take it to the right market – the market where the value of the product is higher and the disadvantages are less noticeable.
4. What is the addressable market size (AMS)? How did you reach those numbers?
Established researchers from leading companies such as IDC, Gartner etc. costs thousands of dollars. Usually, a new startup does not have the resources to invest in such market research.
It is recommended to invest a good amount of hours on search engines to find other researches, presentation slides, and other data that will help calculate the relevant market size for your startup. Even if the information you dug up does not match precisely to your target market, you can roughly evaluate your addressable market size.
There are many more questions, such: how do you plan to penetrate the market? What is the business model? What is the basis for it? What is the business model of your competition? How much cash do you need until operation balance? What are the ownership rates you are willing to give for the investment? And more.
Knowing these questions and being prepared for them significantly improves the impact you might leave on the investors and their ability to properly evaluate the chances of the founders to lead the company towards success.
Additionally, most founders come from a technological background (engineers, developers) and lack the business and financial understanding needed to build and scale a company. Terms such as operating profit, cash flow, fixed and variable costs, equity, and many more and rarely known and will make it hard to lead and steer the discussion in front of the investors. Such a thing could harm the investors’ enthusiasm and willingness to invest – even if the product is great, with no competition and a great market. After all, even the greatest ideas could fail without the proper business, marketing and strategic leadership.
Article Source: https://EzineArticles.com/expert/Asaf_Matyas/1916729
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WHAT IS REVENUE-BASED FINANCING?
Revenue-based financing (RBF), also known as royalty-based financing, is a unique form of financing provided by RBF investors to small- to mid-sized businesses in exchange for an agreed-upon percentage of a business’ gross revenues.
The capital provider receives monthly payments until his invested capital is repaid, along with a multiple of that invested capital.
Investment funds that provide this unique form of financing are known as RBF funds.
TERMINOLOGY
– The monthly payments are referred to as royalty payments.
– The percentage of revenue paid by the business to the capital provider is referred to as the royalty rate.
– The multiple of invested capital that is paid by the business to the capital provider is referred to as a cap.
CASE STUDY
Most RBF capital providers seek a 20% to 25% return on their investment.
Let’s use a very simple example: If a business receives $1M from an RBF capital provider, the business is expected to repay $200,000 to $250,000 per year to the capital provider. That amounts to about $17,000 to $21,000 paid per month by the business to the investor.
As such, the capital provider expects to receive the invested capital back within 4 to 5 years.
WHAT IS THE ROYALTY RATE?
Each capital provider determines its own expected royalty rate. In our simple example above, we can work backwards to determine the rate.
Let’s assume that the business produces $5M in gross revenues per year. As indicated above, they received $1M from the capital provider. They are paying $200,000 back to the investor each year.
The royalty rate in this example is $200,000/$5M = 4%
VARIABLE ROYALTY RATE
The royalty payments are proportional to the top line of the business. Everything else being equal, the higher the revenues that the business generates, the higher the monthly royalty payments the business makes to the capital provider.
Traditional debt consists of fixed payments. Therefore, the RBF scenario seems unfair. In a way, the business owners are being punished for their hard work and success in growing the business.
In order to remedy this problem, most royalty financing agreements incorporate a variable royalty rate schedule. In this way, the higher the revenues, the lower the royalty rate applied.
The exact sliding scale schedule is negotiated between the parties involved and clearly outlined in the term sheet and contract.
HOW DOES A BUSINESS EXIT THE REVENUE-BASED FINANCING ARRANGEMENT?
Every business, especially technology businesses, that grow very quickly will eventually outgrow their need for this form of financing.
As the business balance sheet and income statement become stronger, the business will move up the financing ladder and attract the attention of more traditional financing solution providers. The business may become eligible for traditional debt at cheaper interest rates.
As such, every revenue-based financing agreement outlines how a business can buy-down or buy-out the capital provider.
Buy-Down Option:
The business owner always has an option to buy down a portion of the royalty agreement. The specific terms for a buy-down option vary for each transaction.
Generally, the capital provider expects to receive a certain specific percentage (or multiple) of its invested capital before the buy-down option can be exercised by the business owner.
The business owner can exercise the option by making a single payment or multiple lump-sum payments to the capital provider. The payment buys down a certain percentage of the royalty agreement. The invested capital and monthly royalty payments will then be reduced by a proportional percentage.
