Will the Bailout Help you Get Financing???

With the new administration nearing 30 days in office many people are either fully supportive or extremely hesitant if the decisions being made on Capital Hill with fix the turmoil or just slow down the decline.  This is a very common situation with a new administration especially when such a heavy change in parties is evident.  While our financial crisis is not a common occurrence the trepidation about newly elected officials is usually very common.

Regardless of your political views or position on the past or present administrations you can admit your concern regarding the state of the US economy.  Based on the initial 1200 page stimulus package passed by the Obama administration there may be some help in the future.  Unfortunately the opinions on this package are about as far ranging as the political parties at this stage.  Many feel there is not enough being done to assist in taking the vast amount of toxic or bad debt away from institutions while others feel that the general public isn’t going to see much of a change based on the lack of tax cuts.

So to answer the question at hand!  ”Will the Bailout Help you Get Financing”?

The general answer is NO, or at least not for the time being.  Based on the overall plan and how monies will be injected into the economic centers of the United States, 2009 and the majority of 2010 will be difficult at best for traditional bank financing. Fortunately there are still many options for developers and entrepreneurs in the form of Equity backed financing and Hard money loans.  While these options may not be as attractive as the old institutional financing options these are in some cases the only options in the current market.

There is a new trend surfacing within the lending communities called the Regulation D Private Placement.  This is not a new process by any means but it is becoming far more popular than it once was.  These practices are based on Equity dilution in projects or companies thus allowing for fresh cash flow by diluting a minority amount of equity thus gaining capital to proceed with your venture.  With this said there are a few very specific things investors look for in these types of transactions.  These investors are easily unimpressed by cheap and poorly developed and executed PPM so a word of caution is in order.

In the event you chose to go the route of a Private Placement Memorandum (PPM) DO NOT look for the cheapest route to completion.  Many online companies offer PPM’s via a basic template but offer no true expertise in the matter.  When choosing a group to draft your PPM you need to look for location, experience and the ability to assist in marketing of these documents.  If you don’t remember these key points you will end up with an elementary PPM and no market to raise capital in.

While JMG Capital Partners, LLC was traditionally a debt only facility they have shifted there point of interest into Equity only financing with the occasional Mezzanine Debt and Hard Money transactions.  With offices at 110 Wall Street they are deeply entrenched into the financial forecasts, interests and condition of many US and International private investors and alternative institutions.  This allows for ease of marketing transactions and also gives the average borrower or principal the opportunity to market an otherwise unknown project to very active and high end financiers.

By popular demand! One good scenario for property purchases when there is no down payment money is probably the most asked question in my repertoire.

The truth of the matter is that hard money lenders want buyers to have money in the deal when they buy a property. There are precious few exceptions to the rule and the resulting loans are very costly. Here is an option worth considering.

If the seller and buyer are interested in working cooperatively, and the property has a good deal of equity in it, the following scenario may work.

Seller takes on an operating partner and prepares to bow out of the property by becoming a silent financial partner. The seller adds the future buyer to the deed of the property with the agreement that the new person will be the hands on manager of the property. The partners refinance the property. The silent partner takes cash out from the refinance. This serves as the new partner’s equity payment.

The operating partner “works” the property and makes the monthly loan payments. When the operating partner is ready to refinance the property, by prior agreement, the seller’s name is taken from the deed and the operating partner refinances and pays off the balance owed to the seller.

If the buyer / operating partner defaults, the seller / financial partner can, per provisions in their agreement provisions to take over the property again. In that event, the seller will have the option to remove the operating partner from the deed, take over payments for the loan, locate a new buyer and sell the property or let the property default.

When starting any enterprise or business, whether it is full-time or part-time, we all know the value of having plenty of capital (money). But I bet we both know or at least have heard of people who started with no capital who went on to make fortunes. How? You may ask.

Well, I believe there is actually something that is more valuable than capital that can lead to your entrepreneurial success. I’ll get to the point.

1. TIME.

Time is more valuable than capital. The time you set aside must not to be wasted, not to be given away. Time you set aside to be invested in an enterprise that brings value to the marketplace with the hope of making a profit. Most lenders classify that as Capital Time or Sweat Equity.  In some cases this is more valuable than cash or assets in a fledgling company.

How valuable is time? Time properly invested is worth a fortune. Time wasted can be completely devastating. Time invested can perform miracles, so you MUST invest your time wisely.

Obviously there are other very important factors such as Education, Experience and Knowledge.  I will let all of you consider these statements and hope to see your comments and additions.  After all this is a place to communicate and share with others…

An executive summary is a 1-4 paragraph explanation of what’s on your mind, what you are going to do, what you need others to do and/or what market conditions have to occur to make the whole idea a success.

