Recently, a company with 55 locations — a good solid credit tenant — was looking for space in Northeast Ohio. There were three potential locations, and in two of the cases, the landlord was not willing to spend money on tenant improvements. Therefore, the owner of the third property got the deal.
“Oftentimes, we see tenants and landlords butting heads on improvements, but really, at the end of the day, most deals get done with some sort of compromise between the parties,” says George J. Pofok, CCIM, SIOR, senior vice president at CRESCO Real Estate. “On the other hand, there also are times when landlords or tenants will kill the deal and decide financially it’s not worth pursuing.”
Smart Business spoke with Pofok about how tenant improvements are used as a negotiating tool for both landlords and tenants.
What types of tenant improvements are typically made and why?
From an industrial perspective, the typical tenant improvements are the movement of a wall or two or replacing paint and carpet, as these are things landlords have been conditioned to take care of. A couple of other considerations could be replacing any stained or damaged ceiling tiles and making sure all mechanicals are delivered in good working order. These kinds of improvements are usually done because they are low-cost items that are easy to complete and make a big impact. For instance, if you have a manufacturing operation, oftentimes guys in the shop walk over the carpet with their oily boots, which tends to wear it out quicker than it really should.
What is the difference between capital and tenant improvements?
Capital improvements are similar in nature to tenant improvements but usually are bigger building-type improvements such as replacing a roof, repaving a parking lot, or upgrading the heating and air conditioning system. Tenant improvements are often made to the interior and are more cosmetic. For example, there may be 10 private offices and the tenant moving in may only need five and an open bullpen area. An energy efficiency improvement might be replacing lighting fixtures, but if you’re going to waterless urinals, as an example, those are more capital intensive and it’s an added asset, in most people’s eyes, for the building rather than the tenant.
How should tenants negotiate to ensure the best rates on industrial leases?
If you’re an existing tenant, you have more flexibility because you have a past history with the landlord. Since being there, the roof is that much older, the parking lot is that much older and that means more leverage. When you’re a new tenant coming in, there’s less flexibility, especially for capital-intensive improvements. This, however, can depend on the credit of the tenants; obviously if you’re a Fortune 100 company the landlord knows your check is going to be good.
As a tenant, you should:
- Start the process early on. When you’re touring a property, take careful note of what the space looks like and have all your needs ready upfront first versus having to go back to a landlord again and again.
- Prioritize so you know what you’re willing to give up. For example, you might want carpet changed in all the offices, to add a couple of additional private offices and have the warehouse painted white. Maybe painting the warehouse isn’t as critical to you, but the other two items are; then one of them can be a gift back to the landlord to get what you really want.
- Know cost estimates of what you’re requesting. If you’re going to ask for too much, then the landlord may take a tougher stance from the very get-go.
Another tenant tool is to pay for improvement expenses upfront and have the landlord amortize it via free rent or reduce the base rent.
It’s important to be fair and reasonable as you’re negotiating because landlords want to feel that they get a victory. It can be something small, but as long as they feel like they won part of the battle, then they will be more receptive to working with you.
How are the current economy and market influencing negotiations?
With landlords still hungry for tenants, they want to show to their lender a higher base rate but could still spend money to keep the tenant happy with free rent or additional dollars for miscellaneous improvements. Therefore, if your landlord wants to keep a higher base rate, you can typically ask for more improvements.
Despite this, tenants need to be aware of how the market is starting to change. As manufacturing took a hit over the past few years, landlords needed to be creative to backfill spaces that hit the market as a result of the recession. Now, the market is getting to a point where it has recovered and certain product types are more difficult to find. It’s been a tenant market, but now it’s just as favorable to the landlord.
The vacancy rate has decreased significantly. Right now, it is hovering around 8.3 percent, which is extremely healthy for the overall Northeast Ohio/Cleveland market. A year ago, the vacancy rate was 9.6 percent.
Leasing rates are not changing yet. Historically, they have remained very stable and consistent. The hope is as the vacancy rate declines, property owners will start seeing a slight increase in the flat values. This situation is semi-unique to the Cleveland market. When everyone had the big boom, our boom in the Cleveland market wasn’t significant so we don’t have as far to fall. The base rates are within 5 to 10 cents of where they have been over past five years.
George J. Pofok, CCIM, SIOR, is a senior vice president at CRESCO Real Estate. Reach him at (216) 525-1469 or firstname.lastname@example.org.
Insights Real Estate is brought to you by CRESCO Real Estate
Drew Alexander is probably one of the first to admit that supermarket-anchored shopping centers are very recession-resilient. Good properties in good locations don’t hurt either, as well as good practices. But that’s not the entire story.
Alexander, the president and CEO of Weingarten Realty Investors, which dates back to his great-grandfather’s first dry goods store in Houston, knows that good people are a large part of the equation. And it was the conjunction of being a new parent as well as a manager of people that gave him the insight that there are a lot of similarities between the two roles.
“I found the two things surprisingly similar,” Alexander says. “I think you need to be as consistent and honest as you can. You need to set reasonable goals. You need to show tough love and sometimes separate some people or punish kids when they’ve done something wrong. You should be supportive when folks are down and a bit of a cheerleader when things are tough — and they have certainly been tough for the last several years.”
Is it easy being a tough-love parent/tough-love boss?
“It can be difficult, but I think the keys are leading by example of doing the right thing of working smart, thinking through things, gaining the knowledge in one’s mistake and really treating people as you would want to be treated,” he says. “I think there are a lot of similarities.”
When you have tenants such as Target, Walmart, Ross, Marshalls or TJ Maxx anchoring shopping centers, you could well expect the $542 annual revenue Weingarten received in 2011. But again, the rest of the story is the family-themed culture that has helped keep occupancy above 90 percent not only in the recent financial crisis but in the mid- to late 1980s crisis as well, when the Texas economy was devastated as the oil business crashed.
Here how Alexander imparts a family spirit at Weingarten Realty that helps drive its success with the 16 million square feet in commercial property and shopping centers it owns across the nation.
