The outlook for traditional bonds and bond funds doesn’t look great with historically low yields today, and perhaps even lower yields and values on the horizon.
“Our concern today is that people are putting a lot of money into traditional bond funds, seeing the income that these bond funds produce,” says Jim Bernard, CFA, senior vice president and director of fixed income portfolio management, as well as an investment advisor representative at Ancora Advisors LLC.
However, that income is already falling and Bernard says it is going to continue to drop significantly.
“On top of that, the net asset values of these funds will be falling as the bonds they hold move closer to maturity because values today, in many cases, are significantly higher than the face value at which the bonds will pay off,” he says.
Smart Business spoke with Bernard about how the bond market works and what that means for investors’ portfolios.
How does the traditional bond market work?
Bonds are continuously traded based on two things: the risk of the investment and the current interest rate environment. Currently, the likelihood of credit defaults is low for both corporate and government bonds. However, if a company has a history of losing money, you will want to pay a lower price for that bond or demand a higher interest rate in order to offset the risk of not getting your money back at maturity.
Interest rates and bond prices have an inverse relationship — as interest rates go down, bond prices go up. If you own a bond that pays a stated interest rate of 5 percent, due in three years, it would currently be worth more than face value to an investor because bonds maturing in three years are currently only paying 2 percent.
What do low interest rates and falling bond yields mean for investors?
Interest rates are low and have been for almost five years. They will likely stay this way for another two to five years. So the challenge is deciding whether investors should buy bonds that pay low rates of interest or put money in other places — the stock market, commodities, gold, real estate, etc.
If you bought a 15-year bond 10 years ago when interest rates were 5 percent or more, you might be happy. Unfortunately, most people tend to invest in bonds maturing within five years or sooner, and that means their bond holdings are at historically low yields.
What is the difference between owning an individual bond and a bond fund?
With individual bonds, you get the face value of your bonds back at the maturity date or call date, barring a default. In a bond fund, because it is perpetual, you never know what the future value will be.
Most investment advisers would prefer people invest in individual bonds if they have enough money to adequately diversify simply because of the added comfort of knowing what your bonds will be worth at maturity.
If you do not have enough capital to adequately diversify, or are in an instrument such as a 401(k), where individual bonds are unavailable, you may have to invest in bond funds if you want fixed-income exposure. You then must decide whether you are more concerned about the value of your fund or the income it produces.
What can we expect from bond funds in the future, and what should investors in bond funds do now?
Most individuals invest in bond funds in order to receive income, but that income has dropped dramatically as interest rates have fallen. For instance, one intermediate-term corporate bond fund has paid an average dividend yield of 5.4 percent over the past 12 months, but the current yield has already dropped to 3.3 percent. With five-year government bonds currently yielding 0.63 percent, is it not likely that the current 3.3 percent yield will be maintained.
The second reason an investor would buy a bond fund is for the net asset value of the fund. The net asset value of a bond fund typically only goes up when interest rates go down, but can interest rates go much lower, and therefore can bond prices go much higher? And even if interest rates stay flat, the net asset value will decrease as bonds within the bond fund get closer to maturity since the majority of bond prices are currently above face value.
So in general, concerning traditional bonds and bond funds, this is not a great time to be in either. If you have owned bonds or a bond fund for many years, you may be comfortable. However, for new money or money from maturing or called bonds, there are other, more attractive sectors with bond-like returns that are not as tied to interest rates. These include:
• Master limited partnerships, which pay a rate of interest through the infrastructure of the U.S. energy system, pipelines, etc.
• Certain real estate investment trusts, where income is derived from real estate projects.
• Certain sovereign bonds, which are non-U.S. government bonds and offer a way to diversify from the U.S. dollar.
• Merger arbitrage funds, which have bond return characteristics but are invested in equities.
If your bonds are still paying a good rate of interest, there is no need to be too concerned about selling as long as you are confident you are going to get your money back at maturity. However, right now may not be a good time to allocate new investments to the bond market.
Jim Bernard, CFA, is senior vice president and director of fixed income portfolio management as well as an investment advisor representative at Ancora Advisors LLC, an SEC-registered investment adviser. He is also a registered representative and a registered principal at Ancora Securities, Inc., member FINRA/SIPC. Reach him at (216) 593-5063 or firstname.lastname@example.org.
Wellness programs and initiatives are evolving as employers realize healthier employees give them a competitive edge.
“It’s an issue of creating a high-performing, competitive work force,” says Nancy Pokorny, managing consultant with Findley Davies. “Currently, many companies hang their hat on being world-class safety organizations. They know that maintaining a safe work environment is good for business. As we move forward, companies will be known as ‘healthy organizations,’ too.”
Smart Business spoke with Pokorny about the evolution of wellness programs.
How have wellness programs evolved in recent years?
In the recent past, company HR leaders or benefits staffs initiated wellness programs, but now executive teams are driving strategic wellness initiatives. We prefer ‘wellness initiatives’ because programs tend to have a beginning and an end. Initiatives are much more strategic and imply that wellness is one component of the overall business strategy.
