Need Continuing Education Credits? MEREDA’s 2017 Annual Spring Conference has them!

MEREDA’s Annual Spring Conference – ‘YIMBY’ism: YES in my Backyard – Why Development is Good

Construction Photo from Lucas Royalty Free

In recent years, many American cities and towns have witnessed a renaissance, with destination cities in particular seeing dramatically increased interest.  Typically, the impacts of such demand are felt on a regional scale.  From San Francisco to Portland and beyond, a degree of pressure corresponding to this renewed interest in city life has been placed on communities to build in unprecedented ways. With the rise in popularity of living in urban areas, opinions about how such places should develop are also increasing.

Recognizing the crippling effect of NIMBY, or “not in my backyard”, ways of thinking on housing prices, economic stability and general diversity of communities, some forward-thinking activists have begun to affirmatively make a case for growth and development.  

Coined “yes in my backyard”, or YIMBY, this movement is an overt counterargument to oppositional mindsets–and it’s gaining traction quickly.  In 2016, the first-ever YIMBY conference was held in Boulder Colorado, shining a national spotlight on an often-silent perspective that it’s actually good for cities to grow.  The movement encompasses a variety of vantage points which lead to this conclusion, from those grounded in environmental concerns to social equality and housing prices, and is far from an industry-led lobbying effort.  As such, YIMBYism may represent the beginnings of a fundamental shift in the way a broad range of Americans thinks about growth and its associated elements.

MEREDA is pleased to welcome Jesse Kanson-Benanav -a Boston-area pioneer in the YIMBY movement who has been instrumental as a leader on the front lines of this potential sea change in the conversation about development-for a discussion about its present status and implications for the future.  His perspective will be augmented by a panel of local professionals who will anchor this national trend in local context.  Attendees can expect to gain insight into the near future of community conversations about development, and what it means for the real estate industry more broadly.

Join us on May 18th for what is sure to be an eye-opening and informational event!

Meet our Local Experts:

  • Moderator: Elizabeth Boepple, BCM Environmental & Land Law
  • Jim Brady, Brady Enterprises
  • Jeff Levine, City of Portland
  • Dana Totman, Avesta Housing
  • Patrick Venne, Redwood Development Consulting

EVENT DETAILS

Thursday, May 18, 2017

Registration | Exhibits:   

12:00 PM – 1:00 PM

Program:  

1:00 PM – 5:00 PM

Networking:  

5:00 PM – 6:00 PM

DoubleTree by Hilton

363 Maine Mall Road, South Portland, ME

REGISTERING FOR THIS EVENT

Registration Fees before May 11th* (per person):

  • Members: $85.00
  • Non-Members: $105.00
  • Non-Profit Rate: $55.00
  • Students: FREE**
  • Municipal Officials & Employees: FREE**
  • Legislators & Agency Employees: FREE**

* Prices increase by $15 after May 11th

** MEREDA is pleased to provide subsidized admission for students and municipal officials. Call MEREDA at (207) 874-0801 for details.

CONTINUING EDUCATION CREDITS 

This course has been approved for 3.00 hours of Broker, Legal, Architect and Appraiser Continuing Education Credits.

For more information or to register, please visit www.mereda.org

MEREDA’s Annual Spring Conference is sponsored by NBT Bank, PDT Architects, ReVision Energy, AAA Energy Co., Pierce Atwood, Mainebiz, Onyx Owl, Sevee & Maher Engineers, People’s United Bank and Verrill Dana

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Challenges for Marijuana Businesses and their Vendors

by Gretchen L. Jones, Shareholder and Chair, Business Law Practice Group at Eaton Peabody

While Maine has legalized marijuana for both medical and recreational use, the conflict between state legalization and federal criminal prohibition creates challenges for marijuana businesses and their vendors.

Under the federal Controlled Substances Act, 21 USC §§ 801 et seq., it is a federal criminal offense to manufacture, distribute or dispense marijuana.  Therefore, a marijuana business operating legally within the state is nonetheless committing a federal crime.

Knowingly engaging in transactions which involve monetary proceeds derived from violations of the Controlled Substances Act is also a federal criminal offense.  18 USC §§ 1956; 1957.  Therefore, a business that provides goods or services to a marijuana business, even if it is operating legally within the state, and knowingly accepts proceeds from the marijuana business in payment for those goods and services is likewise committing a federal crime.

In 2009, the U.S. Department of Justice issued the first of a series of Memos to prosecutors in states where the manufacture, distribution or dispensation of marijuana for medical reasons is legal.  This Memo, called the “Ogden Memo”, states generally that while prosecution of “significant traffickers” of marijuana is a “core priority” of the Justice Department, pursuit of that priority “should not focus federal resources in your states on individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.”  However, the Ogden Memo also specifically cautions that states cannot authorize violations of federal law and that state legalization is not a defense to a charge of a federal criminal violation.