Most organizations recognize that communication is a top priority in operating a business. Meeting with your direct reports and having them cascade the information down to other levels is a very common method. But it shouldn’t be the only one.
“It is also important to spend some casual time with employees, to go to lunch with them, to have a cup of coffee with folks and to meet with them in their offices, maybe have a drink after work occasionally and hear what’s going on with them,” Alexander says.
The talk may even include some disagreements about operations. While they are eventual — you can’t expect agreements all of the time, you can learn to exercise control how you respond so you don’t make matters worse.
“Always try to walk the talk,” Alexander says. “When somebody disagrees with you and says you’re wrong, or when somebody gives you some difficult feedback or says that something isn’t working, always try not to retaliate in any way, shape or form.”
In short, the easiest answer is to control your tongue. But it may be one of the hardest things to do since you’re feeling you have to defend your opinion among feelings of resentment, frustration and anger.
“Don’t get into an argument,” Alexander says. “Maybe ask a little bit more about why they think that to really solicit other feedback. I may not always agree with it but I learned a long time ago if you want the honest feedback then you have to accept it graciously.”
Keep as much of the anger out of the conversation — this way you will not be as tempted to say anything that could be construed as hurtful.
How your business is structured will affect how it you manage it. A business with one central location is akin to a nuclear family — and a company with a headquarters and several offices is not that different from an extended family.
But the key to effectively managing either is delegating authority.
The first step, as in raising children or grooming a new manager, is that you walk before you run. So start your own informal training course for delegates.
“When you have a new manager you need to try people with a little bit of training wheels,” Alexander says. “Give them a project, see how they do. I’m a big believer that the vast majority of the time if people come to you with a proposal, they should have a recommendation for what they want to do.
“You can allow exceptions, but you should always be signposted in advance as they come in and say, ‘Look, I thought about this for a minute, and I am really struggling. I don’t have a recommendation, I just want to role play some different scenarios off you and brainstorm with you for a minute.’”
With a solid proposal in hand, the would-be manager will have covered his or her bases and can move on to the review process.
“If they signpost up front, you can be a lot more tolerant about it versus if you perceive that they are coming for you to do their job,” he says. “You need to be a big believer that you want people’s recommendation. Then you evaluate the quality of folks because obviously you don’t want to delegate the same amount of responsibility to everyone because everybody’s ability and skill sets are not the same.
“You have to take a measured approach of trying things out small and giving people more and more responsibilities; then you check with them frequently at interim status reports,” Alexander says.
The last step is to judge the talents of your potential managers after your trial runs are complete. Obviously, you should focus on the traditional qualities of a good performance but keep an open mind.
“I think work ethic is important, but in today’s world, it’s increasingly hard to even judge that on any sort of scale because in part of the communications age that we live in ... I have colleagues who are obsessive about checking e-mails over the weekend when I’ve actually said you are entitled to but you don’t have to!
“So I don’t think burning the midnight oil is even a differentiator any more because it’s just too hard to measure,” he says.
What is easier to measure is the potential manager’s proposal for his project. It should be clear what the recommendation is.
“I use the example that it’s like junior high school math,” Alexander says. “You’ve got to show your work. You have to tell why you favor making that decision. What are the key factors? Even when people come to a conclusion that is different than yours, you like to see how their thought process works.
“Then a lot of times if it is a little more of a tactical decision about how to do something, I am a big believer that if somebody has a plan to get from point A to point B that’s a little different than mine, but they feel very strongly about it, I’d rather have them work their plan that they are passionate about than work my plan because, unless, it’s sort of like a burden of proof thing, that what they are proposing is substantially wrong.”
Along with reviewing the specific proposal, you should look at how it fits into the bigger picture.
“Look at how the judgments are made, what were the factors and don’t get so hung up on the details,” he says. “I use the analogy of driving directions. There are tons of different ways to get from point A to point to B. If you want to take the scenic route because you think it’s pretty, or if somebody else wants to go on the freeway and deal with the traffic, I don’t care.”
Once you have chosen your delegates, make use of them. Assign them as much as you feel they can handle.
“If you run a pretty decentralized organization, the troops who are in the field — the folks and the COO — are your boots on the ground and make the vast majority of decisions,” Alexander says. “When it comes to major capital expenditures acquisition and new development, the CEO obviously gets involved but even then the troops are the ones who input most of the data to create the pro forma so they have a lot of input that drives the return on investment and whether or not it’s above your hurdle rates.”
The CEO may ask a lot of questions about their assumptions and method and point out some inconsistencies from other deals.
“But generally even then, they are driving it a lot,” he says. “So whether it’s your CFO or COO, you may get involved in something but you would tend to delegate a fair amount either directly or just by the nature of your processes. You would really only get involved if there are big dollars or longer-term, human resources involved, anything to do with the brand or investor relations.”
There are some differences, obviously, in terms of the unconditional love a parent has for a child. You can’t fire a child. If a worker is not performing, you have to protect the right things.
“I don’t know any CEO who likes firing people,” Alexander says. “It is something every manager recognizes that you have to do it for the good of the organization. The people who I have talked to who are so-called turnaround specialists don’t like the idea of going into an organization and eliminating a third or whatever of the workforce but they do it because they think it is necessary so that the company survives.”
The termination process is difficult but you will be doing the right thing for all the stakeholders.
“I was fortunate enough that I took over this company from my father, Stanford Alexander, and still work closely with him,” he says. “So you look back and find that a lot of the things that your father taught you as a kid are important today. As a firm, you pride yourselves on integrity and your desire to do the right thing for all your stakeholders, shareholders, retailers, associates and vendors and to take the very long-term view.”
One of the major benefits to come from instilling a family spirit in a company can be a tremendous loyalty from your associates
“This translates into some very hardworking people, who are creative and passionate, who care about the company, care about their co-worker, are very team-oriented people who help each other and are nice to each other,” Alexander says.