For example, a Fortune 500 Cleveland manufacturer underwent a global HR system implementation that required a year-long, intense work schedule for members of HR, IT and project management teams. Prior to launch, project team members gathered for wellness training. They were given free access to health management tools so that they could manage their health throughout the rigorous project. The focus was not on benefits cost reduction; it was on achieving peak performance.
Additionally, employers are integrating multiple initiatives, such as wellness, benefit plan design, health and safety, and onsite clinics to improve employee health. And research supports the interconnectivity of these various initiatives.
A National Council on Compensation Insurance Inc. study shows a link between obesity and higher workers’ compensation costs, finding that obese injured workers received an average of 75 treatments for an injury versus an average of four treatments for those deemed to be nonobese.
What are the most important components of a wellness initiative?
There are three: leadership, permanent commitment to change and accountability. Let’s look at each one, starting with leadership. Too often, leaders provide verbal support, and maybe even financial support through the allocation of a wellness budget, but they have no real role in the initiative. The organization’s leaders and key influencers must have clearly stated roles, just as they would with a new sales, marketing or reorganization initiative.
Second, in order for wellness to become a permanent part of an organization’s culture, wellness should not be something you ‘do,’ it should become a part of who you are as an organization.
Research from Cornell University’s Food and Brand Lab indicates we make approximately 200 decisions daily related to food alone. For the eight to 12 hours a day an employee is at work, it provides a great opportunity to enable good decision-making. This includes food and beverage choices and areas for movement, such as open stairwells.
Finally, as with any change management process, there needs to be accountability for change. We are seeing the use of incentives for health management activities and outcomes. We recommend that these incentives apply not only to those who are enrolled in the corporate benefit plans but to all employees.
One caution about incentives — they are good tools for jumpstarting initiatives but they do not change behavior in the long term. That’s where leadership and permanent culture change come in.
How can you tell if a wellness initiative is working?
With expert help and use of a third party to protect employee privacy, there are several steps you can take to measure the impact of your wellness initiative.
- Categorize your employee population by health risk group through a health screening and measure the movement between risk categories.
- Determine the number of employees with one or more chronic conditions such as high blood pressure, high cholesterol, diabetes, etc. How many are actively managing chronic conditions through medications and lifestyle changes? Are they reversing their conditions by working with a health coach, an onsite health center or personal physician?
- Look at change in attitude toward health from year to year, via employee engagement surveys, culture surveys or wellness surveys.
- Measure the advancement of the physical work environment. Is the cafeteria or vending area seeing an increase in the sale of healthy products versus nonhealthy products?
- Analyze aggregate information from benefit programs to find changes in utilization and other patterns, such as if the percentage of employees receiving preventive care exams increases or the percentage of employees visiting the ER decreases.
By using this type of ‘wellness dashboard,’ you can determine which efforts are working and allocate resources to those making the greatest impact.
Are wellness initiatives relevant only to those companies that offer health care benefits?
No. If you focus only on the employees in your benefit plan, wellness initiatives appear to be more about saving money for the company than creating and maintaining a healthy, productive work force. Similar to the efforts in establishing a safe work environment, efforts to create a healthy work environment are here to stay. A healthy work force will outperform an unhealthy one because there is a greater energy and capacity for work.
Nancy Pokorny is a managing consultant at Findley Davies. Reach her at (216) 875-1939 or email@example.com.
Insights Human Capital is brought to you by Findley Davies Inc.
The average company spends a lot of money on printing, and often it doesn’t realize where those resources are going. By some estimates, approximately 17 percent of all documents printed out are left sitting on printers. The average employee spends about $1,000 per year on document output. And many organizations spend 1 to 3 percent of their annual revenue on imaging technology but don’t even know how many printers they actually own.
By failing to manage print output, companies are unable to identify what they are spending and where they could be saving on costs. Additionally, if IT departments are spending too much time on tasks such as replacing cartridges or fixing printers, it is not an efficient use of their time.
A managed print service (MPS) program can help businesses save money they don’t even know they are spending, while increasing flexibility and reducing stress, says Bill Nelson, vice president of Cleveland Sales at Blue Technologies.
“Everyone talks about the cost of an MPS program,” Nelson says. “However, the biggest concern for a company that manages its own printers internally should be the time it takes and the resources required to have all printers running at 100 percent efficiency. That’s time that could be used to run the daily business and focus on company initiatives.”
Smart Business spoke with Nelson about managed print service programs and how they could benefit your company.
What is a managed print service program?
A managed print service program is an end-to-end solution that provides everything a company needs to control output costs. That includes an initial volume and usage assessment, hardware redeployment and/or acquisition, paper use output that includes supplies and service through an ongoing assessment of the contract, and, as needed, optimization. Basically, it manages all of the printing done by your company. With numerous printers, employers may have no idea how many printouts they are printing each month and who has which printer.
What advantages does such a program bring?
If purchasing or the IT department is responsible for monitoring printers, that is time spent away from focusing on core competencies. A managed print service program can reduce IT support requirements by taking over the management of supplying toner and servicing printers.
A managed print service program identifies all costs so expense management is possible and allows for ongoing proactive management to ensure proper utilization of printing devices. For example, if one employee has a top-notch printer but only makes 100 prints per month, it may be worth swapping printers with someone who prints 100 pages per day. A managed print service program also alerts the program provider when supplies are low. When the toner cartridge gets to 10 percent, the print management company is automatically notified and can ship a new one.
