Taking a Break

Over the past number of years, Revitalization Partners has taken the month of August away from our semi-weekly blog.

This year, however, with the Covid-19 issues, moving from our Seattle office to coordaining working from home and making certain that we helped our clients who were also going through similar changes, it appears that the month of July got away from us as well.

We are announcing a slightly longer vacation from our blog this year and our plan is to be back in September. All of us at RP wish you and your families an enjoyable and safe summer and are looking forward to resuming our writing in September.

All the very best,
The RP Gang

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Re-engineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Real Estate Turnarounds to Consider First

 

Although it feels like an eternity, we are only three months into the coronavirus recession and most owners and lenders are still thinking in terms of “blend-and-extend”.

Nevertheless, three kinds of real estate investments need more active intervention now or they are likely to face much greater losses later.

 

 

THESE USUALLY NEED EARLY INTERVENTION

1. Hospitality Properties.

No recession or depression in the last 100 years has come so fast and so utterly stopped travel, not only in the short term for vacations and business trips, but longer-term for conferences and conventions.

Tourism towns like Ashland, Bend, Chelan and Leavenworth have already lost their shoulder seasons and are now losing the group bookings that keep them alive in the fall.

The outlook for conference hotels in downtown Seattle, Portland and at Sea-Tac is slightly less bleak. Some properties are likely to have difficulty covering not only their debt service but their general and administrative expense.

2.  Senior Housing

The second type of real estate suffering acutely is senior housing, especially assisted care homes. 

These facilities turn over about four percent of their occupants a month, but now they must convince prospective residents not only to “give up their independence” and move out of their homes but face the health threat of group living.

The break-even for many is about 75 percent occupancy, but within six months many could down to 50 percent. Smaller, more thinly capitalized companies may soon be unable to pay salaries.

3.  Land-Development Deals

There are land development deals that were already in trouble before the pandemic. 

The last two years a number of new developers and investors entered the market, overpaid for property and underestimated the length of the approvals process, often for urban infill projects in big cities, low-end lots on the metropolitan fringe and second home lot subdivisions in recreation destinations.

Being newest to the business, these developers and investors are the least able to work them out.

 

DROP FARTHER & FASTER …

In most recessions, real estate values drop farther in value and for far longer than most people expect.

While it probably makes sense to finish most projects now in construction, land deals should be liquidated as quickly as possible, since these usually lose proportionately far more of their value than more developed real estate.

 

FEWER BUYERS WITH LESS CASH …

There will be far fewer buyers with the necessary cash and operational expertise for senior housing and hotels, but their numbers, too, will drop as the recession bites deeper. 

Unless you can ride out the recession long term, act now while values are higher, and you have more options.

“Recognizing your problems early will enable you to recover more of your investment.”

That means finding skilled people you can trust to realistically identify conditions, assess what actions will immediately add value, and then manage the sale or liquidation of the property.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Emotion in Commercial Real Estate

 

There is no doubt that real estate turnarounds can be laden with high emotion and drama.

Dealing with that emotion and drama usually requires more experience and energy than all the technical challenges of real estate, no matter how good or bad the market conditions are.

But…there are tools that can be used with this social side of real estate. 

This blog post describes two that have worked in several situations involving large properties.

 

A LOT OF EMOTION …

It is important to recognize that the nature of real estate means that there is frequently a lot of emotion tied up in it.  First of all, it is tangible, and property is often a symbol of success.

The warehouse in question may be where Granddad started the family business.

The new office building was to have been the shining new company headquarters.

That high-rise apartment building was going to be the best in town.

 

ALMOST ALWAYS INVOLVES DEBT …

Second, real estate is capital intensive. 

Its development or acquisition almost always involves debt, and the equity partners are frequently family or friends who have invested on faith. 

There may be personal guarantees out to banks or lenders.

And the individual who made the loan may be fearful about losing his or her job should anything go wrong.

 

LONG AND INVOLVED PROCESS …

Third, compared with many kinds of business activity, real estate development is usually a long and involved process, one that requires progressively more time and emotion as you move through it.  

Ask someone about the progress of their project, and they probably have a rendering of it stored in the corner ready to pull out.

They might have spent a long day sitting and waiting to testify at a planning commission meeting, or have held a shockingly expensive groundbreaking event.

The marketing materials probably shine with a story yet to be realized.

 

AN UNCERTAIN FUTURE …

By the time there is need for a turnaround, all these hopes and ambitions are still present, but now the future is uncertain and holds fearful prospects.

