My real estate agent said that my condo is “non-warrantable”.  Is that bad?  No.  Similar to the way that getting an FHA appraisal is not the same thing as a home inspection, a “warrantable” condominium has nothing to do with the soundness of the investment.  Fannie Mae has issued guidelines regarding what they will buy on the secondary market.  Some of these requirements redound to the soundness of your condo, some do not.  If Fannie Mae is willing to buy your condominium on the secondary market, it is called “warrantable”.  Fannie Mae and Freddie Mac are the two largest buyers of mortgages in the US and control about 95% of the market.  However, they are not the only game in town, nor should their opinion be considered a judgment of the value of a condominium.

Guidelines for Fannie Mae warrantability include things like the number of owners or renters in a building, the delinquency rate of the homeowner’s dues, and the concentration of ownership in the hands of one person.  Fannie Mae allows for only fifty percent of a building to be in the hands of investors, who presumably rent out their units waiting for a better price to sell. Homeowner’s association dues past thirty days late are calculated at about 15% percent, and there must be acceptable reserves for taxes and maintenance for Fannie Mae approval.  Other types of condo financing programs, in contrast, have guidelines that may allow for sixty day rolling late payments, or allow for other flexibility in assessing the economic strength of the condominium development.   Frivolous litigation may prohibit Fannie Mae from buying a mortgage but would not dissuade another investor; that jerky neighbor may affect how you finance your house.

Does Fannie Mae warrantability affect my resale value or ability to resell my unit?  It shouldn’t.    It is not an assessment of value.   It is simply a guideline for purchase. Your real estate broker should be able to give you a list of lenders that specialize in condominium financing to assist you.  Make sure you pick an experienced financing agent who can answer all your questions.

The item that affects long range for small business owners nearing retirement age the most is the estate and gift tax provision.  The current regs expire at the end of this year.  The $5 million per individual estate tax exemption will drop to $1 million and the top estate tax rate will rise from $35% to 55% for most and 60% for some.  The gift tax exemption will fall to $1 million and the rate will rise to 55%.

Planning for family businesses would be easier if there were some kind of indication as to what tax reform might bring.  The President has proposed a return to 2009 levels with an exemption of $3.5 million and a 45% top tax rate.  At this point, the only thing certain is if a gifting plan for family business ownership is completed in 2012, the rates are known.

Rates on ordinary income such as wages and interest affect the most people.  At year end, the top rate of 35% is slated to rise to 39.5% and millions of “poor and middle income” taxpayers removed from the Bush tax cuts of 2001 and 2003 will find themselves on the tax roll, owing income tax again. 

The limit on itemized deductions adding up to 1.2 percentage point to the tax rate returns as well.  Next year a new 0.9% Medicare tax on wages kicks in for most joint filers with adjusted gross income over $250,000.  Congress has just extended the current “stimulus” payroll tax reduction through the end of 2012, but at some point in time, the social security deficit will have to be addressed creating another cash flow bite for the wage earning taxpayer.

There will be lots of wrangling in the coming months about provisions in the Obama budget, but it’s almost a certainty that higher income taxpayers over $250,000 will be paying higher taxes.  The Alternative Minimum Tax is under scrutiny and both Houses of Congress have some version of a “Pay a Fair Share Tax Act” on the table based on the Buffet Rule.

Investment Income rates are scheduled to rise at the end of 2012, too.  The top rate of 15% on long term capital gains rises to 20% and the current rate of 0% for those in the bottom two tax brackets will rise to 10%.  Qualified dividends will again be taxed as ordinary income with a top rate of 39.6%. 

In 2013 a new 3.8% tax on investment income debuts for most joint filers with AGI greater than $250,000.  It covers capital gains, dividends, rents and royalties, among other things, but doesn’t apply to gains from home sales unless the gains exceed the cap of $250,000 for single filers and $500,000 for joint filers.