What can companies do to prevent employees from printing so much?
With certain software, you can control how employees print. When employees press ‘print,’ the computer will let them know that a document sent to that printer will cost the company X amount, or it could automatically send the document to a lower-cost printer. Just thinking twice might keep an employee from wasteful printing, which helps your company be greener. Some companies automatically default to two-sided copies when possible.
How can businesses evaluate whether a managed print service program is right for them?
A managed print provider will conduct an initial meeting to determine if such a program would be beneficial. It will look at, for example, quantity of the printer fleet, whether your IT staff is getting calls to service printers all the time and if your inventory has toner cartridges for printers the company no longer owns.
A managed print provider will conduct an assessment where data is collected for a trial period. This assessment provides vital information about how your business is currently managing printer output and what is not being managed efficiently, similar to a managed service program for computers. The program provider manages how the ink gets on the paper in terms of cost, service and flexibility.
It’s important to remember that although the program reduces costs over time, for many business owners, it’s more about the convenience of someone else managing the printers. Companies pay their IT staff to improve their ability to meet their core business objectives. A managed print service program frees them up to do just that.
Once you’ve decided to go with a managed print service program, how does the relationship work?
After the contract is implemented, the provider conducts a walkthrough. All devices are labeled, inventory of current supplies is completed, main users are identified and the account is closely monitored. Then quarterly business reviews are conducted to continually monitor and adjust the contract as needed. Companies must be flexible to change, just as their clients’ business needs change.
By considering a managed print service program, you might find a better way to allocate resources that will help increase efficiency and decrease cost.
Bill Nelson is vice president of Cleveland Sales at Blue Technologies. Reach him at (216) 271-4800, ext. 2242 or firstname.lastname@example.org.
Insights Technology is brought to you by Blue Technologies
This past tax season, you could have filed your tax return, but then found out your return had been flagged and someone already collected a refund under your name.
“A lot of CPAs at the end of the filing season found out that a number of their clients fell victim to tax identity fraud, which significantly lengthens the time it takes for them to get legitimate refunds or fix the error,” says Michelle Mahle, CPA, director of tax at SS&G.
Smart Business spoke with Mahle about this growing fraud problem and how taxpayers can try to protect themselves.
What is happening with this type of identity fraud?
Thieves steal someone’s name and Social Security number and use it to e-file a false tax return with a refund, taking money from the IRS. The thieves use e-file because of the quick refund turnaround and often have the refund deposited to a debit card. Then, when the taxpayer e-files a legitimate tax return, there’s immediate notification that a tax return has already been filed for this Social Security number.
An employer has to issue W-2s to employees by Jan. 30, but those forms are not due to the IRS until the end of February. Most fraudulent tax returns requesting refunds are filed in January or February as soon as the e-filing season opens. At that time, the government doesn’t have the information on file to verify what the taxpayer reports. Yet the IRS continues to fall under extreme scrutiny to turn around refunds as quickly as possible.
How does tax identity fraud affect individual taxpayers?
It causes unnecessary delays to refunds, but you won’t know until you file your return and it’s rejected. If there’s a problem with your electronically filed tax return, you’ll get an immediate notification. Then the CPA or tax adviser you are working with would likely step in and deal with the IRS on your behalf. A paper return works the same way; it just takes longer for it to be processed and for the notification letter to get back to you.
It can take four to six months — probably closer to the six-month range — to resolve the issue and get a refund issued to the legitimate taxpayer. The burden of proof falls on the legitimate taxpayers to go through the trouble of proving who they are and why they are entitled to the refund. For example, one taxpayer filed in June and the IRS flagged the return as suspicious. The return consisted primarily of a large salary with a lot of withholdings, resulting in a significant tax refund. The taxpayer didn’t get the refund until around Sept. 15. Normally, with e-file, the refund cycle can be as short as 11 days.
How is tax identity fraud growing?
It’s becoming more prevalent, and the statistics every year are astounding. The IRS has issued billions of dollars in fraudulent refunds. Like credit fraud, the money is usually already spent by the time the government finds and convicts someone of the crime. Many taxpayers are caught off guard and immediately want to know their risk or exposure. CPAs and tax advisers should be warning their clients that this could happen to them.
What can taxpayers do to protect their identity from being used for tax fraud?
Even the most cautious, careful person can fall victim to this type of fraud, based on the way records are kept and maintained. Taxpayers may be doing well with protecting their credit card information, but they also have to be aware of tax identity theft and protect their Social Security number. It really is a matter of matching a name and a Social Security number, and that’s it — the address seems to be irrelevant for purposes of claiming that refund. In one instance, multiple fraudulent returns were filed with the same mailing address.
The government does require that Social Security numbers not appear on documents being sent through the mail, but that may or may not be happening. In many cases, thieves actually steal mail from mailboxes. It’s been so severe that postal workers have been mugged for information around retirement villages or communities, which is particularly prevalent in Tampa Bay and Miami, Fla. If you’re living in a retirement community, it may make sense to use a post office box. Also be conscientious of paper documentation at stores requesting credit applications or completing forms at medical facilities and how they file, share or dispose of your Social Security number. If someone needs your Social Security number for a specific purpose, perhaps write it down in a manner that can be immediately discarded.