Who wants to let go of their dream? People can feel alone and trapped.

What is offered here may sound like two very modest tools for use at the very beginning of the turn-around process, when all these emotions are at their peak, things are most uncertain, and there is not yet a path to the future.

Together, however, they begin to create that path to the future, one grounded in the past and present.

 

TWO HELPFUL TOOLS …

1. A DETAILED HISTORY:  The first is writing down a detailed history of the project, usually filling up a page or two, that provides a chronology of who did what when and with how much what money.

This might include, for example, the date and amount of the first option payment, when purchase of the property closed and with whose funds, how much was spent on planning and approvals, the cost and length of construction, and the various lenders involved.

It sounds simple but writing this history can be both useful and therapeutic.  Beyond the fact that the receiver or others will need it, this history requires a detailed sharing of information, something many that borrowers living in fear may have grown loath to do.

This tells their story, both the good and the bad, and puts different issues in perspective. This history also tells you what technical reports you can now store away not worry about.

 

2. A PROFORMA MODEL:  The second tool is a pro forma model of the sources and uses of cash for the project.

This shows, over time, where the money came or will come from (such as equity, debt, operating income and disposition), and what it has been or will be used (such as land acquisition, design, construction, leasing and loan repayment.)

Ideally, this is all one page, and probably covers somewhere between two and five years of cash flows.

 

REMOVE EMOTION …

The fact that this is a table of numbers itself takes some of the emotion out of the discussions. There is no architect at the table to defend his plan, no broker eager for a steady stream of leasing commissions.

Putting together the numbers does require the borrower and lender to quantify their assumptions about what will add value to the project, what it will be worth at various stages of completion, and how long things will take.

That, in itself, moves the discussion from the past to the future, from “Where did I make a mistake?” to “How do we move forward?”

 

EARLY STAGES …

We are now in the early stages of a recession that, according to many in real estate, we were due for a year or two ago.

Because the onset was so abrupt and the future is so uncertain, emotions are going to run higher than ever on distressed real estate.

The borrowers and lenders that can come together now and work out a strategy will have more options and will recover more than those who wait.

These tools are one way to deal with the emotions that often keep people from starting that process.

 

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Watch Out for Zombie Companies!

 

The term Zombie company was originally used by Japanese media around 1990, to describe companies with large historic debts that ultimately failed and resulted in the country’s 1990 market crash.

The definition of Zombie companies relates to businesses that are highly leveraged, and are generating sufficient cash to fund operations, however, are not able to repay their debt when due.

Their lenders and/or investors continue to support these companies by granting forbearance or by extending repayment terms in hopes that the business outlook will improve.

The real truth is, those companies are in effect insolvent, or dead, and therefore become Zombies.

 

ONE COMMON DENOMINATOR …

Zombie companies come in many forms. They can be startups funded by venture capital firms, family businesses, privately-owned companies, or companies owned by private equity firms.

While Zombies come in all shapes and sizes,
there is always one common denominator,

high debt leverage relative to cash available
to fund operations and debt service.

 

A recent article in Forbes magazine highlighted that corporate debt of large nonfinancial US companies is nearing $10 trillion and small, medium, family, and other businesses not listed in the stock exchanges carry an additional debt of $5.5 trillion.

The total of nearly $15.5 trillion, results in an average debt to equity ratio of 84%. 

A recent CNN article written prior to the COVID-19 crisis revealed that 1 out of every 8 companies in advanced world economies met the definition of a Zombie company.

 

THE COVID-19 CRISIS HAS …

Regardless of the reasons for highly-leveraged companies, the COVID-19 crisis has significantly increased the number of Zombies, although there have been no recent statistics showing how many more companies are almost dead.

The central focus here is that while the number of distressed companies has accelerated since the beginning of the year, what can and should be done to deal with this growing epidemic?

 

 

THE 1ST QUESTION TO ASK …

The first question that has to be asked is can the Zombie be resuscitated?   Can it be brought back to life? 

This question requires that the responsible fiduciaries make an assessment of the company’s viability.

In other words, is the company better off alive or dead? 

It is a common truth (at least with companies we worked with) that life-threatening problems are not always dealt with in a timely manner.

Typically, resolutions to operating problems are pushed off, in the hope that things will get better although they usually do not. This issue always compounds the problems and in today’s environment, the term “Hope is Not a Strategy” is even more relevant.

 

RESPONSIBLE PARTIES MUST ACT …

An honest assessment is required by the responsible parties to make this determination.  And an honest assessment includes a thorough and objective evaluation of the company’s near-term prospects.