Buy-Out Option:
In some cases, the business may decide it wants to buy out and extinguish the entire royalty financing agreement.
This often occurs when the business is being sold and the acquirer chooses not to continue the financing arrangement. Or when the business has become strong enough to access cheaper sources of financing and wants to restructure itself financially.
In this scenario, the business has the option to buy out the entire royalty agreement for a predetermined multiple of the aggregate invested capital. This multiple is commonly referred to as a cap. The specific terms for a buy-out option vary for each transaction.
USE OF FUNDS
There are generally no restrictions on how RBF capital can be used by a business. Unlike in a traditional debt arrangement, there are little to no restrictive debt covenants on how the business can use the funds.
The capital provider allows the business managers to use the funds as they see fit to grow the business.
Acquisition financing:
Many technology businesses use RBF funds to acquire other businesses in order to ramp up their growth. RBF capital providers encourage this form of growth because it increases the revenues that their royalty rate can be applied to.
As the business grows by acquisition, the RBF fund receives higher royalty payments and therefore benefits from the growth. As such, RBF funding can be a great source of acquisition financing for a technology company.
BENEFITS OF REVENUE-BASED FINANCING TO TECHNOLOGY COMPANIES
No assets, No personal guarantees, No traditional debt:
Technology businesses are unique in that they rarely have traditional hard assets like real estate, machinery, or equipment. Technology companies are driven by intellectual capital and intellectual property.
These intangible IP assets are difficult to value. As such, traditional lenders give them little to no value. This makes it extremely difficult for small- to mid-sized technology companies to access traditional financing.
Revenue-based financing does not require a business to collateralize the financing with any assets. No personal guarantees are required of the business owners. In a traditional bank loan, the bank often requires personal guarantees from the owners, and pursues the owners’ personal assets in the event of a default.
RBF capital provider’s interests are aligned with the business owner:
Technology businesses can scale up faster than traditional businesses. As such, revenues can ramp up quickly, which enables the business to pay down the royalty quickly. On the other hand, a poor product brought to market can destroy the business revenues just as quickly.
A traditional creditor such as a bank receives fixed debt payments from a business debtor regardless of whether the business grows or shrinks. During lean times, the business makes the exact same debt payments to the bank.
An RBF capital provider’s interests are aligned with the business owner. If the business revenues decrease, the RBF capital provider receives less money. If the business revenues increase, the capital provider receives more money.
As such, the RBF provider wants the business revenues to grow quickly so it can share in the upside. All parties benefit from the revenue growth in the business.
High Gross Margins:
Most technology businesses generate higher gross margins than traditional businesses. These higher margins make RBF affordable for technology businesses in many different sectors.
RBF funds seek businesses with high margins that can comfortably afford the monthly royalty payments.
No equity, No board seats, No loss of control:
The capital provider shares in the success of the business but does not receive any equity in the business. As such, the cost of capital in an RBF arrangement is cheaper in financial & operational terms than a comparable equity investment.
RBF capital providers have no interest in being involved in the management of the business. The extent of their active involvement is reviewing monthly revenue reports received from the business management team in order to apply the appropriate RBF royalty rate.
A traditional equity investor expects to have a strong voice in how the business is managed. He expects a board seat and some level of control.
A traditional equity investor expects to receive a significantly higher multiple of his invested capital when the business is sold. This is because he takes higher risk as he rarely receives any financial compensation until the business is sold.
Cost of Capital:
The RBF capital provider receives payments each month. It does not need the business to be sold in order to earn a return. This means that the RBF capital provider can afford to accept lower returns. This is why it is cheaper than traditional equity.
On the other hand, RBF is riskier than traditional debt. A bank receives fixed monthly payments regardless of the financials of the business. The RBF capital provider can lose his entire investment if the company fails.
On the balance sheet, RBF sits between a bank loan and equity. As such, RBF is generally more expensive than traditional debt financing, but cheaper than traditional equity.
Funds can be received in 30 to 60 days:
Unlike traditional debt or equity investments, RBF does not require months of due diligence or complex valuations.
As such, the turnaround time between delivering a term sheet for financing to the business owner and the funds disbursed to the business can be as little as 30 to 60 days.
Businesses that need money immediately can benefit from this quick turnaround time.
The M&A and Corporate Finance Advisors at InternetInvestorsGroup.com work with revenue-based financing capital providers to secure growth funding for technology companies.