“By running a public company but with a little bit of the spirit of a family that cares — that loyalty will show up for you in tenure, work ethic, passion and esprit de corps.
The folks will care about the company. They have a lot of emotion and feeling toward it. You obviously will want to offer competitive salaries, have good benefit programs, a nice work environment, a lot of wellness programs, education programs and scholarships to associates’ children for college. Do a lot to hire and retain good quality people.”
Simply put, with everyone pulling in the same direction, the team will reap the benefits.
“A consultant once used the expression with me that there are basketball teams and then there are track teams,” Alexander says. “In basketball, the team wins and everybody wins. In track, it’s nice when your friend wins his or her race, but you really want to win your race.
“You really want to be more like a basketball team where everybody wins. You may be the QB gets a lot of the attention and gets asked to do the interviews, but it’s really about the whole team. If a lineman doesn’t do what he is supposed to do, then all of us are going to suffer. So we are all incented to pull in the same direction.”
How to reach: Weingarten Realty Investors, (713) 866-6000 or www.weingarten.com
The Alexander File
President and CEO
Weingarten Realty Investors
Born: Fort Worth, Texas. I go by Drew, and my real name is Andrew. But nobody other than my high school principal called me that.
Education: I started out at the Wharton School of Business at the University of Pennsylvania and did a couple of years there. Then I transferred to and graduated from the University of Texas at Austin. My degree is a bachelor of business and administration with a focus in real estate.
What was your first job?
I was about 7 years old and we had the supermarket company at the time. I worked in the stores helping customers unload their carts to be checked out. I wasn’t a carryout at the other end of the process because my mother didn’t want me in the parking lot. She thought I would get run over. So I was doing a job that doesn’t exist anymore. I helped the customers unload from their cart to the conveyor belt to be checked out. One of my other jobs in the supermarket was labeling all the prices on things.
I think I learned from that job to go to college and work in something that wasn’t so manual. Also, I think I learned the value of customer service. I got paid a whopping 10 cents an hour, but frequently, principally housewives would say, ‘Now you’re a nice young man, do you get paid?’ And I said, ‘Yes, ma’am. I get10 cents an hour.’ ‘You’re so hard-working. Here’s a quarter.’ Occasionally, I got a dollar. That was a lot of money in the early ’60s to a kid. I think I put a lot of it into baseball cards over the years.
What was the best advice you ever received?
I think that would go back to advice from my dad in terms of doing the right long-term thing and treating people as you would want to be treated.
Whom do you admire in business?
I think many of the strong leaders, Warren Buffett, Jamie Dimon, Steve Jobs. And certain parts of this are their creativity and passion although certainly not everything. Then as I mentioned before — my dad. It’s corny, but it’s the truth.
What’s your definition of business success?
It ties into the goals, and that’s where I think when you get to the end, whatever that is, having done the right term thing is a success. So clearly there are things that go into that in terms of share price and total return for shareholders, being well thought of by all the stakeholders and that would be shareholders, employees, vendors, tenants, etc., but that’s where I think if you are doing the right long-term thing, then all those other things will flow from that.
The Akron/Canton area has seen a lot of commercial real estate activity recently. The area’s industrial vacancy rate has gone down slightly, from 8.7 percent last year to 8.5 percent this year. While that rate is slightly above the Cleveland market’s 8.2 percent, it is still well below the national average of 9.7 last year and 9.2 percent this quarter. The office vacancy rate sits at 10 percent this year, up from 9.3 percent last year but still below the national rate of 12.1 percent this year.
Some of the biggest news out of the Akron/Canton area includes the expansion of Struktol. The rubber and plastics supplier is expanding its operations in the area and recently leased 97,000 square foot in Stow, in addition to its existing space in that area. Also illustrating industrial growth in the area, The Timken Co. recently moved into 28,000 square feet of additional space to expand its operations.
Smart Business spoke with Terry Coyne, SIOR, CCIM, an executive vice president with Grubb & Ellis, about real estate trends in the Akron/Canton markets.
What are the factors behind the changes in the office vacancy rate in Akron/Canton this year?
Office space is typically a lagging indicator and industrial space is a leading indicator. The region is experiencing significant occupancy by new players in the oil and gas industry. Without them, the vacancy rate would rise.
While the vacancy rate for manufacturing has remained flat from the year prior, sizable companies such as Struktol and Timken are expanding.
The increase in the office vacancy rate seems to be correlated with an jump in total square footage in the region, which increased by 268,813 square feet in the second quarter. It therefore seems that the increased vacancy rate could be due to new construction that has not yet been filled, or from companies that have moved into newly constructed buildings and vacated their previous building.
What is the news beyond what the numbers reflect in manufacturing real estate?
A lot of vacancies have been bought up. Getting someone in the large Lockheed Martin building was fortunate, but there are also some emerging trends that are leading to these numbers. First, many manufacturing companies are reshoring, meaning they are moving production from abroad back to the U.S. Second, the oil and gas industry continues to attract business. Third, many existing manufacturing buildings are being razed, which is reducing the inventory and shrinking the market for existing properties. This causes vacancy to go down and rents to increase. Although the industrial numbers appear flat, the market is improving.
In the Akron/Canton market, existing buildings are filling up with tenants. What does that say about commercial construction in the area?
It’s really very hard to get financing for the speculative construction of office buildings. The area will continue to see rents increase and vacancies decline until banks decide they will provide the loans necessary for the construction of speculative office buildings. What will likely happen is that more businesses will begin building to suit themselves. But the interest rates that make this the best case scenario are not there yet, and many companies are hampered by the amount of equity they need to get a loan, which can be near 30 percent.
The area will likely not see a substantial pace of speculative office building construction for another two and a half years. While this might not be good for construction companies, it is good for landlords who will benefit from increased occupancy and the ability to charge more for rent as the market tightens.
How is the Akron/Canton area real estate market faring compared to the nation?