In 2011, a second memo, called the “Cole Memo”, issued from the Justice Department clarifying that the Odgen Memo was not intended to provide a shield again prosecuting persons who are in the business of cultivating, distributing or selling marijuana, or those who facilitate such activities, even if those activities are legal under state law.

In 2013, a second Cole Memo issued which expands on prior Memos in response to states’ legalization of marijuana for recreational use.  The Cole Memo II provides a list of 8 specific priorities of the Justice Department and advises that in jurisdictions with “strong and effective regulatory and enforcement systems . . . conduct in compliance with those laws and regulations are less likely to threaten the federal priorities,” suggesting that marijuana businesses whose activities are appropriately regulated under and comport with State law should not be the subject of federal criminal prosecution.

Finally, in 2014, a third Cole Memo issued which addresses marijuana-related financial crimes.  This final Memo states in general that “it may not be appropriate” to prosecute persons who conduct financial transactions with marijuana businesses if those businesses are not in violation of State law or any of the Cole Memo II priorities.

Reading the Memos as a whole indicates that Justice Department 1) is not interested in prosecuting sick people or their caregivers (Ogden and Cole I); 2) wants and expects states which have legalized marijuana to take regulatory enforcement seriously (Cole II); and 3) is providing somewhat of a safe harbor for the transaction of business with marijuana businesses (Cole Memo III).

The challenges remain, however, because none of the Memos provide a defense to a federal criminal prosecution; they are merely guidance to prosecutors, and the Justice Department can amend or revoke them at any time.

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How to speed up the Commercial Real Estate Appraisal process

by Mark L. Plourde, MAI, Maine Valuation Company

When the parties of interest in a commercial real estate transaction finally reach agreement, and financing is a component of the deal, why does it then take so long to get a commercial real estate appraisal report completed?  The simple answer is there are many obstacles to overcome in the valuation process for credible results. Let’s review some of the all-too-common pitfalls that can add unnecessary delays to completing an appraisal.

First, regulations require that a “financial institution” must be the Client of the Appraiser for all commercial real estate loans in excess of $250,000. Acting on behalf of their borrower, financial institutions usually solicit proposals from several appraisers to find the best fit in terms of delivery time of an acceptable appraisal report and at the most reasonable fee. In this process, the financial institution needs to clearly describe the characteristics of the property to the appraiser to obtain a reliable time/fee quote. Minor mistakes made in this initial step can easily cause delays, and if not corrected, can become a major obstacle in underwriting after work has been completed. So, step one is to accurately describe the property characteristics and scope of work to the appraiser.

Second, even though the borrower typically provides information to the lender in the application process, such information is not provided by the lender directly to the appraiser. The appraiser is usually instructed to request all necessary information directly from the contact person.  Too often, when the appraiser reaches out to the contact person given, that person is not ready to provide the information in a timely fashion.  In fact, sometimes the contact person given by the lender is the buyer (not the broker or the seller). This causes delays in that the buyer has no history with the property to answer questions effectively, and may only have some of the necessary information.  Access to inspect the property itself may be delayed for a week or more while the contact person gets back from travels or notifies all tenants, and/or gathers all the requested information (e.g., leases, expense history, plans/specs, etc.). So, step two is to be ready to respond and provide the information and access.

Third, the due diligence process of finding and confirming current market data gets bogged down when participants do not return calls or Emails, and/or factual information on such transactions is kept confidential for whatever reason(s). Appraisers are bound by professional ethics and strict regulations that require confidentiality, so sharing such data when asked should not be the problem that it is at times. When financial institutions review our reports in the underwriting process, they will seek clarifications and revisions related to such data and analyses in support of the final appraisal report that they will lend on. So, step three is to share comp data.

Finally, if the appraisal assignment includes an “as complete” opinion, such as when renovations or new construction are involved, delays in obtaining final plans, specifications, project costs, time table for completion, etc. are often significant reasons why delays occur.  If only preliminary plans/specs/costs are available, and these are subject to change, a series of delays/updates can occur which invariably puts the appraiser’s schedule in conflict with promised delivery dates on other projects that make it difficult to stay on track.

In closing, appraisers today don’t have the luxury of working on only one project at a time. We must commit to ever shorter delivery times to land assignments in this faster paced business environment. Estimates have to be made as to how long it will take to complete an assignment. Other promised project delivery dates can overlap into the mix if the current assignment stalls for any reason(s).   Appraisers are paid a flat fee, not on a contingency fee basis, and are thus already motivated to complete more appraisals in order to earn more money.  Appraisers, users of appraisal services, and market participants would benefit with a higher volume of better quality appraisal reports being delivered in a timely fashion. To that end, these are some of the common pitfalls that can delay the completion of a commercial real estate appraisal, and may be avoided.