Contact Us at http://www.InternetInvestorsGroup.com to secure funding for your technology business.
Article Source: https://EzineArticles.com/expert/Kris_Tabetando/1954267
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After the past year, many companies are reflecting on their values and how they can make a positive impact in their communities. Finding better ways to interact with the world is not just good business sense, but helps a company become a positive force, leading to a more sustainable, thriving community for everyone.
Collaborating with employees and stakeholders to develop benchmarks that include everyone’s input helps motivate all toward these collective goals. It’s important to review your company’s progress toward your goals on a regular basis.
For example, at Nordstrom, Inc., their 2020 Sharing Our Progress report assesses the company’s accomplishments and reflects on the progress they’ve made against their 2025 goals. Over the next five years, they’re working to achieve specific outcomes, creating new programs in response to customer and employee expectations.
Here are five important ways your business can make positive changes.
1. Environmental sustainability
Customers today desire eco-friendly, sustainable products. From recycling and reducing packaging to energy conservation and decreasing your company’s carbon footprint, changes big and small help the environment.
For example, in 2020, Nordstrom Made brands reduced their single-use plastics by 13 million units. The company also launched BEAUTYCYCLE, the first beauty take-back and recycling program accepting all brands of beauty packaging at a major retailer, with the goal to recycle 100 tons of beauty waste by 2025.
2. Diversity, inclusion and belonging
Companies wanting to ensure that employees and customers know they walk the walk when it comes to diversity and inclusion must review their products, services, hiring and business practices. Making sure everyone is welcomed within the company is vital to ensuring you’re serving the entire community.
One way to demonstrate your commitment to diversity and inclusion is to champion underrepresented brands. Last year, Nordstrom committed to $500 million in sales from Black and Latinx brands by 2025, and they made it easier for customers to find Black-founded brands online by launching a new category.
To better serve all their customers, the company also introduced Inclusive Beauty, a new category featuring a curated assortment of beauty products for everyone — regardless of skin or hair type, tone, complexion or texture.
Additionally, diversity should show up at all levels of a company. For instance, Nordstrom’s leadership is 60 percent women and its Board of Directors is 45 percent women, nearly 30 percent of whom are people of color.
3. Giving back to the community
For any size business, there are many ways to give back. From restaurants providing free meals to frontline workers to companies retooling their manufacturing setup to create face shields, giving back has been one of the most inspiring aspects of the pandemic.
Companies can also encourage employees to volunteer by offering days off for volunteerism, or to give to charities by offering a donation match. In 2020, Nordstrom gave more than $11 million, with $3.5 million to 3,615 causes through their employee matching gift program.
4. Supporting employees
Because the pandemic has posed so many challenges, companies wanting to retain talent need to ensure their business is a positive, nurturing place to work, even from home. Supporting employees is not just the right thing to do, it also helps your business grow and thrive.
Nordstrom has worked to ensure that their supply chain employees on the front lines were supported with the safest possible work environments, with enhanced pay and wellness resources.
Listening to employee feedback, the company also expanded flexible work solutions and added new caregiving benefits and mental health resources to help employees balance competing demands of work and family. Flex-work solutions included “no meeting” blocks, core work hours, reduced/part-time hours and job sharing. To help employees impacted by the pandemic, they also enhanced leave of absence options and introduced new benefits for caregivers — including back-up childcare options and elder care resources.
5. Global responsibility
While for some businesses global responsibility may seem daunting, it’s become clear that issues in one part of the world can affect people — and businesses — half a world away. It’s more important than ever to be aware of where the products you sell come from, and who is impacted by their creation.
Last year, 32 percent of Nordstrom Made products were manufactured in factories that invest in women’s empowerment, reaching 40,000 workers. Making a commitment to further empower women in developing countries is one crucial way to ensure your business is having a positive influence.
Learn more about how Nordstrom is working to make a difference at NordstromCares.com.
CRYPTOCURRENCY NEWS
Jay L. Zagorsky, Boston University
On Sept. 7, 2021, El Salvador will become the first country to make bitcoin legal tender.
The government even went a step further in promoting the cryptocurrency’s use by giving US$30 in free bitcoins to citizens who sign up for its national digital wallet, known as “Chivo,” or “cool” in English. Foreigners who invest three bitcoins in the country – currently about $140,000 – will be granted residency.
Panama is considering following El Salvador’s lead.