If you can legitimately speed up the timing of your filing, you also should do so, as the fraudulent returns are generally filed early on. However, that’s not an option for a lot of taxpayers.
How is the IRS reacting?
There’s been nothing specific announced yet for this upcoming tax season, although the IRS is definitely aware of the increasing fraud and working to control it. If they come out with any provisions or changes, it will be on its website, www.irs.gov.
One way it could possibly crack down is to only allow one refund per account. The IRS also will be looking more closely at mailing addresses in the upcoming filing season and appears to have implemented an internal grading system that makes a return ‘suspicious.’ The IRS can implement things that would restrict a lot of the occurrences, but in the end, it also restricts the flexibility we have as taxpayers. So, do we want to be inconvenienced and have our affairs secure, or have the convenience of a quick, timely refund at the cost of having our affairs exposed to tax identity fraud?
Michelle Mahle, CPA, is a director of tax at SS&G’s Cleveland office. Reach her at (440) 248-8787 or MMahle@SSandG.com.
Learning how to deal with disaster during a crisis is probably not the right way to go. In the aftermath of Hurricane Sandy, employers are reminded of the importance of insurance, disaster planning and claim preparation.
“Always at a time like this, organizations who were not affected need to take a step back and ask themselves, ‘What if?’” says Neil Harrison, group managing director, Risk Control, Claims & Engineering, at Aon Risk Solutions. “We are spending a lot of time talking to organizations and helping them to say, ‘OK, what if it was us? Would we have been ready? Were we prepared?’”
Smart Business spoke with Harrison and Roland Laury, CFPS, senior risk consultant at Aon Risk Solutions, about some best practices business owners can use to help them ride out any disaster.
How did Hurricane Sandy affect the overall insurance industry?
An event like Sandy gives the insurance industry an opportunity to demonstrate why it exists. Too often, businesses look at insurance purely as a cost, but the industry is playing a role in business specific and general economic recovery. From the perspective of brokers and insurance companies, they expect to be judged in terms of their performance and how they respond to clients. There is a lot of resource pressure, as the number of claims is significant, so already busy staff is suddenly taking on increased workloads. Resource scale and leverage become key, and operational efficiency is a prerequisite for success.
It’s too early for anyone to comment on the longer-term impacts of insurance pricing or coverage availability for individual businesses or industry segments. When these events happen, almost everybody has an opinion of the cost, and those opinions vary widely. The reality is nobody knows at this early stage. Property damage, business interruption and contingent business interruption all come together to create the overall cost. In addition, just because an organization is based in St. Louis or somewhere not in Sandy’s way doesn’t mean businesses didn’t have customers, suppliers or vendors who were affected. This may indirectly affect them in terms of business interruption or contingent business interruption.
What should business owners know about their insurance policy for an event like Sandy?
There are some key things that organizations should look at. The first step is making sure you’ve got the right insurance coverage — the terms, the conditions in place, definitions of perils — for this kind of event and that you understand it. Business owners need to understand limits and exclusions. They should aim to have claims preparation coverage on the property cover, meaning there’s the opportunity to engage an expert for some of the accounting work critical to quantifying and making the claim. With this coverage in place, and with a relevant expert engaged, generally speaking, a claim is better prepared and the process runs more smoothly.
Linked to that is the need to make sure that the values at risk — asset values and business interruption values — are well understood and accurate. Too often, an organization has a claim and then is found to be underinsured or overinsured. A best practice is having an external expert work with you on assessing those values during your policy renewal process. The business interruption is particularly important because it’s far more complicated to work out in post-loss panic mode. If you think about the economy since 2008, everybody has different values at risk now than they did then. Organizations may have just continued to index link their values or sums insured.
Looking beyond insurance, what can businesses do to respond well to disasters?
The organizations that have responded well are those with business continuity plans which are well defined, kept up to date, frequently tested and broad. The plans cover not just the direct issues of building damage but also employee safety and welfare issues, supplier issues, customer issues, etc. There’s no alternative to investing the time, and probably some money, in a far-reaching business continuity plan because it gives the balance sheet the best protection possible.
Insurance is an outcome in many ways of business continuity. Take a broad look at the business, plan for every eventuality, make sure everyone knows what to do when an incident happens, have restoration firms on contract so you’re first in queue when an incident happens, and have access to generators or additional alternative power.
How can a business best submit claims if it does suffer damage?
When a significant incident hits, the company has some responsibility to mitigate the damage and the cost of the loss. Much of it is common sense, but common sense is easier to apply when it’s written down and people know what they are responsible for. Make sure that:
- Everyone knows to report the loss to a broker or insurer immediately and there are clear lines of communication.
- Immediate action is taken to minimize loss.
- You keep the documents, invoices or receipts for any vendors brought in for restoration or to provide alternative power, etc. Later, this will become a part of the insurance claim.
- You take photographs of the damage. It’s surprising how many people get everything repaired and then try to make the insurance claim without proof.
- You engage an external expert, if needed. Sometimes when a business is in trouble mode, it’s all about recovery. Outside expertise allows the business leader to talk to customers and suppliers and deal with staff, while the expert handles the more tactical, and somewhat more mundane, issues.
