As published in the Business Ledger – March 4, 2010

Anyone who owns commercial real estate knows that there are cycles in commercial real estate. There are times when the commercial real estate market is “hot” and times when the real estate market is oversaturated and is considered “soft.” As the economy has been in a deeper than normal recession, the commercial real estate market is also experiencing deeper issues than normal in a soft market. In fact, a congressional watchdog panel raised new warnings about the condition of the commercial real estate market.

In its monthly report, the Congressional Oversight Panel for Troubled Asset Relief program predicted that the failure of these loans could further endanger the banking system and preclude a true economic recovery. The report noted that about $1.4 trillion in commercial real estate loans will come due at the end of their terms and about half of those are considered “under water”, where the fair market value of the property is less than the mortgage debt outstanding. The report further stated that the potential losses from these loans could amount to $300 billion, which would severely impact small to mid size banks, who have a high concentration of commercial real estate in their portfolios. The concern is that if these banks do not have adequate reserves to cover these losses, that there could be more bank failures, which will adversely impact any real recovery in the economy.

There were several potential solutions that were listed in the report, including doing a “stress test” of individual banks whose portfolios contain a concentration in commercial real estate loans. Due to the sheer volume in number of these small to midsize banks, it may not be feasible to review these banks’ records at such a detailed level. Another suggestion is that the federal government could inject additional capital into the small banks, buying their toxic assets or guaranteeing loans. Based upon the fact that the federal government is considered by many taxpayers as spending too much of the taxpayers’ money already, this may not be a feasible approach. There are also concerns if the federal government “reuses” paid back TARP funds as to whether that is constitutional to do so without additional legislation.

A more practical approach might be to allow the banks to extend the due date for the underwater loans, rather than to force a bank to recognize losses at this time. This would allow the economy to recover and over time, the commercial market place would recover, allowing the fair market values to recover as well. It would also allow the owners of the property to find additional tenants for the property or sell the property and pay off more of the outstanding balances of loans for the property. This may allow the banks to recover 80% or more of their loans outstanding, as against taking a loss for the entire loan, reselling the property, and being able to recover maybe twenty cents on the dollar. In addition, if the bank forecloses and cannot sell the property, as there are few buyers out in the marketplace at this time, the bank will have to pay the maintenance and upkeep for the property, the insurance cost and the real estate taxes, as well as a management fee. These costs, along with the legal expense, may force the bank to take a lower offer than that they would have normally accepted in a decent market.

Hopefully, the federal government will enact the necessary regulations that will allow the banks to extend the due dates of the loans on terms that will allow the borrowers to pay, which may include the accrual of a small interest amount, e.g. 1-2%, until three to five years have passed which would allow the cycle to Anyone who owns commercial real estate knows that there are cycles in commercial real estate. There are times when the commercial real estate market is “hot” and times when the real estate market is oversaturated and is considered “soft.” As the economy has been in a deeper than normal recession, the commercial real estate market is also experiencing deeper issues than normal in a soft market. In fact, a congressional watchdog panel raised new warnings about the condition of the commercial real estate market. In its monthly report, the Congressional Oversight Panel for Troubled Asset Relief program predicted that the failure of these loans could further endanger the banking system and preclude a true economic recovery. The report noted that about $1.4 trillion in commercial real estate loans will come due at the end of their terms and about half of those are considered “under water”, where the fair market value of the property is less than the mortgage debt outstanding. The report further stated that the potential losses from these loans could amount to $300 billion, which would severely impact small to mid size banks, who have a high concentration of commercial real estate in their portfolios. The concern is that if these banks do not have adequate reserves to cover these losses, that there could be more bank failures, which will adversely impact any real recovery in the economy. Denice A. Gierach, owner and founder, The Gierach Law Firm pass. After all, most of the commercial real estate loans were good loans hit by a really bad economy. In other words, the borrowers did not cause the loans to go bad—it was the economy. Enacting regulations of this nature would make the best of a bad situation for both the borrower and the banker, as well as for the overall economy. Absent these type of regulations that would allow a “lend-extend” type of loan adjustment, the federal government may cause the other shoe to drop, which will cause additional bank failures and additional economic problems.

The following are some items that may be of interest to you:

…A measure that would have extended COBRA benefits to a terminated employee has been cut from the Senate version of the jobs bill. The original version of the bill would have extended the benefit for three additional months. This measure will probably be advanced as a separate bill.