Does making bitcoin legal tender mean every store and merchant in El Salvador will now have to accept digital payments? If more countries do the same thing, what will this mean for consumers and businesses around the world?
As an economist who studies wealth and money, I believe that briefly explaining what legal tender is will help answer these questions.
What is legal tender?
Legal tender refers to money – typically coins and banknotes – that must be accepted if offered in payment of a debt.
The front of every U.S. banknote states “This note is legal tender for all debts public and private.” This statement has been enshrined in federal law in various forms since the late 1800s.
The greenback is not legal tender in just the U.S. El Salvador, for example, switched from the colon, its previous currency, to the U.S. dollar in 2001. Ecuador, Panama, East Timor and the Federated States of Micronesia also all use the dollar as legal tender.
Do merchants have to accept legal tender?
But despite the definition above, legal tender doesn’t mean all businesses must accept it in payment for a good or service.
That requirement applies only to debts owed to creditors. The ability for a store to refuse cash or other legal tender is made explicit on the websites of both the U.S. Treasury, which is in charge of printing paper money and minting coins, and the Federal Reserve, which is in charge of distributing currency to the nation’s banks.
This is why many companies such as airlines accept payments exclusively by credit card, and many small retailers take only cash.
As the U.S. Treasury points out, there is “no federal statute mandating that a private business, a person or an organization must accept currency or coins as payment for goods or services. Private businesses are free to develop their own policies on whether to accept cash unless there is a state law which says otherwise.”
And this would be no different if the U.S. made bitcoin legal tender. Private businesses would not be required to accept it.
There is clearly some confusion in El Salvador over the issue, however. Its original bitcoin law, passed in June 2021, states that “every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service.”
This led to protests and resulted in skeptcism from economists and others. As a result, El Salvador President Nayib Bukele tweeted in August that businesses did not have to accept bitcoin.
Why did El Salvador make bitcoin legal tender?
El Salvador is betting that being the first to open its doors completely to bitcoin will help boost its economy.
President Bukele said he believes this will encourage investors with cryptocurrency to spend more of it in his country. He even has a plan to have El Salvador’s state-run geothermal utility use energy from the country’s volcanoes to mine bitcoin.
Creating, or mining, bitcoin takes a lot of energy, so mining makes sense only in places with cheap electricity.
The $30 given to every citizen who joins the cryptocurrency craze will temporarily stimulate the economy. However, the overall impact will likely be a short-term boost. The impact of similar payments in other countries, like COVID-19 stimulus payments, appear to end after people have spent the money. Moreover, it’s unclear El Salvador’s increasingly indebted government can even afford it.
And the widespread adoption of bitcoin will likely take years. El Salvador has been installing 200 bitcoin ATMs to allow people to convert cryptocurrency into dollars.
Since just 30% of the Central American country’s population even has a bank account, I believe the U.S. dollar will still be used in El Salvador for a long time, even if its president wants to move toward bitcoin.
Jay L. Zagorsky, Senior Lecturer, Questrom School of Business, Boston University
This article is republished from The Conversation under a Creative Commons license. Read the original article.
A company named JCR Capital sent me an email flyer several months ago advertising their equity capital for value-add real estate investments.
Value-add commercial real estate investments typically target properties that have in-place cash flow, but they seek to increase that cash flow over time by making improvements to, or repositioning, the property. In other words, the property has tenants, but they are paying substantially below the potential rent that the property could be getting.
In a value-add investment deal, the transaction’s sponsor makes an active effort to elevate the income stream of the property, typically through a significant capital improvement program, such as a partial or property-wide renovation. Examples of such improvements might include new paint, new signage, renovating the lobby, and improving the security of the property and the parking area, etc.
In their marketing flyer, JCR Capital advertised preferred equity, joint venture equity, and programmatic equity. Programmatic equity? What the heck is programmatic equity?
Before we get into programmatic equity, lets first do a quick review of the term, “equity”. Equity is not just the difference between what your house is worth and the balance on your first mortgage.
Equity – in the context of real estate – is the money that the owner stands to lose before “the bank” loses its first penny. Obviously, “the bank” could also mean a credit union, a life company, a conduit, or any other type of real estate lender.
Equity is often referred to as the first-loss piece. If anyone is going to lose any money on a real estate deal, the first guy to lose a chunk out of his tush is the equity holder (the owner).