It’s important for businesses to have continuity planning, follow best practices for insurance, consider a claim preparation clause and ensure common sense is applied when a loss occurs. Recognize that disaster response, claim response and claim preparation are specialist technical disciplines, and many organizations find that their investments in those areas have a positive return.
Neil Harrison is the group managing director, Risk Control, Claims & Engineering, at Aon Risk Solutions. Reach him at (312) 381-5660 or email@example.com.
Roland Laury, CFPS, is a senior risk consultant with Aon Risk Solutions. Reach him at (314) 719-5120 or firstname.lastname@example.org.
Insights Risk Management is brought to you by Aon Risk Solutions
There are a number of reasons why you might want to sell or transfer your business. Some serial entrepreneurs find they like to start businesses but don’t really like to run them. Others have been around for a long time and are just getting tired or too old to stay in their role.
Some owners may have maximized the value of their company. Perhaps your personal balance sheet needs more diversification because 95 percent of your value comes from the business, so you bring in partners or sell a portion to employees, giving yourself more options and downside protection.
Whatever the reason, Norman M. Boone, founder and president of Mosaic Financial Partners Inc., says there are a number of questions to answer if you’re a business owner moving through the transition process.
“It’s really important to focus on your personal needs, both financially and emotionally,” he says.
Smart Business spoke with Boone about asking the right questions prior to a sale and how to deal with the financial and emotional issues.
What are some key factors business owners need to understand about selling or transitioning from a business?
There are six key things that they have to be thinking about and understand:
• What’s the business worth?
• Do you have a plan of who is going to come in and operate the business successfully when you are gone?
• Have you been too busy running the company to consider personal issues like your own estate plan, will and insurance?
• What do you want in terms of lifestyle? Do you want to keep running this business until you drop dead, or do you want to sell it and go onto the next business? What are your criteria and where do those triggers happen? Do you want to be working full time or part time? Do you need control of the business or not?
• If your personal finances are completely reliant on the business, what’s your extra exposure of not having diversification? If something were to happen to the business, would you and your family be OK going forward?
• What are some tax issues you could face with a sale or transition?
Why is it so important to ‘know your number’?
One of the key issues when it comes to selling a business is that people don’t know how much money they need to be able to live their life comfortably and successfully for as long as they and their spouse might live, factoring things in like medical care and Social Security. For example, if somebody spends $100,000 a year, maybe they need $2.5 million in assets to support that. If your lifestyle is more expensive, then you need more dollars, and knowing what that number is, whether it’s $2.5 million, $5 million or $15 million, is pretty important before you start to negotiate a sale.
If you sold your business for $6 million and after taxes you’re left with $4 million, you’re going to be frustrated if that’s not enough to support your lifestyle for as long as you might live. You may not be able to continue living as comfortably as you were before.
Is there a disconnect between what people need to live on and what their company will actually sell for?
As a general rule, people overestimate what a company could sell for, particularly on an after-tax basis, and underestimate how much capital they need to support their current expenses. That combination means that often people are really frustrated. They might get right to the edge of the deal, and suddenly realize, ‘Oh gee, I can’t do it on this. I need 2 million extra dollars to sell the business.’ You see deals fall through reasonably frequently because of that.
Once you know your number, you can do things to make the company more valuable. Get your accounting in good order. Minimize expenses in order to raise profitability. Grow the business in terms of sales. Have a brand that is as well known as possible. In addition, the less dependent the business is on you as an individual, the more it’s worth to somebody else, because if you’re critical and are replaced, then it’s very possible that operation could fall apart. Therefore, build in systems, processes and procedures to bring along key employees so they can continue to manage the business without skipping a heartbeat.
Why is it important to focus on what comes before selling?
If you’ve been running a business for 25 years and you’re being asked to let go, it’s not easy. You get emotionally attached to it and, as important, your identity is tied up in being the owner of that business. If you sell the business, what is your identity? What are you getting up for in the morning? This issue comes up all of the time. It’s one of the reasons why people don’t have a succession plan and why they don’t sell when they need to.
Owners need to try to think about what other things they want their life to involve, and then prepare and practice doing that before the sale. It could be getting involved in nonprofit organizations or sitting on the board of a couple of your friends’ companies. Business owners should retire to something, rather than from something. In the ideal world, the person who is selling the business is inevitably sad, but ideally, they are excited about what it is that they are going to do once they have more free time.
Norman M. Boone is founder and president of Mosaic Financial Partners Inc., which is celebrating, this year, its 25th anniversary. Reach him at (415) 788-1952 or email@example.com.
Insights Wealth Management & Family Business Consulting is brought to you by Mosaic Financial Partners
With lower lease rates and the Marcellus Shale boom, commercial real estate in the tri-state footprint is looking up. Greg Sipos, senior vice president, corporate banking manager, at First Commonwealth Bank, has been encouraged by recent commercial real estate activity in western Pennsylvania, as well as in Akron, Columbus and Youngstown, Ohio.
“When I say those names, you’re not like, ‘Wow, that’s a great place to go,’ but, you know what, it really is these days,” Sipos said. “They’ve had some real estate growth and nice projects in those markets. It’s well ahead of the rest of the country, and I’m encouraged by the amount of activity in the last six months.”