Every hard money loan, business loan, proposition, etc. has an idea or scenario on which it plays, and a plan to make it happen.

Here’s what to write in your executive summary for a hard money real estate loan:

Describe the real estate you own and its current value. If you are buying, describe what you will buy, what it’s worth and state what you will pay for it.

Tell how the value has been established.

Tell how much you need to borrow from the lender and where the balance of the cost to close will come from. JMG Capital Partners and most other hard money lenders will lend up to 65% of the purchase price on commercial real estate.

For loans in this category you will be required to put up a minimum of 20% cash or other equity in your project. The balance can come from another loan, such as a seller carry back loan.

Describe what you will do with the property, how you will make money by owning it, and how you will make the monthly payments on the loan you are requesting.

Describe your exit strategy. A hard money commercial loan is a bridge loan. You will have 1-3 years to refinance it with a conventional loan.

All of these transactions can be structured into Equity financing in the event they are development projects.  Equity in most cases will allow for a longer term on repayment and also a lower rate of return.

As the holidays season approaches savvy investors and companies begin preparing for there year end books, all the while staring a new administration in the face and tensions are on the rise.

As other companies are removing debt by returning investments and returns to investors, those receiving the funds are scrambling to place those funds by year end. Regardless of the profit, the main concern for any investor is the potential for steep capital gains taxes. Needless to say they don’t only fear the tax man, but a new administration that has clearly stated their intent to raise tax brackets substantially for people making over $250,000.00 per year.

With this said, facing the grim reality of putting those earning into the stock markets or other common shelters is like playing Russian roulette. Every major global market is in complete turmoil, so all private and institutional Investment avenues are screaming for Equity or Asset backed transactions to place there monies before year end.

This market; for the observant start-up company or smart potential borrower is perfect. They should begin to quickly market there product or proposals to any investment avenue possible. There are few times when a borrower becomes in control, and that’s at year end or in the times of major market meltdown. For those of you who might not be aware, these are both happening right now…

Don’t get overly excited though. Just because its “go time” for these groups, doesn’t mean they will take unnecessary risk. So take the time to develop your funding request as these opportunities only come once a year.

In most cases, investors are looking for safe equity backed transactions they can participate in on a minimal level. These forms of transactions typically include Regulation D Private Offerings. These offerings are structured as share or unit sales of temporary equity stakes in your company until the funds have been repaid, along with the earnings over a 3-5 year time frame. 

There are 3 different rules a transaction of this type will fall under.
They are as follows:

• Rule 504 is for raises under $1,000,000.00
• Rule 505 is for raises under $5,000,000.00
• Rule 506 is for raises in excess of $5,000,000.00

Each of these rules includes different stipulations regarding the amount of sophisticated Non-Accredited investors allowed to participate in that particular funding request.

While seeking out a dealer/broker is an option, it isnt necessary as these are Private Offerings and can be structured by anyone with knowledge of this form of funding. Additionally most DB’s will charge excessive sums of up front marketing fee’s to attempt in placing your project. Occasionally, as is the case with JMG Capital Partners, LLC the only fees associated with this form of capital is the drafting expenses that can range from $10,000.00 - $30,000.00 depending on the size of the PPM and amount needed.

Despite being a highly successful form of funding, rarely will you find groups offering these services for a success fees. Frequently when a firm offers these services under this payment structure, they will work hard to place these funds, as that is the way they are compensated. So, in a nut shell if you get paid they get paid and vice versa.

Regardless of political preference or financial position, it is inevitable that not only you and I personally, but our next generation will be profoundly effected by the current condition of the Global economy and markets.

We as a society for the most part, have stood by and let everyone else make decisions about where our money goes; what its used for; and what we get in return.  Regardless if you vote Republican, Democrat, Independent, or Green there is no single party that has all the answers for the current economic free fall.

While the world stood by and pointed fingers, there own economies fell into despair on the backs of there politicians again regardless of there political beliefs. But still we stood by and let our Global policies outweigh our own personal beliefs and “Gut Feelings”.

It’s been well documented that a horrific decline in the housing globally was coming and that the world would feel the pain of an industry in peril.  Yet a large portion of us still took out loans that were un-payable if this balloon popped.  Now where are we?   We are cleaning up a mess so our children don’t have to live in a depression.  There is no President; there is no Queen, or Sheik, ruler, parliament, cabinet or congress that can fix this mess alone.  We must all rise together and work past our differences to save this world from itself.

Popularity doesn’t solve problems and experience doesn’t solve problems either.  People solve problems!  We as a people must solve this problem.  It’s ok to take risk but not at the expense of the rest of the world.