Net absorption rates in the Akron/Canton area in the second quarter were 651,525 square feet for industrial properties and 25,662 square feet of office space. This year, to date, absorption for industrial properties is at 1,447,517 square feet and office properties are at 111,678 square feet.
Conversely, the industrial vacancy rates in the Akron/Canton area have improved slightly, from 8.7 percent this past year to 8.5 percent this year. In comparison, the national vacancy rate was 9.7 this past year and has shrunk to 9.2 percent this quarter.
Looking at office vacancies, the Akron/Canton saw its rate of 9.3 percent last year, grow to 10 percent this year. This opposes the trend that is being experience across the U.S., which had office vacancy rates of 12.5 percent last year that tightened to 12.1 percent this year.
How do you expect the year to finish in both office and manufacturing real estate?
I expect that you will continue to see a decent pace of absorption on the office side, but industrial absorption will slow.
In terms of new construction, we’ve seen industrial slow down and office keep its pace. There haven’t been any sizeable properties shutting down recently and there’s not a lot of unsettled market right now. In that sense, the good news is that the bad news is over. In 2010, we hit bottom and all the negative noise that appeared every day of another building shutting down has stopped.
Getting rid of any dilapidated supply — when it holds more value as a commodity than as an underlying asset — helps underlying asset values. While it can be understood that razing existing buildings might hurt because it increases the price of existing properties, pricing in this area is still extremely low. If you are looking for office space, it’s tough to find a better deal than in the Akron/Canton area.
Terry Coyne, SIOR, CCIM, is an executive vice president with Grubb & Ellis. Reach him at (216) 453-3001 or email@example.com.
Insights Real Estate is brought to you by Grubb & Ellis
Finding the necessary financing to thrive — or just survive — can be difficult for small businesses. But there are resources available to help startups and entrepreneurs compete in this market.
“SBA loans are designed for borrowers that might not qualify for conventional financing due to a number of different reasons,” says Romona J. Davis, Vice President of SBA lending with FirstMerit Bank.
Smart Business spoke with Davis about how to determine whether an SBA loan could help your business, and how to get started with the process.
What are the differences between SBA loans and conventional loans?
The main difference is that SBA loans are backed by the United States government, which provides a guarantee to the bank. SBA loans are for borrowers that might not qualify for conventional financing due to a variety of reasons, such as:
- Insufficient collateral
- A startup business or one that’s only been in existence for a short period of time
- The company is looking for a longer term on its owner-occupied commercial real estate purchase
- The borrower is in a ‘high-risk’ industry
- The borrower only wants to inject a minimum down payment
- Impending or current ownership changes with the business
- Inconsistent financial performance over the past few years
How does a lender determine if an industry is high risk?
It varies by bank. Most banks consider the restaurant industry as one that has a lot of risk associated with it. Also, when the economy changed and building contractors were negatively impacted, they became high risk.
However, being part of a high-risk industry doesn’t mean a conventional loan is impossible.
What can SBA loans be used for?
SBA loans can be used to:
- Purchase owner-occupied commercial real estate
- Buy out a business partner
- Buy a business
- Purchase machinery and equipment
- Buy a franchise
- Construct a building (the business must occupy 60 percent of the space)
- Cover working capital needs
- Refinance existing business debt
What types of businesses are eligible for SBA loans?
To qualify for SBA financing, the entity must be designated ‘for-profit.’ In addition, the business must meet certain SBA size standards, demonstrate good character, have a positive payment history on previous federal debt (no prior defaults on federal debt), possess U.S. or Legal Permanent Resident status, and show reasonable expectation of repayment.
What are the required size standards?
The SBA has developed size standards for different types of industries. Companies must meet either a maximum number of employees, maximum revenue amount or an alternative size standard to qualify as a small business.
How is ‘good character’ determined?
First, the SBA looks at the company’s credit, tax liens and any prior delinquencies with the government.
Also, the SBA always wants to know if a borrower has any criminal background, has been under indictment, is currently on probation, has ever been on probation, or has ever been charged with or arrested for any criminal offense, other than a minor motor vehicle violation.
The two ways to assess character, from the SBA’s perspective, are through personal credit and personal background.
Why might a business opt for an SBA loan instead of a conventional loan?
Businesses might opt for an SBA loan versus a conventional loan if they:
- Want a longer term on their owner-occupied commercial real estate or equipment loan
- Want a straight term and amortization versus a balloon note
- Prefer a lower down payment on their transaction
- Have a collateral shortfall
- Want to consolidate business debt into one loan that could offer a longer repayment period
- Want to buy out their business partner with a minimum equity injection
- Want to purchase a business but there’s insufficient collateral
- Desire cash flow savings due to a longer term and amortization
How can businesses get started with the loan process?
If a business is interested in an SBA loan, the first step is to contact a bank that participates in the SBA program. The banker will need to make certain that the company is eligible as indicated above. Assuming the business is eligible, the borrower would need to provide a financing package to the bank for SBA consideration.
Disclosure: All opinions expressed in this article are that of the authors or sources and do not necessarily reflect the views of FirstMerit Bank or FirstMerit Corp.
Romona J. Davis is Vice President of SBA lending for FirstMerit Bank. Reach her at (330) 996-6242 or firstname.lastname@example.org.
Insights Banking & Finance is brought to you by FirstMerit Bank
The Pension Protection Act and recently passed pension legislation amounted to hundreds of pages of regulations affecting 401(k)s and other retirement plans. The size and heft of these laws speak volumes about the complexity and difficulty of administering retirement plans.
In addition, the Department of Labor has increased the number of retirement plans that it audits. DOL statistics show an estimated 70 percent of retirement plans audited in 2009 and 2010 were fined, received penalties or had to make reimbursements for errors. During this time period, the DOL collected $1.08 billion in corrections, reinstatements and fines.
“Fortunately, business owners who provide retirement plans for their employees don’t have to digest the Act or become experts in pension administration if they simply consult a local third-party administrator,” says Brian M. Smith, Director of Sales and Consulting with Tegrit Group.