When you are a Zombie, it does not help to look at the long term!  Responsible parties should also seek outside help in assessing the near term prospects, to ensure objectivity.

If, at the end of the day, the assessment reveals there are no options to revive the company, the responsible parties must look at all alternatives to maximize the return to its creditors.

Remember, when a company cannot pay its debts when due, the fiduciary responsibility shifts from the shareholders to its creditors.  Companies in this situation must act quickly as the value of the company’s assets declines rapidly.

It is also important to reach out to a firm experienced in helping responsible parties assess their situation and who can suggest alternatives for improving the return to its creditors.

If one believes a company you are affiliated with is headed towards the Zombie World, it is extremely important to evaluate options for improvement before its too late.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Most Business will Suffer and May Fail; Yours Can Survive

 

COVID-19 has already decimated stock markets around the globe. On March 16th, the Dow Jones Industrial Average fell nearly 3,000 points, the highest percentage decline since the infamous “Black Monday” crash of 1987.

While the Dow has recovered by about one-third as of this writing, it and all major U.S. indexes are still down by about one-third in the past 30 days, and the markets will likely yo-yo their way down further before stabilizing.

 

DOUBLE WHAMMY …

Ironically, and serving as a double whammy, the corona crisis is also preventing the industries most suited to benefit from the oil price war from being able to do so.

Instead, falling oil prices serve only to put additional pressure on domestic industries that benefit from (indeed, rely on) higher oil prices.

The cancellation of events and closing of businesses requiring people to gather in even modest numbers (sporting events, theater, bars and the restaurants, the list goes on) would have been enough to have a disastrous impact on businesses small and large-in very short order.

The situation is far more extreme, of course, with many communities across the United States on virtual lockdown as of the date of this article.

 

100% BUSINESS SLOWDOWN …

COVID-19 had already caused systemic interruptions to the supply chain of 75% of American companies, even before the virus had a chance to establish a real stranglehold on the health of our nation.

Businesses must enter crisis management mode as we have reached the peak of 100% business slowdown for any business not essential to treating the virus.

The fact that all this comes at a time when corporate debt ($13.5 trillion worldwide) stands at a record high isn’t exactly a good thing.

 

PERSONAL WEALTH ALSO HIT …

Moreover, given the hit to personal wealth that has already occurred in the form of stock market declines, owners of private businesses will be hard-pressed to borrow from their personal net worth to help prop up their businesses.

In the face of all this: a multi-trillion-dollar federal stimulus package, supplemented by many state, local, and private efforts, has already been announced. 

And while the response to COVID-19 begins to take shape, the question is:

Will this be enough?

While most businesses will suffer, and many will fail, yours can survive. Most will.

And, when your business does survive, it can emerge to take advantage of what by then will be a large pent up demand for goods and services of all kinds-much in the same way that the end of World War II helped to create the postwar economic expansion.

 

There are five general actions you should take immediately to position your business as one that will not only survive this crisis, but which will thrive when it is over:

1. Conserve your cash.
2. Review your insurance policies.
3. Stay informed about government stimulus programs.
4. Review burdensome contracts for provisions that will excuse your performance.
5. Don’t stick your head in the sand.

 

WE HAVE BEEN HERE BEFORE …

Whether it is a blessing or a curse, the U.S. and the world are no strangers to crisis management and coping with global economic meltdowns.

While the current financial crisis has shown signs of dwarfing the Great Recession of 2008, the important thing to keep in mind is that we have been here before and recovered- in large measure with massive government help, which is clearly already on its way.

In fact, from 2009 through 2019, the U.S. economy had rebounded from the Great Recession to reach unprecedented levels. By the turn of the last decade, the stock market was hitting one record high after the other.

The unemployment rate had fallen below 4% for the first time in 50 years as job growth averaged 178,000 jobs per month, and consumer confidence had risen nearly 50%. This is all to say that, at least on a macro level, the effects of the Great Recession have now become a thing of the past.

 

AMERICAN SELF-RELIANCE …

This will also be true of the current coronavirus crash.  American self-reliance and entrepreneurship have never met a challenge it cannot overcome. Ingenuity in the face of new hardships is the cradle of great invention.

On top of that, the rallying of governments, businesses, and individuals alike to respond in a collective manner that promotes the general welfare and greater good provides strength and reassurance that this moment is fleeting, and relief is coming.