The bottom line is it’s an election year and there won’t be anything happen in the way of substantive tax reform.  It wouldn’t surprise us if there was a temporary extension of the current provisions introduced after November 6^th.   That might be a sure thing, IF there is a promise of tax reform in 2013.  We can only hope that reform doesn’t mean the addition of another 1000 pages of tax code.

General Taxable Income

       ___ W-2 Form(s) for Wages, Salaries, and Tips

       ___ Interest Income Statements: Form 1099-INT & 1099-OID

       ___ Dividend Income Statements: Form 1099-DIV

       ___ Sales of Stock, Land, etc.: Form 1099-B

       ___ Sales of Real Estate: Form 1099-S

       ___ State Tax Refunds: Form 1099-G

       ___ Alimony Received or Paid

       ___ Unemployment Compensation Received

       ___ Miscellaneous Income: Form 1099-MISC

Retirement Income

       ___ Retirement Income: Form 1099-R

       ___ Social Security and Railroad Retirement Income

       ___ Form SSA-1099

Business Income

       ___ Business Income and Expenses

       ___ Rental Income and Expenses

       ___ Farm Income and Expenses

       ___ Form K-1 Income from Partnerships, Trusts, and S-Corporations

       ___ Miles Traveled for Business Purposes

Tax Credits Checklist

       ___ Child Care Provider Address, I.D. Number and Amounts Paid

       ___ Adoption Expense Information

       ___ Foreign Taxes paid

       ___ First Time Home Buyer Tax Credit

Expense and Tax Deduction Checklist

       ___ Medical Expenses for the Family

       ___ Medical Insurance Paid

       ___ Prescription Medicines and Drugs

       ___ Doctor and Dentist Payments

       ___ Hospital and Nurse Payments

       ___ Miles Traveled for Medical Purposes

       ___ Home Mortgage Interest from Form 1098

       ___ Home Second Mortgage Interest Paid

       ___ Real Estate Taxes Paid

       ___ State Taxes Paid with Last Year’s Return (if itemized)

       ___ Personal Property Taxes Paid

       ___ Cash Contributions to Charities

       ___ Fair Market Value of Non-cash Contributions to Charities

       ___ Unreimbursed Expenses Related to Volunteer Work

       ___ Miles Traveled for Volunteer Purposes

       ___ Casualty and Theft Losses

       ___ Amount Paid to Professional Preparer Last Year

       ___ Unreimbursed Expenses Related to Your Job

       ___ Miles Traveled Related to Your Job

       ___ Union and Professional Dues

       ___ Investment Expenses

       ___ Job-hunting Expenses

       ___ IRA Contributions

       ___ Student Loan Interest Paid

       ___ Moving Expenses

       ___ Last Year’s Tax Preparation Fee

Tax Estimate Payments Checklist

       ___ Estimated Payments Made with ES Vouchers

       ___ Last Year’s Tax Return Overpayment Applied to This Year

       ___ Off Highway Fuel Taxes Paid

General Information

       ___ Copy of Last Year’s Tax Return

       ___ Social Security Numbers for You and Your Spouse

       ___ Educational Expenses for You and Your Spouse

       ___ Dependents Names, Years of Birth, and Social Security Numbers

       ___ Dependents Post High School Educational Expenses

       ___ Child Care Expenses for Each Dependent

       ___ Prior Year Personal Identification Number (PIN) One can be obtained at www.IRS.gov if you do not have one.

       ___ Routing Transmit Number (RTN)(For direct deposit/debit purposes)

       ___ Bank Account Number (BAN)(For direct deposit/debit purposes)

Banks & Associates consultants are uniquely qualified to help you close these difficult and complex projects. This FHA insured HUD program is targeted specifically for the multi-family, assisted living and skilled nursing facilities and is a nonrecourse program. We continue to work with developers to “carve out” a section of their development projects that will satisfy current land debt and jump start a project that otherwise has no chance of obtaining funding in the near future.  The key to this approach is our ability to structure a transaction that can close in this difficult environment.