Smart Business spoke with Smith about how to utilize third-party administrators (TPAs) when trying to decide how to structure your company’s retirement plan.
How can a TPA help with retirement plans?
TPAs provide a wide range of retirement plan services for business owners, from consulting on regulatory changes and maximizing retirement plan designs to administering defined contribution and defined benefit plans. Many small and medium-sized employers lack a dedicated, in-house specialist to administer retirement plans. Working with a local TPA fills the need to have a benefits expert close at hand.
TPAs work closely with dozens of business types in a variety of industries. They understand the challenges business owners face such as rising taxes and business expenses, health care reform, retaining talented employees and more. That means your local TPA is well equipped to help you design a retirement program that meets the unique needs of your company, squeezes the most out of your benefit dollars, provides incentives for your employees and helps you accomplish your own retirement goals.
Why is this kind of assistance so important to business owners?
Running a successful business of any kind is more difficult than ever in today’s challenging economic climate. For many business owners, offering a qualified retirement plan is an ideal way to attract and retain key employees, as well as help the owners plan for their own retirement. For example, given the competitive work landscape, employer match programs are becoming more popular as tides are turning.
The issue facing many business owners is determining the type of plan that is best for their employees and themselves. Is it a defined contribution plan like a 401(k) or a defined benefit plan?
Selecting the right plan for your business is a crucial step and a third-party administrator, with expertise in plan design and administration, can help assist you in meeting your fiduciary responsibility to the plan while providing a path for your participants to achieve their retirement goals.
Has it become common for business owners to utilize TPAs to administer their retirement plans?
When you bring together years of experience implementing and serving plans, the retirement plans can be more specialized. Businesses can think more outside the box with the expertise of TPAs, as there’s no longer a check-the-box, cookie-cutter solution.
What should an employer look for when deciding on a TPA?
Before you team up with a local TPA firm, make sure you do your due diligence, as not every TPA has the same level of expertise. Ask the right questions to make sure you have a good fit, such as:
- How extensive are the TPA’s services? Does the TPA specialize in a specific niche such as 401(k) plans, or does the firm consult on a broader range of retirement benefits?
- What is the TPA’s reputation in the marketplace? Check references to determine if the TPA is easy to work with, whether or not it delivers quality service and if it designs effective retirement plans. Ask for specific case studies.
- How long has the firm been in business? How many plans and participants does it service?
- Is it willing to propose a retirement plan design for your company, at no cost, that takes into account your employee and business needs?
- How many employees does it have? Do employees have credentials or receive training from professional organizations such as the American Society of Pension Professionals and Actuaries?
If you are unaware of the TPA firms that are available locally, contact the provider of your retirement or other benefits programs for referrals. Most providers work with a nationwide network of TPAs that most likely includes some in your area.
Is a team approach or one administrator better when using a TPA for your retirement plan?
There is no right or wrong answer as it depends on the needs of the business. However, a larger TPA firm has the ability to fill more needs than one CPA. The large firm can focus on a host of services from actuarial consulting to plan design to document services. A one-person CPA firm that provides TPA work will be limited in what it can do, so these firms often focus on one piece of the business.
Brian M. Smith is the Director of Sales and Consulting for Tegrit Group’s Columbus, Ohio, office. Tegrit Group is a national leader in actuarial consulting, plan administration and technology solutions for public and private retirement plan sponsors. Reach him at (614) 458-2060 or email@example.com.
Insights Retirement Plan Services is brought to you by Tegrit Group
Credit insurance, which has been around for many years, is a custom financial tool that protects a business from losses due to insolvency or past due/slow pay from their customers.
This problem of insolvency or past due/slow pay from customers isn’t expected to stop any time soon, either. U.S. corporate default rates are expected to rise this year, as marginal companies that already refinanced debt in the last few years stumble because they didn’t reduce debt and just pushed out payment schedules, according to a USA Today article.
“This insurance product can be a cost-effective device for transferring risk — premiums are tax deductible while reductions in bad debt reserves are not,” says Cliff Baseler, vice president, Best Hoovler Insurance Services, Inc., a SeibertKeck company.
Smart Business spoke with Baseler about why the value of this insurance is consistently being demonstrated during economic financial crisis time and time again.
How does credit insurance coverage work most effectively?
If your company does business in which it extends a line of credit for merchandise orders or other accounts payable, then this insurance protects you against losses because when you extend credit to a business your own financial solvency gets tied in with that account. Coverage can apply to a single debtor or a greater spread of risk by including all of your unquestioned buyers in excess of a certain dollar amount. Annual sales of at least $1 million can make the program more cost effective.
Why should employers look into buying this type of coverage?
Business owners must be more attentive regarding the management of their accounts receivable in the face of this global economic climate. There are more business failures both domestically and internationally. This was borne out by increased worldwide demand for credit insurance across all geographies in the first quarter of 2012, according to the Global Insurance Market Quarterly Briefing. The United States saw a modest increase in demand of less than 10 percent, with the largest demand increase in Asia.
Credit insurance provides catastrophic loss protection that can be used by businesses of all sizes and by all business sectors. There are many benefits as to why a business owner will purchase this coverage. Some include:
- Increasing credit to your existing customer base and extending credit to new customers.
- Improving cash flow.
- Enhancing bank financing by increasing borrowing capacity. Banks will lend more against insured receivables.
- Reducing bad debt reserves and freeing up cash.
- Utilizing it as a risk management tool to improve business planning by elimination of unknown risk.
How does credit insurance protect you better than just looking at a customer’s payment history?
Unfortunately, payment history is not a valid predictor of default. Close to 50 percent of all payment defaults rise from stable and long-term customers. One sudden loss could have a devastating impact on you and your business. Consider that your receivables are a concentration of all your cost and profit, and in many cases, you create them based on a customer’s promise to pay. Therefore, there is a tremendous amount of risk facing your business. Credit insurance is a great tool to remove this disastrous risk from a balance sheet.
What do business owners need to know about purchasing this insurance?
