The deal that Citi reached with Treasury and the IRS is a potential disaster.  I don’t know about you, but if I was in a position to seek a way to avoid taxation during a share transfer, I would certainly ask my tax attorneys to see if we can use this as precedence.

Forget the amount that they just gave up (primarily so that Citi could freely pay its year end bonuses out), this could cost many billions in the future.

The federal government quietly agreed to forgo billions of dollars in potential tax payments from Citigroup as part of the deal announced this week to wean the company from the massive taxpayer bailout that helped it survive the financial crisis.

via U.S. gave up billions in tax money in deal for Citigroup’s bailout repayment – washingtonpost.com.

Today, I spoke with a blue collar worker in his mid-thirties. He was asking about a small pet services business and wanted to know if he was getting a good deal. During our conversation, we realized the business owner is simply asking to much for the business. So, at one point, I asked him how much he had to invest. “8.8 million dollars,” he responded.

He is considering buying a business for about $3o0,000 and expects to cash flow about $65,000. That’s if he and his wife each put in 40 hours a week!

What would you do? I responded by asking if he knew how much 3% of 8.8 million was. He is a blue collar worker and probably earns about $40,000. He come upon 8.8 million in inheritance and wants to know what to do. Can you imagine? Anyway, I told him that 3% of 8.8 million dollars is $264,000. The reason I told him that is because if he puts his money in an annual interest bearing account and gets 3% interest, he can take $264,000 every year and NEVER touch the principal. In 400 years, he’d still have 8.8 million dollars. If he got 7% interest, the numbers get silly to the tune of $616,000 annually. If he takes only $250,000 and banks the rest of the $616,000, His 8.8 million turns into over $45,000,000 in 20 years. Remember, he is still taking home $250,000 annually!

For some of you, $250,000 isn’t enough to live on. For him, he’s in his mid 30′s and has gotten used to living on $40-$70K a year (wifes income added). At a minimum, it’s an almost 4x increase in annual income.

I advised him to sit on the money for awhile. I hope he doesn’t do anything hasty…like buying a 40 hour pain in the butt pet services company so he can add an extra $3-4K monthly to his $50 million he’ll have by the time he’s 55.

10% of all US homes are in foreclosure!  That is simply staggering!

US foreclosure filings will hit 3.9M in 2009, bringing the 3-year total to 10% of all US homes.

Foreclosure heat map

via Foreclosure Thursday – The Stealth Stimulus | Phil’s Stock World.

According to my commercial real estate broker, leasing commercial real estate involves giving free months of rent, allowing for a build-out or build-out allowance, and also paying for utilities?! My broker tells me that it is customary to offer several months free rent here in Middle Tennessee. I am going to call on a close personal friend to help me with the minimal build-out required and will probably trade some web services for his labor. I do remember reading something about “triple net” leases and how triple net refers to the payment of utilities by the real estate owner.  The extra stuff I was not aware of. I own an office condo and have an almost $1,400 monthly mortgage payment. The “rentable” square footage is 750 square feet.

This is not how I pictured it would go. I figured I would lease the space for an amount OVER the monthly expenses and make a profit…even if it was $5 a month.  At the least, I thought I would break even. For those of you considering an investment in commercial real estate, make sure you take this into consideration. I realize it is one example but the commercial real estate environment is in tough shape.

I have a person interested in leasing the space for 3 years at between $20-$22.50 per square foot. If the deal goes down like my commercial real estate agent has advised me, then I will be losing money on this property every month. Welcome to the new world of commercial real estate. This is not a good deal. But, it is far better than paying all the expenses myself. I have had this property on the market for over a year and only one person has looked at the property. 2 people have looked at leasing it. Talk about no action. This should make you think long and hard about commercial real estate and the potential impact on our economy. Be very cautious.

I will update this post as things happen.

This deal flies in the face of my continued rant that commercial real estate is in trouble… or does it?  Simon could be one of the solid players in commercial real estate.  Having the ability to issue shares for a part of this transaction is a big deal.  They only need cover costs until the economy rebounds.  If they paid pricing based upon current metrics, they can make this work.

Ahh… to be a buyer when everyone else NEEDS to sell.  Speaking of that, did you see that the “W” Hotel went for $2 million plus assumption of liabilities?  Dubai’s trouble is another’s gain.

Simon Property Group Inc. said Tuesday it will buy the outlet shopping centers owned by Prime Outlets Acquisition Co., solidifying its position as the nation’s largest public real estate company.

via Simon Property to buy Prime Outlets for $700M : 24 Hour Business : The Buffalo News.