Our newest full doc program includes loan sizes of $2,000,000 and up, fully amortizing up to 40 years and features sub 5% rates for the construction and permanent loans. In many cases, the acquisition or refinance and rehabilitation of existing properties is eligible with rates as low as 4.25%. The maximum loan to value can be up to 83.5%, but with significant equity in the land, it’s possible no new equity is required. This money is still available, even in this market, but it takes experts like us to guide the borrower through the process.

To get started the process started, please submit an executive summary of the project and Personal Financial Statements for each borrower. Of course, tax returns, rent rolls, proformas statements, and construction/re-hab budgets will also be necessary.

There is still plenty of low interest rate money available for small businesses and their owner occupied and investment properties. Our “sweet spot” for loan requests is $500,000 to $15,000,000.  Our underwriting criteria have become much more intense, but tools like our business performance analysis help both credit committees and business owners, alike. Terms are for up to 30 years with the USDA guarantee and rates can sometimes be fixed, especially within the SBA 504 structure. We can approve up to 80% financing and in many cases, as high as a CLTV of 90% with seller carry back. Credit scores as low as 650 can be approved.

Property types include owner-operated Small Manufacturing, Medical Doctor/ Offices, Automotive Services, Gas Station / Convenience Stores, Retail, Light Industrial, Mixed Use, Warehouse, and Lodging.  What’s even better is a refinance of an existing property with proven income is easy and a welcomed submission.  Acquisitions must have an experienced management team and liquidity.

The loan process is easy and painless with your Banks & Associates consultant to guide you all the way.  In today’s environment it’s a 45-60 day process.

1. 1. Preliminary submission (A complete submission is a current Tri-merge credit report, an executive summary and years personal and business tax returns.
2. 2. A conference call with the borrower
3. 3. Terms Sheet is issued reflecting preliminary loan terms
4. 4. Site Visit to meet borrowers and evaluate collateral
5. 5. Underwriting and Credit Evaluation (Borrower receives a copy of our Business Performance Analysis.  Click here for more detailed information)
6. 6. Appraisal and other third party reports
7. 7. Review and Closing.

With 2012 promising a volatile stock market, tax rates uncertain and estate tax laws facing certain review, a small businessperson needs the best professional advice he can find.  Even in a stable environment, a small business needs a core group they can count on for financial, accounting and legal advice.  Throw in any setback in the past year, like property devaluation, a divorce, death of a spouse or other threats to your business, you want a team who is looking out for you and your best interests.

As a core of suggested advisors, you should have an accountant, attorney and financial advisor.  At the very least a good estate lawyer should be weighing whether you should make moves to take advantage of the current $5 million gift-tax exclusion which is scheduled to drop to $1 million in 2013 rather than waiting until the end of 2012 to make recommendations. 

A good accountant will look at possible scenarios for future tax-law changes in advising you on tax saving moves, in addition to helping you evaluate the stability of your long-term debt and equity stack.  You accountant should also be working with your financial advisor to evaluate your “risk level” in the aftermath of the 2008-09 financial crisis to help you find at least modest growth in your portfolio.

If you’ve never formally put together a team of advisors, choosing them can seem to be a daunting task.  Just about anyone can hang out a shingle and offer advice without very little training or experience.  Insurance sales people, stock brokers and even accountants and lawyers might call themselves financial advisors but your specific needs might not fall under their area of expertise.

What credentials matter the most?  Certified Public Accountants, chartered financial planners, and chartered financial analysts have completed extensive course work and passed many hours of exams.  These designations also require work experience and additional continuing education each year.   Stockbrokers, by contrast have only have to study for licenses to sell securities.

These varying titles, in addition to training come with different obligations to you.  CPA’s, attorney’s and registered investment advisors who are paid to give advice have a fiduciary duty, or legal obligation to put the client first in making financial decisions.  Stockbrokers and other advisors have only an obligation to recommend options that are “suitable” for you, a far lesser requirement.