The level of indemnity ranges from 80 to 100 percent depending on your credit management experience, accounts receivable portfolio and premium target. Policies are designed to fit a business owner’s need for coverage. Risk retention comes in the form of co-insurance and deductibles and helps in lowering the premium. Co-insurance is a percentage of the loss you retain on each insured account.
There are only a small handful of carriers that specialize in this type of coverage. Each will have their own risk appetite, underwriting philosophy, and method to how they structure and administer their policies.
Underwriters will research, approve and monitor the accounts you want to insure. They also will approve coverage limits on the customers you want to insure. You will want to provide underwriters with a balanced spread of risk that will offer best pricing and terms. It’s important to clarify with the underwriter your maximum terms of sale, lead times for customer orders and note any special circumstances that might require additional coverage.
You can insure the entire accounts receivable portfolio or a select number of accounts. The premium will be based on your loss history, customer credit quality, spread of risk, and deductible and co-insurance levels in the policy. Usually the premium is less than half of one percent of insured sales.
Your customers’ payment history is not a valid evaluator of their failure to pay. Having a carrier watching over your covered accounts and helping evaluate credit limits is a great advantage to a business owner’s risk management plan. Nonpayment and slow pay by your customers will weaken a company. Credit insurance can help protect a company’s biggest asset — your own business credit.
Cliff Baseler is vice president of Best Hoovler Insurance Services, Inc., a SeibertKeck company. Reach him at (330) 867-3140 or firstname.lastname@example.org.
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Women are playing an ever-increasing role in changing the economics of growth, growing businesses and jobs, and creating new opportunities for everyone. This is especially the case in economies that are slow or stagnant, where greater opportunity exists to start a business.
“Women are taking advantage of these opportunities in droves, and they’re able to grow businesses in times of slow economic changes,” says Stephanie Union, a partner and chair of Kegler, Brown, Hill & Ritter’s women-owned business area.
Many women have taken small mom-and-pop shops and grown them into successful small businesses.
“There’s a greater opportunity for women to do that today, whereas in past generations, there might not have been, and communities are benefitting from the number of jobs they create,” she says.
As women continue to progress in the professional world, mentorship programs, referrals and professional associations designed to support women business owners are increasingly important.
Smart Business spoke with Union about the unique opportunities women have today to give or receive advice that can help grow women-owned businesses.
How can women helping other women and referring business to each other be beneficial?
There’s recognition among certain successful women that you can pass on your success by referring your colleagues and friends to other female professionals. It’s amazing the number of referral groups, professional networks and organizations that provide many opportunities to get involved, a number of which encourage referrals among women. Having that camaraderie can help women succeed and gain ground in their own businesses.
There are also a number of certification programs for women-owned businesses that offer a leg up in terms of getting certain types of work from federal and state governments. For example, the Women’s Business Enterprise National Council will certify women-owned businesses, as does the Small Business Administration. The certification processes are rigorous, and companies have to prove that they are a woman-run business and that the majority of the company is controlled by a woman. The documentation and effort required to get certified is stringent, but that designation can be very beneficial for companies in certain industries.
How do the needs of women business owners differ from those of their male counterparts?
A number of women find themselves in industries traditionally dominated by their male counterparts, so finding their way among the men can be a challenge. Partnering with people who have insight into the industry can help them find comfort. Many women business owners have navigated the waters themselves and can help other women get established.
The needs of women business owners can sometimes be fulfilled more fully by fellow women. Women who are professionals generally have a better sense of what other women business owners are experiencing and what they have to face on a daily basis. That empathy can direct the way women do business together and help all of those businesses succeed and prosper.
How can women benefit from working with services that cater to women business owners?
Having ties with professional women’s groups can give someone perspective on the obstacles women deal with and how to support women going through those struggles. While the services aren’t different or better, they are provided in a way that women can appreciate more and respond to better.
There is something to be said for knowing the struggles women face and have faced. Taking these into account when giving advice can help women business owners succeed.
What issues are women business owners likely to face?
There have been historic struggles for women. While there are laws that allow women to vote or prevent discrimination, women still face struggles that are different from those that men face.
Maintaining a work/life balance is an issue for both men and women, but it’s hard when you’re a mother and working full time, considering there remain different societal demands for women than men. While conditions are changing, they haven’t fully equalized between the sexes, so daily struggles still exist. The goal is to recognize those struggles and support women by helping them find balance within the working world.
What can women do to help other women be successful professionals?
There are mentoring opportunities. Who better to understand the struggles of a woman than another woman? Some organizations and associations have mentorship programs, but, in my opinion, the best mentorships happen without much formality. It is better if the relationship develops naturally.
Natural mentorships are informal. It’s not a situation where you must meet with the woman you are mentoring four times per year and accomplish certain goals. Instead, it is a relationship that develops in which you care about the way the person you are mentoring is advancing and can offer her advice.
To be prepared to be a women business owner, you also need education. When starting your own business, there are a lot of things you need to know in terms of accounting issues and legal matters, including rules surrounding employees and hiring. You need to have a good education or surround yourself with people who have experience in those areas.
A number of women-focused associations or organizations can provide the support or connections needed to get a business up and running.
Stephanie Union is a partner and chair of Kegler, Brown, Hill & Ritter’s women-owned business area. Reach her at (614) 462-5487 or email@example.com.
Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA
If you run a small business that has had difficulties obtaining a loan, there is some good news. Preferred lenders can help businesses navigate through the U.S. Small Business Administration (SBA) loan programs to obtain financing needed for growth and expansion. The SBA loan process can be confusing, and small businesses may experience unknown challenges when applying, such as a collateral shortfall or not enough cash down payment to put into the transaction. However, preferred lenders, like community banks, can help small businesses with this process.
“We’re likely experiencing the lowest interest rates in history,” says Edward L. Wood, CTP, regional vice president of commercial lending for National Bank & Trust. “The ability to lock those rates in for a longer period makes today a compelling time to get an SBA loan.”