The AIG saga is almost funny.  I say almost because there are far too many US tax dollars being used like Monopoly money.  I feel that the government pay restrictions are a bit ridiculous (who has the say, who picks the arbitrary amount, etc), but it looks like the expected uproar over this issue is coming.

The government has their hands full with AIG.  They need to superstar employees to generate enough cash to give the appearance that a payback is possible.  Without them, the whole company could come crashing down.   This is going to get worse each and every quarter.

Five high-ranking executives at American International Group Inc. said last week they were prepared to quit if their compensation is cut significantly by the insurer's government overseers, according to people familiar with the matter.

via Fresh Pay Skirmish Erupts at AIG – WSJ.com.

In my opinion, commercial real estate is an area that has yet to feel the fallout from the economy.

We can brush the jobless recovery news under the rug or paint a pretty picture based upon the horrific comps from a year ago, but commercial real estate developments are struggling.

Looking for a way to play the downside?  Consider SRS.

Dangerous Time To Own Hotel Stocks According To Top Ranked Equity Analyst – Yahoo! Finance.

We have covered quite a bit of AIG news on BobandScott.com since the bailout (AIG story history).  Frankly, I am still stunned at the levels that AIG trades at.  The is a public entity with negative book value and a giant mountain of debt to pay down.

In July, there was a growing speculation, that AIG was essentially used as a vehicle to pay down other entities with rather strong ties to the decision makers.

http://www.bobandscott.com/market-news/was-the-aig-bailout-a-goldman-bailout-by-proxy/

As more of the facts come to light, it becomes clear that the AIG bailout was paying out at levels that were unnecessary.  The payouts were to people rather close to the Fed and those in power.

On the question of whether this payout was what the report describes as a “backdoor bailout” of A.I.G.’s counterparties, Mr. Barofsky concluded: “The very design of the federal assistance to A.I.G. was that tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties.” The report noted that this was money the banks might not otherwise have received had A.I.G. gone belly-up.

via Fair Game – Revisiting a Fed Waltz With A.I.G. – NYTimes.com.

Recently, I’ve met with a couple business owners who had what they believed to be very solid buyers ready to purchase their businesses only to have each of the deals go sour. These weren’t “pie in the sky” buyers who just expressed interest. These were buyers who did all the due diligence and, in one case, even had check issued. The buyer actually showed the seller the cashiers check he had for the down payment. The documents were all in place. The work of the attorneys were done. The parties just had to close the deals. Then, in both cases, both deals fell apart.

The oldest saying in business sales goes something like this: “it’s never a deal/sale until you have the check.” Unfortunately, for business owners, its not that easy to just say, “oh well, we’ll get the next one” like salespeople can do.

Unfortunately, emotions run high and, once the buyer gets really serious, business owners start to mentally transition to the next chapter of life. Money is, in their minds at least, already being spent. Trips might be planned. The spouse may be really counting on this next chapter of life. Whatever the reasons, the emotional disconnect between the business owner and his/her business is really tough to reverse. Once the business owner has mentally “jumped ship” it’s really hard to get back on the boat. The seas of business can be rough. Business owners work hard to beat the odds and create businesses worth buying. The buyer is found and everything seems to be in place. Then, the business owner mentally jumps ship. The business still functions but the owner is floating away from it. The ships starts to sail away and the business owner begins to watch. There may be involvement, but it’s only by force of habit. The passion and emotion is going and there is little being done to stop it.

As a business owner, you’ll eventually be faced with this predicament. What will you do? Will you fight the urge to spend the proceeds from the sale of your business…before the sale is closed? Will you be “optimistic” and believe this IS the buyer who will purchase your business. Or, will you learn from the above deals gone wrong? Will you keep your head down and keep working until the day the business is closed? Will you stay emotionally and mentally involved?

Until you’re there, the questions are easy to answer. Once faced with the situation, however, it’s much harder. Percentages say there is an 80-90% chance the deal will close if agreements are finalized. Above are two painful reminders of why you need to stay connected to your business until the deal closes…and the check is in your hand (or better yet, is cleared in your bank account).

————————————————————————————

Scott Hill
Peer Business Group
“Helping our Peers Buy and Sell Small Businesses”
http://www.peerbusinessgroup.com

The housing market is far from recovery.  It is too easy for someone who is underwater to decide it is time for a fresh start.  BK!  I am afraid the stigma of bankruptcy might go away. The mindset might just become “If GM can do it, why can’t I.”.  Well, you don’t have billions in taxpayer dollars to play with.

One in Four Borrowers Is Underwater – WSJ.com.