As such, this is an opportunity to forge a new way forward as it will be those who adapt to the present circumstances, proceed responsibly, contribute to the local, national and international cause, and protect themselves from future threats who will prosper in the end.

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

We’re From the Government ………….

 

The outbreak of the COVID-19 pandemic has made a farce out of that famous saying: “We’re from the government, we’re here to help.”

And lest you believe that this blog is a rant about the President, there are enough of those to go around without our help.

But as a group of individuals that work with companies in either financial or management difficulty, we have learned that most problems can be addressed by two things: Competent Management and realistic Financial Alternatives.

 

THE ROLE OF GOVERNMENT …

The role of the federal government is to manage those things that are difficult to do at the local or state level.  

And this pandemic has certainly demonstrated that the Federal Government has proven to be grossly incompetent at the very things we not only depend on them for, but in doing the things we pay them, through our taxes to do.

Some examples:

Congress decided that the mechanism for distributing money to small business (less than 500 employees) was going to be the Small Business Administration (SBA).

And they set aside billions of dollars for the program.

One of these programs, the Economic Injury Disaster Loan program is supposed to provide small businesses running out of cash due to the pandemic “with working capital loans up to $2 million” according to the SBA website.

 

HOW DOES IT WORK?

How does it work? Let’s hear from one borrower.

“I called the SBA and I actually talked to someone who has been with them for a long time and knew what he was talking about. He explained to me why had all of the hard pulls in my credit. I was one of the original ones who sent everything in with the 2000 (application) number.  As soon as that was received, they pulled.

Then when we had to reapply, they automatically pulled again. I was told on one of many calls in that I should apply yet again which was the 3rd pull on my credit. He was able to look up my application. The one in the 3300 and saw that it was pending in queue and I should hear something by Monday. He also said that there is so many duplicates that they have to go through them to make sure they are duplicates and that is slowing them down.

Also, he told me that they are capping loans at 15,000.00 plus the grant of 10,000.00 for a total. Of $25,000.00, if you meet the requirements of the max 15,000.00 some will be lower. You do get $1000.00 per employee for the grant. He said they had to throw the “up to 2 million” out the window when they received millions of applications. He said they are working 24 hours a day to get these done.”

 

OUR CREDIT RATING …

Since, in our society, credit rating determines many things:

  • Can we buy a house or a car or rent an apartment?
  • And what will the cost of those things be?

Yet, because of sheer incompetence in establishing the program, this person’s credit rating is impacted long after this pandemic is over.  Is that really the best we can do?

Tom Sullivan, the US Chamber of Commerce vice president for small business policy wrote in an internal email:

“I do not understand the SBA’s decision to have a quiet rollout instead of admitting publicly that their disaster loan program is tapped out and Congress needs to grant them more money.”

 

MORE NEEDLESS DELAY  …

But Congress has now delayed returning to work until May4th at the earliest.

This means another multiple week delay for those businesses and employees.

And for those employees that desperately need the unemployment checks from the various state governments, another two weeks to solve the problem of the supplemental unemployment funds.  Much of the country is in long lines for food and Congress extends its vacation.  Why not?  We’re paying for it.

Throughout this pandemic we have heard from the media that states need more protective gear for their front-line personnel and for patients. 

One governor said that “it’s like being on eBay with prices going up with every bid.”  If you’re in a populous state with a large tax base, you probably have the money.  But if you’re in a smaller, rural state, how do you bid against a California or New York?

 

FIXED PRICE FOR ESSENTIAL GOODS …

During the second world war, the Federal Government fixed prices for essential goods.  Anyone could buy what they needed at a fixed price.  How hard would that have been to implement?  In today’s age of incompetent government, maybe impossible. 

Especially when the government maintains an emergency stockpile of this equipment, paid for by taxpayer dollars and a White House staff member announces that this stockpile is “theirs” not the peoples in the states.

There are any number of incompetent actions that we see on the part of both the legislative and executive branches of government. From trying to slide climate change funding into the emergency aid bill or spending $238,000 of taxpayer’s money for a trip to satisfy an ego.

And, as we are reminded, multiple times per day, this is an election year. The suggestion is that we put aside our partisan differences when voting and vote for the most competent management. Not the person with the most money for ad’s, the best sound bites or who believes like you about selected issues, but the people we, collectively we believe are the most competent managers at all levels.

 

COVID-19 DOESN’T CARE …

COVID -19 doesn’t care if you’re a Republican, Democrat or Independent. 

And if you’re one of those people, lying in a hospital bed on a ventilator, you can only hope that the rest of us elected the most competent people we can find.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.