Questions you might ask of a potential accountant include:

1. 1.       Do you belong to professional groups requiring continuing education?
2. 2.       How will you assist me to analyze my financial statements?
3. 3.       Can you assist us with our strategic planning process?
4. 4.       What kind of experience do you have working with lenders to properly structure our debt?
5. 5.       Can you represent me in tax court, if necessary?
6. 6.       What is your audit record?
7. 7.       How well do you work with other advisors – financial planner and attorney?

In selecting a financial advisor, you might ask these questions.

1. 1.       What services do you provide?
2. 2.       How do you charge for services?
3. 3.       Will you be acting as a fiduciary?
4. 4.       How often will we talk?
5. 5.       Have you been disciplined by a professional or regulatory body?
6. 6.       What is your money management style?

When selecting an attorney, you should ask these questions.

1. 1.       How do you charge?
2. 2.       What will the total cost be?
3. 3.       Will you or your junior associate handle my matters?
4. 4.       Do you have specific expertise in (whatever your special circumstances might dictate)?
5. 5.       If you have a family owned business, ask the prospective attorney about his estate tax expertise.

At Banks & Associates, we’re prepared to assist clients put together a core group of advisors who will become your  ‘trust team’. 

To Understand Financial Statements

by Brooksher L Banks CPA

Ever wonder what underwriters look at when they analyze financial statements and a borrower’s personal financial condition? Are there parts of your financial statements you really don’t understand but were afraid to ask?  When we get ready for loan committee, we know as much (and most of the time more) about the borrower’s business financial condition as they do.

Every small business can use a tune up and an outside look at their business’ financial results. Our process analyzes 3-5 years of tax returns. From our analysis, we produce an easy to read narrative report in layman’s terms that helps a business owner understand how the credit committee looks at their loan request, but more importantly how they should be evaluating their business.  Our Performance Analysis is not only for financial professionals like underwriters, but it also helps small business execs understand financial statements in non-financial terms.

The B&A Analytical Performance Report is complete with ratio analysis, comparisons to industry peers and even expectations for future operations. The report discusses key company metrics in the areas of liquidity, profits & profit margin, sales, borrowing and asset usage. For the last five years, we’ve successfully used this tool for loan committees and our small business clients. In fact, many of them ask us to update their report annually as a part of their strategic business planning.

Another tool that is a part of the performance analysis is our ability to take a client’s assumptions and generate projections for the next five years based on those assumptions and historical performance.  Just like the analysis of historical performance, the projection analysis produces a full set of financial statements – Balance Sheet, Income Statement, Statement of Retained Earnings (or Owners Equity), and a Statement of Cash Flows.  Our spreadsheet format makes it easy to sit down with a client, in person or in an online meeting over the internet and play “What If” by making adjustments to key variables based on industry standards.

As a part of our underwriting process, we supply borrowers with this historical analysis as a part of our loan underwriting process – a $1,500 value! Projections can be time consuming and the cost will vary by business and industry based on our standard rates.  Ask us about using this tool as you prepare to apply for financing or simply as a tool to assist you to better understand your business and your financial results.

The beginning of the year is always a good time to reflect on ways to improve performance and grow your business.  In fact, one trap the small business owner falls into is failure to take time to plan, whether it involves the strategic direction of the company or the finite details of the new budget.  So whatever the excuse for not taking the time, here are 5 key things to insure 2012 will be better than last year.

Educate Yourself and Your Customer.   To stay ahead of the curve, it’s important for your company to know all there is to know about your industry and meeting your client’s needs.  Not only is it important to know about your industry, your products and your services, but you should know about your customer.  What does your company have that can make your client more efficient, effective and profitable?  Next educate yourself about your environment – the culture of your area and the idiosyncrasies of the people.  When you educate yourself on issues important to the people you are attempting to do business with, you win over many clients; when you speak with authority on your own industry as you are building these client relationships, you speak with authority, you seal the deal.  Commit yourself to attending at least two industry educational events and one community event this year.