Example:
ABC Development Company specializes in turning around big apartment projects that have become run down. In downtown Washington, DC, ABC Development learns of a 360-unit apartment project within two miles of Capital Hill. The well-located apartment project was once filled with ambitious, young political staffers; but when the old man died, and his wife took over the management, the condition of the property and the rents plummeted.
ABC Development can acquire the property for just $32 million, but the renovation costs are another $9 million. With an interest reserve and the other necessary soft costs, the total project cost is $46 million. The bank, with whom ABC Development has a relationship, will only loan up to 70% of the total cost because the project has become a big drug house and a gang hang-out.
A huge renovation project like this needs to be structured like a construction loan. Who remembers the four elements of Total Cost? Of course, there is the land cost (in this case, the cost of the land and the building), and then there are the hard costs (bricks and mortar). What else? Soft Costs – that’s right! Good job.
But you are still forgetting the fourth element of Total Cost (of a development project). It’s the contingency reserve. A good rule of thumb when computing the contingency reserve is to use 5% of hard costs and soft costs. Why not 5% of the land cost? Because by then the developer already knows the cost of the land. There is NOT going to be a cost overrun in connection with the land.
Therefore the total cost of a development project is the land cost, plus the hard costs, plus the soft costs (interest reserve, architectural fees, engineering fees, points, closing costs, etc.), plus the contingency reserve.
Okay, now let’s get back to ABC Development’s big value-add deal. We said the total cost was $46 million, and the bank was willing to lend $32.2 million – which is 70% of the total cost. Therefore ABC Development will need to contribute $13.8 million. The development company has $3.8 million to contribute, so it will need an equity provider willing to put up the remaining $10 million.
This is the type of value-add deal that would be perfect for the nice folks at JCR Capital. Their transaction sizes include equity contributions of between $5 million and $50 million nationwide. (We are talking large deal sizes here, folks. The property should at least be worth $20MM.)
Okay, But What the Heck is Programmatic Equity?
As Sam explained to me, “Programmatic equity is where we provide a facility of capital, say $25 million to $50 million of committed capital, for a particular strategy that a sponsor is pursuing.”
Example:
Let’s suppose that a developer specializes in buying large, older, mobile home parks, and then the developer repaves all of the streets, tears out the landscaping and puts in far-nicer lawns and bushes, puts in a new pool and a new clubhouse, enforces the park rules about skirts and storage sheds, squeezes out the mobile homes being used as rentals, squeezes out the ugly and/or single-wide coaches, and then dramatically raises the rent.
When everything is stabilized, the developer then sells the mobile home park to a REIT. This is his program. He has flipped four parks already, and he has identified fifteen other parks in need of his program. He needs just $3 million in equity to satisfy each bridge lender providing the underlying first mortgage, but in order to renovate all fifteen parks, he might eventually need a total of $45 million in equity.
A provider offering programmatic equity might go all the way down to just $3 million on each mobile home park because the sponsor will be doing 15 of these projects. The provider might offer the developer a capital facility (kind of like a line of credit) of $30 million in equity to start renovating these large, old, mobile home parks.
By George Blackburne
Last week I wrote a blog about how historically aggressive private money commercial bridge lenders are getting. This month George Smith Partners, the big commercial mortgage banking company (the original founder started George Smith & Company decades before I founded Blackburne & Sons forty years ago) released a newsletter, FinFacts, containing the following tombstone:
“George Smith Partners (“GS P”) placed a $10,900,000 non-recourse loan for the refinance of an underperforming stabilized 50-unit multifamily community in Los Angeles. The Sponsor recently acquired the asset at approximately 50% below market from an affiliate party, and GSP was able to facilitate approximately $3,000,000in cash out proceeds at closing.”
“A portion of the loan proceeds will be used to renovate units as they become vacant in order to achieve current market rents. GSP identified a non-institutional lender (private money lender) who was comfortable with the cash out proceeds and who understood the history and dynamics of this non-arms-length acquisition. The non-recourse loan is fixed for 1.5 years with a 7.99% interest rate and 4.99% pay rate.”
Terms:
Interest Rate: 7.99% with 4.99% pay rate
Term: 18 months
LTV: 70%
Recourse: Carve-Outs Only
Fees: 1.0%
Prepayment: None; no exit fee
The reason I brought this closing to your attention is because the Big Girls (the originator of this commercial loan at GSP was a lady) are arranging large commercial bridge loans with less than interest-only payments.
Article Provided By By George Blackburne