Smart Business spoke with Sipos about the state of the real estate market and how bankers are getting back to the fundamentals of lending.
How does the current commercial real estate market look?
When you look at this market, there was limited asset appreciation over the years, and the borrowers never overleveraged the way that it happened everywhere else. People built equity in their real estate by normal amortization of loans. So if they had a 15-year loan and they paid it back over 15 years, they built equity in their real estate. Western Pennsylvania has always been known for that, as opposed to the rest of U. S., where asset appreciation was due mostly to the perception of overall growth through demographics. Problems occurred because assets were overleveraged in a lot of ways. Conversely, Pittsburgh went from being one of the worst real estate markets in the country to being one of the best in the span of three years because of the steady equity growth.
The mood is very strong in this area with some game changers. The growth in the Marcellus Shale area and the oil and gas industry in western Pennsylvania has brought strength to the market through all aspects, from multifamily to the retail businesses and hospitality industry. Another thing that’s happened in the central business district, as far as Pittsburgh is concerned, is a lot of large firms headquartered in other cities realized that the rent per square foot in Pittsburgh is much more reasonable than the rent per square foot in Manhattan and other comparable markets. Companies are relocating to the central business district or to Pittsburgh in general because of favorable lease rates.
Hospitality is known as a good indicator for the economic health in commercial real estate. What is the outlook in the tri-state area?
Yes, hospitality is an indicator, and it is doing very well now. Western Pennsylvania had a lot of older product, but now a lot of newer product is coming online around Pittsburgh and in some of these smaller towns. Morningstar, a financial-data firm, reports that — at least for the next three or four years — it’s definitely an industry to lend in.
When banks make a loan for hospitality, they look at what the drivers will be — why will people be coming and staying here. A lot of the hospitality that got into trouble was in resort areas because, during recessionary periods, people tend to forgo vacation. The hotels that are successful are the ones that have many drivers. For example, is it a flagged property? It’s much easier in today’s market to get a loan for a Marriott, a Hilton, a Holiday Inn or a Choice product because of the reservation system. One hospitality loan was recently done in Latrobe, Pa., the home of professional golfer Arnold Palmer. There’s a lot of industrial around, it has a resort element because of Idlewild Park and the Laurel Highlands, it has St. Vincent College, hospitals, and it has Mr. Palmer’s name attached to it, which results in reciprocating agreements between Latrobe and Florida. So there are drivers for occupancy. You don’t want to open up a hotel where you have to bet on tourism or one industry.
How have lending practices changed, and how much emphasis is being placed on equity?
The one thing that’s different now — that hasn’t come back the whole way — is the lending rules were generally much less stringent pre-recession. Post-recession, it’s back to the fundamentals. When you want to buy something, you need to have a down payment for it and you need to have cash flow to repay it.
Banks are requiring down payments. As a business owner, when you are thinking about making that expansion or when you’re thinking about buying a new building, you need to make sure you have the right amount of equity to go into the project. The bank is no longer willing to take the equity risk it was taking pre-recession.
Having equity shows you can afford it and shows your commitment to the project. If you are able to buy real estate without putting equity into it, it’s much easier to walk away. Some people might be interpreting that as unfair, but it’s not really unfair, it’s just the way it’s always been done prior to the years leading up to the recession.
It’s important to remember there are differing ways to find equity. These include:
- Equity through government programs.
- Investors on the sidelines looking to invest.
- Personally guaranteeing loans, a practice people were always comfortable with. Borrowers have to be willing to guarantee the indebtedness, maybe by pledging other equities in other properties as collateral.
Greg Sipos is a senior vice president, corporate banking manager, at First Commonwealth Bank. Reach him at (724) 463-2556 or firstname.lastname@example.org.
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In 2012, Chief Executive rated Texas as the No. 1 state for business, while California was the worst. Both states have held their titles for eight years in a row. In the survey, based on 650 CEO responses, Texas earned high marks in business-friendly tax, regulatory environment and work force quality.
Ryan K. Robinson, president and co-owner of Signal Metal Industries Inc., says he couldn’t imagine having his manufacturing business anywhere else. A second-generation company that has been in the area for 40 years, Signal specializes in building heavy equipment and machinery designed to specification.
“Texas is surely one of the most business-friendly states in the Union,” Robinson says. “I think within Texas, the city of Irving is somewhat unique in that 70 percent of Irving’s tax base comes from businesses. So the city of Irving and the Greater Irving-Las Colinas Chamber understand that business is the driver of this community.”
Smart Business spoke with Robinson about why Irving is the best location for them, and how to create a good working relationship between your business and municipal organizations.
Why is Irving, Texas, a good location for your business and others?
First and foremost, Irving is centrally located within the country. My company builds large, heavy products that ship coast to coast and out of the deep water port of Houston Another factor is our great airport — our plant is located within 10 minutes of the Dallas/Fort Worth International Airport, one of the five busiest airports in the world.
Also, the work force in Irving is great. North Irving is a bit glitzier and is where Las Colinas is located. This, along with our new Orange Line light rail service, gives Irving the sophistication that it needs to be a power player with everyone around the country.