Don’t Be Afraid To Say “No”.  Analyze your core business and know your core customers.  Even though it may be financially rewarding in the immediate future to stray from your core, it is distracting.  Not all business is good business.  Make sure you are comfortable turning down business that does not fit within your mission and core capabilities.  Many may be watching you to see if you’ve been tested and proven before they choose you – are you picking the right clients?  Saying “No” can help you build a solid reputation and result in the quality work you do.

Be Confident and Open To Change.  To grow in any industry, you must be confident in your expertise and have the nerve to tell a client that their ideas might not produce the most successful results.  Over the past three years, we’ve found many small business owners are content to doing things the way they’ve always done them and in today’s environment change has been forced on all of us.  It’s important to be able to help a client understand when their ideas or suggestions are all wrong for them and just won’t work.  Once you are confident that your ideas and creativity will produce the desired results your clients envision, you can begin to create that sense of expectation from a client that will give you the open door to advise them what works and what doesn’t for their specific situation.

Be Relevant.  Clients are the only people who must be open to change.  You must be open to change, too.  The old saying goes, “If you keep on doing what you’ve always done, you’ll keep getting what you always got”.  Don’t be afraid to depart from the status quo when your company output is not relevant to the changing needs of your clients.  Today, those demands for change can come from increased government regulations, technology changes in an ever changing digital world, or simply from the desired result of your customer.

Know Your Competition.  Whether you’re in an industry that is based on competitive bids for a product or the results you deliver from a service, knowing how you stack up against your competition is essential.  It’s important to know their strengths and weaknesses and how you match up.  This is an essential component of your strategic plan that is often forgotten when economic times get tough.  If you’ve ignored your strategic plan or it’s gotten stale, we should talk about how we can assist you and your management team get it up to date and focused.  Knowing your competition will make you stronger, better and help you grow.

DIRTFTOT-ET.  Do It Right The First Time On Time – Every Time!  It looks like my fingers were misplaced on the keyboard, but that anachronism should be the mantra for everyone in your organization from customer service to producing the product or service.  Establish defined procedures and processes for even the smallest detail or system in your company.  When you have systems, it’s easy to establish performance standards and measure the outcomes.  Being consistent with DIRTFTOT-ET will build a reputation with prospects, clients, and build repeat business that will grow you stronger.

Grow right, grow wisely and prosper this year. 

One of the most overlooked sources of temporary capital, especially in today’s market is the private loan.  At the beginning of the 4^th quarter, 2008, two of our private hedge fund clients were featured in a Wall Street Journal article.  In light of the current lending environment (which isn’t a whole lot different than three years ago), it might be good to visit some of the reasons and ways to use bridge lending.

In the article, an investor found an opportunity to purchase a vacant retail property in Brooklyn.  The problem then, as today – there’s not a bank in the country that is eager to lend on vacant property that needs more investment to start.  Eric was able to obtain a one year $2.3 million loan to pay for the $3.7 million property.  Today the building has been rehabbed, is occupied and was valued at $4.2 million when permanent financing was obtained on the income producing property.

The good news?  Private money offers these advantages:

• 50-65% LTV.  You’ll see advertisements touting “up to 75% LTV”.  That’s bait and switch, plain and simple.  Usually, that’s 75% of the Quick Sale Value of the property which can be as high as a 40% discount off the appraised value of the property, depending on the market.  In other words, realistically, it’s 50-65% of the appraised value.
• Fast Closing.  Most private loans will close within 30 calendar days.  We have two funds that can close as quickly as two weeks.
• Economic Opportunities.  Using private money allows a borrower to take advantage of bargains available in today’s real estate market.

The bad news?  Private money is going to carry an interest rate of 12-14%, plus the origination points.  Most hedge funds, trusts and even some insurance funds command a 16-22% annual return for their investors.  However, when property is purchased at an attractive price and the deal can be closed quickly, a borrower can afford to pay more for the loan.