Smart Business spoke with Wood about SBA loans and how obtaining one could benefit your business.
What types of businesses can benefit from an SBA loan?
Typically, the SBA’s goal is assist small businesses with their growth and lending needs, rather than large corporations that do more than $100 million annually in sales. However, there are a variety of SBA rules that companies must abide by to qualify for an SBA loan. It is always recommended that the borrower find an experienced SBA lender who participates in the Preferred Lender Program (PLP) and can help you navigate the SBA requirements.
How do SBA loans differ from other loan products?
There are many advantages to SBA loans, including a lower down payment, sometimes as little as 10 percent, which is typical of two SBA programs known as 504 loans and 7A loans. You also can get extended payment terms with these loans. For example, lenders with working capital loans prefer to keep amortizations between 36 to 48 months. Under the SBA 7A guaranteed loan program, many lenders allow longer amortization periods, usually up to seven years, which provides an even greater benefit to the borrower.
Also with a SBA 7A loan, the bank is lending all of the funds for the project and the SBA provides the lender with a guarantee, generally around 75 percent of the total loan amount. These loans offer working capital to fund growth, accounts receivable and inventory.
The SBA 504 loan is geared toward equipment financing and/or owner-occupied real estate. With this type of transaction, the borrower has two loans — one with the SBA who finances 40 percent and the second with the lender who finances 50 percent. The borrower is only required to provide 10 percent equity in the project. Under the 504 program the lender maintains a first mortgage on the collateral while the SBA takes a second position. Additionally, with the SBA 504 loan, the borrower should be aware there are prepayment penalties within the first 10 years.
The effective rate for the SBA portion of the 504 loan in August 2012 was a fixed rate of 4.45 percent. The lender portion is usually handled with a five-year adjustable rate.
What is the process to obtain an SBA loan?
The process starts when a borrower contacts his or her preferred lender. The lender will assist him or her through every step of the process. The lender drives SBA 7A loans and capital lines of credit from start to finish and submits the transaction to the SBA for approval. For SBA 504 loans, the lender will also work with a third-party non-profit entity that will underwrite and submit the transaction to the SBA for approval.
To apply, simply provide the same information you would for any other type of loan. Lenders are looking for the last three years of business and personal tax returns of the guarantors and accountant-prepared financial statements covering the three previous years. A personal financial statement from each year and an aging of the business accounts receivable and payables are also needed.
Why is now a good time to apply for an SBA loan?
The uncertainty in the interest rate market makes today a compelling time to apply. Because of this uncertainty, the SBA loan becomes an incredibly viable product that could allow you to fix part of your total debt service for up to 20 years. Getting longer amortizations on working capital loans are compelling because it allows the borrower to stretch payments out over a longer period of time, thus reducing your debt service requirements.
There is also uncertainty in the market, not only in terms of where interest rates will head but also where inflation will be and the debt level the U.S. has taken on. While interest rates will rise no one can be sure when that will happen, so it is to a company’s benefit to act now.
How can working with a community bank to obtain an SBA loan be beneficial?
A community bank has the ability to better execute an approval. There are fewer people at the top involved in the approval process than at a larger bank.
Depending on the type of transaction, it could take three weeks to get an approval once the lender receives all necessary information. Community banks are well suited to obtain all the necessary information upfront, which can help avoid delays.
Edward L. Wood, CTP, is regional vice president of commercial lending and the HCDC (Hamilton County Development Corporation) 2011 lender of the year. Reach him at (800) 837-3011 or firstname.lastname@example.org.
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During the next two years, there are things that employers need to know and need to be doing to comply with the Patient Protection and Affordable Care Act.
“While this was working its way through the Supreme Court, many were holding their breath waiting to see what would happen,” says Dale R. Vlasek, a member and chair of the employee benefits practice group for McDonald Hopkins. “The decision is that it is constitutional, which means that businesses must take action.”
Smart Business spoke with Vlasek about the changes businesses need to be aware of as health care reform takes effect.
How does the ruling play out for employers?
The Supreme Court determined the individual mandate — the requirement that all U.S. citizens have health insurance — and imposing a penalty or tax on those who do not purchase insurance is constitutional. Large employers effectively face a similar mandate, called shared responsibility, or ‘pay or play,’ that goes into effect in 2014, requiring that they offer a health care package that is affordable, limits an employee’s cost sharing and provides essential benefits, or the employer must pay a penalty.
Large employers are those with 50 full-time employees who worked at least 30 hours per week during the previous year. To determine if your company fits this description you should add up all the hours worked by full- and part-time employees and divide that total by 2,080. This could show that you qualify as a company with more than 50 employees and that you must provide your employees with the opportunity to participate in your benefit package or pay a penalty.
How will the mandate affect the benefits offered?
Medical benefit packages must offer a certain level of coverage. There should be a limit on cost sharing in terms of deductibles and co-insurance, and it must be affordable, which means the amount an employer can expect an employee to pay in terms of premium costs. The way the law is written, premium costs can’t be more than 9.5 percent of an employee’s household income. That can be difficult for an employer to determine, so the IRS allows employers to work from an employee’s W-2 income statement.
If the employer chooses not to offer benefits, it will pay an excise tax that is $2,000 per year, multiplied by the number of uninsured full-time employees. The employer can, however, subtract 30 employees from the total who are uncovered, leaving it to pay penalties only on the remaining
If an employer is offering coverage that some can’t afford, those employees could get into a health care exchange or potentially be eligible for subsidies or tax credits to help pay for coverage. The employer then must pay an excise tax, but only on those who are eligible for the tax credit or
How else might existing benefit plans be impacted?
Insured plans previously had no discrimination rules from a tax perspective, so, for example, you could have a plan that only covered executives. However, health care reform changes that. You can’t be discriminatory and you may need to cover broader classifications of people. This component has been put on hold while the IRS, the Department of Labor and the Department of Health and Human Services write regulations that outline how companies must comply.