South Irving residents are the blue collar, hard-working folks. Therefore, we have a tremendous pool of qualified workers that we eagerly draw from. It’s a great place to have a manufacturing company, especially if you are located in the southern part of the city along with many other manufacturing companies.
Finally, the city and Greater Irving-Las Colinas Chamber of Commerce have a lot to offer any business. In Irving, there are headquarters of Fortune 500 companies, medium-sized companies like Signal Metal and a whole host of the mom-and-pop types. The city and chamber realize the value in all of them and tailor programs for the big guys, the medium guys and the small guys.
In your experience, what makes a good relationship between a manufacturing company like yours and the city or chamber of commerce?
Becoming a member of the Greater Irving-Las Colinas Chamber three years ago created the relationship, but my relationship is somewhat unique — as with all of us here in Irving — because the chamber is the economic development wing of the city of Irving.
Most cities have their own economic development department. The city of Irving does not; it is a partnership between the city and the chamber. That is one of the main reasons why Signal wanted to become a member of the chamber and why I wanted to serve on the board, because it gives me the ability to network with city managers and the mayor of Irving directly because they sit on the same board as I do.
Why is this relationship important?
Once you have a relationship with the city, you understand how the city works. A lot of members in the Irving Chamber are retail companies that sell to the public in Irving, but I don’t have a single customer in Irving. However, you always have to deal with the bureaucracy of the city when you grow — as Signal has in the past five years — and buy property, construct buildings or expand existing facilities.
Since I’ve been involved in the chamber, it’s made things much easier because I know who does what and I have a chance to visit with them. I think that gives me an advantage when it comes to getting through the red tape in a timely fashion.
Signal hasn’t grown because of its membership with the chamber, but the relationship with the chamber has facilitated that growth because the chamber has helped negotiate and make sure everything is in line, whether it be with the fire department, building permits or code enforcement.
Do you have any advice for other business owners about creating a smooth working relationship with city officials or the chamber of commerce?
My advice is to join and get involved. There’s plenty of opportunity to get involved at the Irving Chamber. Your local chamber will welcome you with open arms to serve on a committee or to just take advantage of all the mixers and networking opportunities you get as a member.
Once you get involved in the chamber, you learn more about how the city operates because city officials sit on the board. They talk about the opportunities and the successes of the city. You’re right there in the middle of it. Getting involved gets you plugged in, and then you can take it from there.
Ryan K. Robinson is president and co-owner of Signal Metal Industries Inc. Reach him at (972) 438-1022 or email@example.com. Visit the Greater Irving-Las Colinas Chamber of Commerce at www.irvingchamber.com.
Many employers feel they have no control over the health care events of their employee population, seeing themselves as victims rather than informed consumers. However, it’s important to understand there are alternative solutions outside of the “insurance” box options when choosing a health plan for employees.
“As an employer, whether you have 10 employees or 500 employees, there is a whole host of new products and concepts that may make some sense for you — that you really need to explore,” says Mark Haegele, director, sales and account management, at HealthLink.
These options, including small group self-funding, captives, exchanges and co-ops, are growing as the health care industry rapidly changes, based on improved data analysis and the drive to keep overall health care costs down.
Smart Business spoke with Haegele about how these out-of-the-box health plan options work and what advantages they can bring.
What options are available for smaller employers who want to self-fund?
There are a host of new programs under a self-funded environment for employers with 10 or more employees. The 15-life employers may never have thought these options were available, but that’s not the case anymore. Self-funded employers can avoid premium taxes and state-issued mandates, while getting away from insurance company risk and profit. The employer has additional freedom to structure its health plan and can receive more claim information to better manage the health of the employee population, and therefore lower costs. Self-funding continues to be of interest to employers.
How do captives work to some employers’ advantage?
Small employers, with help from third-party claims administrators or benefit consultants, join forces to set up their own captives or use a cell in an established captive to cover risk above a self-insured retention. It’s usually made up of similar-sized employers, not necessarily similar in industry-type. For example, a 50-life employer would take the risk up to $50,000 for each member in the health plan. The captive, getting contributions from all employers, takes the risk from $50,000 to $250,000. The re-insurance carrier would risk all costs over $250,000.
By boosting retentions and pooling risks with other employers — who typically agree to put in wellness, disease management and other programs to lower claims costs — employers hope to keep increases in health insurance costs more in check. Also, all contributions to the captive, such as the $50,000 to $250,000 in the example, are tax-free. Finally, by pooling risks, participating employers can hold on to profits — if premiums exceed claims and other costs — rather than surrendering profits to a commercial insurer, as with a fully insured program. Many employers are looking at captives and starting to understand the advantages.
How are employers exploring the use of health care exchanges, both public and private?
Exchanges are new organizations set up to create a more organized and competitive market for buying health insurance. They offer a choice of health plans, certify participating plans and provide information to help consumers better understand options. Private exchanges are beginning to pop up, and in 2014 government-run exchanges will come on line.
Like a cafeteria plan, the consumer has a menu of insurance alternatives, such as five different insurance companies and six different plans, for one rate. While this creates the ultimate choice, exchanges may not be cheaper. Exchanges take away an insurance company’s ability to decline, drawing bad risk like those with major health problems. Many national insurance carriers say when public exchanges start, commercial population premiums will increase by 40 percent.