…Ford could be held to be liable for negligently designing a fuel tank in an automobile that had a fuel tank that burst into flames when struck from behind. This was an Illinois Appellate court case that will probably be appealed by Ford.

…A recent Supreme Court case dealt with the issue of who would receive the benefits of an employee benefit plan upon the death of the insured, the former spouse who was named in the plan documents or other family members of the deceased as a result of the marital settlement agreement effective on the date the divorce becomes final. Not only should the marital settlement agreement be specific in have the soon-to-be ex-spouse waive his or her rights to those specific benefits, the insured should also change the beneficiary designation with the plan administrator to someone other than the former spouse. This case only covered employee benefit plans covered by ERISA. If the spouse does not take similar action to change the beneficiary designation of life insurance at the time of the divorce, there will still be competing claims for the life insurance benefits.

…A new law passed the Illinois General Assembly, making it a misdemeanor to intentionally give a police officer a false name, place of residence or birth date. This applies when the person is arrested, detained or when the officer has asked for the information because the officer has good cause to believe that the person is a witness to a criminal offense.

…There is a bill in the Illinois house which expands the tenancy by the entirety property for residential real estate to include any interest in real property held in a revocable inter vivos trust created for estate planning purposes, provided that the husband and wife are the primary beneficiaries of the trust and that the trust specifically states that the interests of the beneficiaries to the homestead property are held as tenants by the entirety. This will extend the protection for a person’s residence, where a judgment creditor may want to attach and sell the residence of the debtor spouse after a judgment has been entered.

Many business owners own family businesses that were either started by them or that were inherited from their parents who started the family business. He or she may have built that business into a nice size business that, despite the business cycles and the current unusual economy, throws off a nice income for them and allows the business owner to maintain a very comfortable lifestyle. Over time, that business owner may bring in their children or other family members into the business to do various tasks.

The more forward thinking business owner will desire to have a succession plan. At some point in time, that business owner may desire to retire or could possibly die prior to retirement. In either event, that business owner will want the business to continue to provide for his or her spouse and family, either as an ongoing business or to be sold, so that the value of the business can be captured and reinvested to ensure that lifestyle for the family. In order to sell the business in the future, the business is going to need both a continuity of management, as well as depth of management. This means that the business owner must keep upgrading the executives within the business by focusing on the education of those executives.

This may be in the nature of more formal programs, such as a Master’s in Business or continuing education programs in the field. It may also mean that there is some cross training so that several executives are familiar with the same parts of the business that would result in a more cohesive workplace, as well as give the business the depth of management that it needs to grow and someday be sold to another business. If the business owner has children or other family working in the business, that business owner will need to first determine the level of the family member’s interest in the company, their work ethic and the aptitude that family member of the business owner may have for the business. If the business owner feels that family member has a real interest in the business, has an aptitude for the business and seems to enjoy the business, that person may someday be able to manage the business and perhaps own the business through a gift program that the business owner establishes as part of the estate planning process or through an outright purchase. In any event, that family member needs to learn the business from the bottom up. The old adage of starting in the “mailroom” is really true, as there are so many facets of the business that the person needs to learn.

Generally, the business has different areas such as manufacturing, sales, marketing, accounting or finance and human relations. In order for that family member to eventually manage the business from the top, he or she needs to be trained in all of these fields. That is not to say that he or she will like each field equally, but the business owner often fields issues that run through one or all of these areas, so he or she will have to learn all of these areas.

If the business owner places the family member in one of these departments or areas and expects that the head of any of the areas of business will mentor that person, it is important to keep that person accountable and not treat him or her any different than any other employee, just because that employee is related. If the business owner treats the family member as special and without consequence for failing to do the job right, the family member will not learn anything from working with the other employees in that department and no employee will want to mentor him or her.

Besides training on the job, there are also trade associations that relate to the business as a whole that may help the family member to learn more about the business of the business. This may help to educate the younger generation on how the competition works, how to do the job more efficiently and why certain decisions are made by the business owner. After all, the business owner makes it look so easy, but he or she is actually processing all the information about the issue in light of all the experience he or she has seen over the years.

The forward thinking business owner knows the importance of education, as that is central to the exit strategy at the other end.