Plans that were grandfathered — or those that have been in existence since March 23, 2010 or earlier and that haven’t changed, can continue to operate as they did, even if, under the new law, they could be considered discriminatory. But as the insurance industry moves to provide better benefits and makes changes, these plans are being redesigned and companies may have a difficult time remaining grandfathered.
Will flexible savings accounts face changes?
Previously, there weren’t any limits on how much pretax money employees could defer into FSAs, but the accounts are ‘use it or lose it’ so if the employee didn’t use the benefit the employee lost it. As a result, employees had to look ahead and figure out how much they might need to spend within a year.
Starting in 2013, there is a cap of $2,500 on FSAs. Employers will need to amend their plan documents and the IRS has issued guidance that says this can be done by 2014, as long as it operated in accordance with the law in 2013.
What will change from an administrative and reporting perspective?
For 2012, employers must report on W-2 forms the cost of the health benefits being provided to an employee. Initially, this requirement is limited to employers that issued at least 250 W-2s in the prior year, but eventually all companies will need to comply. On W-2s issued for 2012, companies must put in the actual costs, and for employers that are self-insured, they are required to put in the COBRA cost. There is concern that this is the first step toward making benefits taxable or using the information to determine who should pay a penalty for lack of coverage.
Also, the law requires employers to issue a summary of benefit coverage, a four-page paper that presents key features of the plan, the benefits, cost sharing and an explanation of what it pays for in three common claims scenarios. It also highlights deductibles and copays, who to talk with for more information and a glossary of common terms or a link to a website with that information.
The best strategies for employers is to begin examining their plans to ensure that they are in compliance when the new rules take
Dale R. Vlasek is a member and chair of the employee benefits practice group for McDonald Hopkins. Reach him at (216) 348-5452 or email@example.com.
Insights Legal Affairs is brought to you by McDonald Hopkins LLC
Selling your company or merging with another company is a time-consuming process that requires meticulous attention to detail. While there are practical and necessary steps to prepare for a merger or acquisition, such as obtaining counsel, choosing an investment banker and preparing your financials for review by potential buyers, there is an emotional component as well.
“A big concern a business owner has in this situation is to prepare for the reality of letting go of something he or she has had for many years,” says Robert T. Pacholewski, vice president at MelCap Partners LLC. “You can talk about a sale and all the positives associated with it, but the reality is, it can be difficult to let go.”
He says that while it is an exciting event, there can be remorse and doubt.
“Many business owners have spent more time with their business than with their own family. Letting go of that is a hard thing.”
Smart Business spoke with Pacholewski about how to complete the M&A process, both practically and emotionally.
What can trigger the M&A decision?
One of the triggers for a seller is age and impending retirement. Another trigger is that an owner might want to leave his or her current business to start a new enterprise or look for outside investors to get additional capital infused into the business.
On the acquisition side, a business owner may be looking to buy another company to enter into new markets, to capture new technologies or products, to acquire a company’s management skill set or to gain production capabilities.
Who should business owners consult before moving forward with a merger or acquisition?
Owners should consult their most trusted advisers at the time a deal is put forward. Consulting with a trusted attorney, accountant or investment banker can help owners determine if they are ready to sell or merge. Many times, an investment banker can be brought into a situation by an owner’s trusted adviser. The investment banker can more fully vet the process and talk with the business owner about what is involved in the very emotional decision of merging or selling a business.
Also, business owners on the verge of an M&A decision might benefit greatly from talking with a close personal friend who has gone through a similar process to better understand what they are getting into from a business owner’s perspective. Most private middle-market business owners will only do this once, so they need to make sure they understand what they’re getting into. It can be exciting, but it can also be very difficult letting go.
What should be discussed and put in order before moving forward with a merger or acquisition?
In the event that your business is going through an expansion, launching a new product or entering into new markets, make sure that it has had enough time to come to fruition before deciding to sell. It could create a potential problem wherein the buyer might believe that the plan could be too difficult to complete if the sale is announced during such an event.
Furthermore, it is important to get your facilities in order. This can be simple housekeeping, such as making sure facilities are clean and putting on a coat of paint.
Also make sure your company is in compliance with all laws and regulations that govern how you do business. You don’t want any negative surprises.
Once the decision to move forward is made, what are the steps that follow until the M&A process is complete?
First, determine the goals and objectives you want to achieve through the sale process and hire an investment banker whom you expect will meet them. It is not uncommon for business owners to think their company is worth more than it actually is in the market. An investment banker will evaluate the business and present a range of value for the business. Business owners have to evaluate their goals and objectives realistically and have people around them who can help them meet their goals. A sale process can take six to 12 months to complete and it would be a major setback if expectations were unrealistic and not met.
Then put together basic information on your business, such as sales, production, customers and suppliers to create your confidential sales memorandum. This may require looking ahead two or three years and back four to five years to put all the projections and historical data together for prospective buyers.
After all the information is gathered, the investment banker will put together a group of potential buyers and market the business. Eventually, you will enter into a letter of intent with one buyer to allow that entity to complete due diligence. It typically takes 90 days to complete the transaction.
How can business owners brace employees for the change?
Usually, the sale is kept confidential from employees until the business is sold, with the exception of key managers. When communicating that the business has been sold, it is critical to talk with your employees about the process because they want to know what it means to them. For instance, do they still have a job? Both the management team and your employees are vital to your business going forward. Make sure you communicate with them at the appropriate time.
How you present the news can vary from company to company, but generally, it’s best to talk with them in a way that is consistent with your style and philosophy.
Making the companywide announcement can be very emotional. If you’ve owned and operated a business for 30 years, your employees can become like family, and it can be a very emotional conversation.
Whatever your delivery, the general message should be that a lot of careful thought and consideration went in to the sale and you’ve found the right buyer to allow the company to move forward and prosper in the future.
Robert T. Pacholewski is vice president at MelCap Partners LLC. Reach him at (330) 239-1990 or firstname.lastname@example.org.
Insights Mergers & Acquisitions is brought to you by MelCap