One of the standard documents we have in our SBA application kit is a personal family budget. We think it is important when someone is buying or starting a business to see what their family expenses are in comparison to the income sources they will have from that business and other sources after they purchase the business.
Recently, I met with the seller and potential buyer of a business to discuss the possible financing of the sale. The transaction would also involve some additional expenses in relocating the existing business. After meeting, I suggested they revise the operating budget for the business to realistic figures.
After that was completed, I told the buyers to then prepare an accurate family budget, not one that unrealistically cuts all expenses to the bone, but one that is representative of actual living expenses they have historically incurred. I told them the budget needs to be realistic. Don’t forget about the cost of fixing the car, buying clothes for the kids, or an occasional time to eat out.
A week later I received a call from the potential buyers. After they completed their budget, they discovered the business could not provide enough money to support their family. The business would require that one would work full time and another at least part time in order to be successful. They thanked me for helping them see the financial reality that was hidden by their excitement and dreams.
I encourage everyone to complete a personal family budget who is purchasing or starting a business. Sometimes the best positive answer you can get is to be able to say no to an opportunity.
Beware of Taxi Medallions
A story in Bloomberg today has a headline “Taxi Medallion Prices Are Plummeting, Endangering Loans.” In a recent study by Capital One of its $690MM in taxi medallions, 81% are in risk of default. Currently, more than half of these loans are non-performing.
BankUnited told investors in November that 59% of its tax medallion loans are under collateralized. Of these nearly 95% of the taxi loans were to New York City borrowers. The distressed taxi industry is feeling the pressure of ride sharing services like Uber and Lyft. Uber became the preferable mode of transportation for business travelers in the fourth quarter 2016, taking 52% of ground transportation business according to Certify. Rental cars accounted for 33% of travel and taxis were below 15%. Lyft doubled its share from 2 to 4% in the past year.
On the last business trip I took, I took a taxi and also ordered an Uber. I found the Uber was cheaper and the driver much more friendly. She also waited for me when I ran to get food at In-N-Out!
For the lender, if you do not have taxi medallion loans in your portfolio, beware of any new medallion opportunity. If you are unfortunately to have some of these, prepare for the possibility of some write downs and restructuring.
Secondary Market Multi-Family Mortgages
Pactola has formed a partnership with one of the largest producers of secondary market mortgages on apartments and multi-family housing. These are placed in the market with Freddie and Fannie. Products offer locked rates for 5-10 years or longer. Rates are tied to the underlying US Treasury notes with a spread that varies with different thresholds for LTVs and DSCRs.
Last week, a qualifying 10 year fixed rate conventional loan could yield 4.50% at an 80% LTV maximum with a minimum DSCR of 1.25x. This product may be able to help you provide some financing for your member or expand your horizon to other projects in your community. Let us know if we can help.