You might think with the high return available to the lender, these loans would be easy to obtain.  One of Banks & Associates’ first engagements in 1999 was underwriting for private loans.  The principals are the same:  1) value of the collateral; 2) cash flow of the property; 3) strength of the borrower and the ability to pay in the event the property or business fails.  In today’s environment, private lenders are seeing potential loans that three years ago were being done by banks.   On average, our fund clients see more than 500 loan requests per week.  The approval rate?  Between 1 and 2%

See our Private Lending Fact Sheet in our Document Center.

Dealing With Uncertainty

While legislation passed  last December extending lower tax rates, a divided Congress leaves tax reform
at the top of the political agenda. Unfortunately, the year has passed without  any reform proposal gaining enough support to pass which makes planning for  2011 and 2012 extremely difficult.

There is a silver lining  in the cloud of uncertainty – taxpayers still find themselves enjoying relatively
favorable income, gift and estate tax rules for this year and next.

While many of the topics  we’ll discuss are generic in nature, we encourage you to contact your Banks
& Associates professional before undertaking any major tax planning  actions. We can help you structure a personalized long-term strategy that  leverages what is known in the short term and takes into account how different  proposals may affect your investment approach and individual goals.

Section 179 and Bonus Depreciation

The Section 179  depreciation deduction for qualifying assets acquired in 2011 is $500,000. The  depreciation deduction decreases dollar-for-dollar for depreciable assets  acquired for more than $2 million. The deduction is scheduled to decline to in  the next two years.

For qualified assets  acquired and placed in service during 2011, 100 percent of the cost can be  deducted in the current year using accelerated bonus depreciation. This bonus  provision declines in 2012 and is scheduled to expire at the end of 2012.

Ownership Transition

Planning in advance of a  potential exit or ownerhsip transition pays dividends both financially and in peace of mind. Coordinated planning helps you develop a comprehensive strategy  that addresses business financial planning, personal financial planning,  management succession, estate planning and ownership transition. Banks &  Associates has a team of advisors who specialize in these areas and we can  customize a plan that takes into account your business, personal and family  needs.

Credit for Employee  Health Insurance Expenses of Small Employers

Eligible small employers (generally with 10 or fewer FTE employees with wages of $25,000 or less) are
allowed a credit for 35% of certain contributions made to purchase health  insurance for their employees. The credit begins to phase out for employers with  either 11 FTE’s or an average annual per-employee wage of more than $25,000.

Pending Payroll Tax  Changes

Even at this late date  in the year, Congress and the President can’t seem to decide what to do about  the budget including the extension of the payroll tax withholding rate. This  obviously affects business bottom lines and employee’s personal cash flow. So you  can still add payroll tax changes to the uncertainty of the current budget
crisis and Social Security reform in limbo.

Planning Tips for Individuals and Families

Federal income tax rates for individuals will remain constant  from 2011 to 2012 so the decision to defer or accelerate income at the end of  2011 should be based on the best use of deductions and losses between the two
years.

• Bunch medical  expenses into tax years when they’ll exceed 7.5% of AGI

• The 15% long-term  capital gains rate has been extended thru 2012. Consider tax loss  harvesting strategies before year-end to offset to offset current year  gains or to accumulate losses to offset future gains that would be taxed  at a higher rate

• New rules have  eliminated the income recognition from cancellation of indebtedness in  some cases related to home mortgages. Consult your tax advisor before  agreeing to any loan modification

• The American  Opportunity Tax Credit was extended to 2012 for the first four  years of higher education. The credit has more liberal income limitations  and provides for a portion of the credit to be refundable

• Consider giving  appreciated property to a charity instead of cash. You’ll get a  deduction for the fair market value and avoid paying tax on the capital  gain

• You can make  year-end charitable contributions using your credit card,  but the gift must be processed and charged to the card by 12/31 to be  dedcutible

• Looming tax law  changes means getting advice from your tax CPA and  investment advisors to optimize net capital gains and take advantage of  any losses in your account