Private exchanges may be able use their advantages over public ones to lower costs. Even though they cannot decline, they have more control over who is coming in and can make it less attractive for bad risk through higher prices or benefits. Also, public exchanges must take subsidized members — uninsured with income under a certain threshold — who are likely more of a bad-risk population.
Employers are determining whether to continue to offer a health plan or just pay the penalty and send employees to purchase health care off the exchanges. It’s not as simple as it seems — although an employer may pay $8,000 per employee per year to offer a health plan and the penalty is only $2,000 per employee, typically employees demand higher wages when not receiving benefits. Retaining and attracting key employees could be why employers offer benefits in the first place. There are also tax implications with the decision to terminate, including extra taxes. One model found that Company X with 10,030 employees, where 3,000 highly paid employees purchase health care no matter the cost, paid $26 million more to terminate its health plan rather than raise the employee premium.
What role do co-ops play with alternative health plan solutions?
Health insurance purchasing cooperatives allow small businesses and municipalities to band together to negotiate for improved health insurance coverage for employees. The California Health Care Foundation found that under the right circumstances pools can meet cost and coverage goals and expand insurance choices, but it depends on the cohesiveness of a pool’s members and the market in which it operates.
Whatever health plan alternative you find fits your company best, employers do have options outside of the big box. You can get away from typical insurance companies.
Mark Haegele is a director, sales and account management, at HealthLink. Reach him at (314) 753-2100 or firstname.lastname@example.org.
Training really sets a foundation for your staff as to what you’re trying to get accomplished — your goals and visions. In addition, it gives employees an idea as to what’s in the future, because as an employee goes through the interview and training process, he or she wants to know what he or she gains from taking the position.
“Specifically in Houston, there are so many competitors here that if we don’t have a good training program in place — if we don’t have a good development program in place — we can lose some of our good talent to our competitors,” says Jeremy Wilcomb, the operations manager at The Daniel Group.
Smart Business spoke with Wilcomb about some best practices to follow when implementing an employee training and development program.
Why might some employers hesitate to put formal training or employee development in place?
Maybe in the past, you’ve hired experienced employees or didn’t have the manpower to put forth a formal training program or dedicate anyone to training employees. You just trusted that those you hired had enough experience to develop themselves. You might hesitate because of the time and effort that goes into putting a program in place. With any company, you want to see an instant return on your investment, and that isn’t always clear with a training and development program.
Also, employees sometimes have the tendency to hop to the next best paycheck, so it’s hard for companies — small companies specifically — to put a lot of money into training or development with the fear that trained employee will inevitably leave. However, that’s why it’s so important to set the standard up front with employee training, career development and constant education throughout the course of an employee’s employment. It will help the employee feel more valued and assist with retention.
What training and development opportunities should employers make available to employees?
Industry-specific training is always good to have, whether employees have been in the industry for a long period of time or are new to the industry. Make the training specific to their job so they are constantly getting educated about changes. That constant training will help keep them up to speed and potentially allow them to think ahead of the curve.
Even if it’s just little tidbits here and there, you can try to do some sort of continuing education quarterly. A lot of the continuing education is very minimal in cost — maybe someone comes up with a new idea that you can share. As long as someone is taking some sort of nugget away from a training session, you can consider it to be successful.
What type of training you should implement depends on the employee and situation. A lot of companies do online training. It can be inexpensive and really effective, but there’s no one-on-one interaction and it’s hard to ask questions. It’s more of an information dump, which works with busy schedules and provides people time outside of the workplace to continually educate themselves. With open forum topic training, there’s a dialog that is created between the trainee and the trainer so you can dive a little bit deeper into a particular topic. There are also webinars, which always open up to questions at the end.
You can create a combination that works for you. For example, it’s great to have some sort of roundtable or open forum training quarterly, with other supplemental training as necessary.
How should you deal with the cost while ensuring employees are making the most of the training?
There’s never a perfect science to that. However, you can have anyone who undertakes training write up an overview of what they learned — what they took away from it, what they liked, what they didn’t like. This can help you decide whether it was worth the cost. If you’re sending employees to a conference, which is expensive, that’s always the big question: Is it worth the cost, and which employees are ‘A players’ who can get the most out of it?
You should set up goals and parameters that you want your staff to meet, while budgeting additional training costs for new employees up front. As long as they are bringing some sort of piece out of any type of training and using it in the field to some success, the cost often will justify the means.
What are some common mistakes employers make when creating an employee training and development plan?
Some of the common mistakes include reading too much into it and putting too much information in it, or being too vague by rushing through it and saying, ‘Hey, here’s a pamphlet. Go get ’em, tiger.’ It’s like training your kids; there’s that medium level that you need to have to make sure that it’s comprehensible and that they can retain the information, while bringing in different inserts into the ongoing training. Another mistake is if there’s no followup.
The plan should have a small overview, a table of contents, as well as go over company values and all of the pertinent information of whatever area they are in. Then later, you can do the ongoing education and training and key in on specific points of their position. This keeps them from information overload.
Jeremy Wilcomb is the operations manager at The Daniel Group. Reach him at (713) 932-9313 or email@example.com.
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