Mark L. Plourde, MAI is the Managing Partner of Maine Valuation Company and a MEREDA member since 1997.  Maine Valuation Company provides unbiased professional opinions of value on commercial real estate along with appraisal review services throughout Maine.  www.mainevaluation.com

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2017 Greater Portland, Maine Industrial Market Snapshot

by Justin Lamontagne, CCIM, Partner | Broker, NAI The Dunham Group

A “healthy” market is a catchy and common term to describe the current state of the Greater Portland industrial sector. But our experience suggests that the market is only healthy for a select few, primarily landlords and sellers.

For the sixth consecutive year, vacancy rates have dropped. In fact, last year, I called the 3.38% vacancy rate “remarkably” low. Today, that number has dropped a full 100 basis points to 2.32%, which I would call simply “inhibiting”. Throughout the year, we worked with buyers and tenants who struggled to find suitable relocation and growth opportunities. Multiple offers and off-market sales became common, which further frustrated end-users. We coached clients to remain patient, flexible and communicative in this fluid and competitive market.

Accordingly, the limited inventory drastically increased both lease rates and sales pricing for industrial style space. Sale price trends, in particular, deserve a closer look. In 2011, at the tail end of the recession, Class A & B industrial buildings were selling in the $40/sf range. Sales were almost exclusively going to owner-user businesses who were bullish enough to bet the economy would turn. Today, those businesses are competing with a smaller inventory pool, and against investors looking to diversify their portfolios. Quality industrial buildings are now averaging in the high-$50/sf range and we have seen peak pricing at $70-80/sf.

The bright side, and a “healthy” sign of market conditions, is the recent resurgence in new construction, adding much needed inventory. And that trend will continue into 2017 as speculative industrial projects are being built and marketed in Saco, Gorham, Scarborough and South Portland. I expect that over 150,000 SF will be added to our inventory in 2017.  That means busy contractors, architects, engineers, brokers, attorneys, bankers, etc.

New projects do, of course, require higher lease rates, which the market is starting to support.  I predict lease rates will continue to climb for at least another year or two. And, the added inventory will finally slow our plummeting vacancy rates. An important caveat to this prediction is the still unknown impact of recreational cannabis cultivation and retail sales. Anecdotally, our industrial clients still prefer to buy existing buildings when possible. We have advised them to be ready to jump when opportunity arises and be willing to pay a premium in order to win a deal. Therefore, I predict sales price per square foot will again rise, and the gap between existing and new construction costs will continue to shrink.

So, is this a healthy market? It depends on who is asking! On behalf of all us at NAI The Dunham Group, thank you. I hope you find the data discussed herein helpful as it pertains to your particular real estate holdings and business goals.

Originally published as part of NAI The Dunham Group’s Greater Portland Industrial Market Survey, January 2017, http://www.dunham-group.com/uploads/industrial-market-survey-2017_web.pdf 

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MEREDA’s Morning Menu Breakfast Event – The State of Senior Living In Maine

breakfast-logo-for-press-releases-social-mediaThe nature in which we address the care and housing of our seniors has evolved in recent years.  Developers, architects, builders, and healthcare providers have all seen the shift in the way we care for Maine seniors makes a drastic, positive impact on the senior residents, their families and the staff.  Maine has some unique challenges when it comes to providing for its’ aging population and it’s important that we respond by promoting safety, dignity, respect, choice and support for our older citizens.

Join MEREDA for breakfast on Wednesday April 26, 2017 from 7:30 – 9:00 AM at the Lunt Auditorium at OceanView in Falmouth as we discuss this sensitive, important topic.  We will also discuss the financial implications for this housing market and take a closer look at a few local facilities around Maine.

About the Panel:

Rebecca Dillon holds a passion for senior living design. As a Principal at Gawron Turgeon Architects, she provides sensitive solutions to designing for the aging population while seeing architecture as an exciting problem-solving process. Rebecca is a Registered Architect having earned her Bachelor of Architecture from Boston Architectural College. She is registered in the States of Maine, Massachusetts and Illinois, a member of the AIA and NCARB and LEED AP BD+C certified.   Rebecca’s level of expertise in health care and senior environments is extremely extensive. With over two decades of experience, she has created healing and homelike settings for assisted living, skilled nursing, nursing care, memory care, independent living, active adult living, adult daycare and hospice care; and her projects have earned numerous accolades and awards.

Bill Shanahan is President of Northern New England Housing Investment Fund (NNEHIF).  NNEHIF is a private, nonprofit corporation that specializes in tax credit syndication and offers consulting services to affordable housing developers in Maine and New Hampshire.  Bill is the Treasurer and serves on the Board of MEREDA, is Board Chair for the Maine Affordable Housing Coalition (MAHC), is on the Governing Board of Housing Action New Hampshire (HANH), and is the Vice President of National Association of State and Local Equity Funds (NASLEF).  Bill serves on the Board of the Genesis Community Loan Fund, a CDFI that provides financial resources for the creation and preservation of affordable housing and other community development activities and is on the Board of The Park Danforth.

Chris Wasileski has been working for Sea Coast Management Company for 10 years, primarily on Real Estate Development project management, approvals, and design-build construction.  Sea Coast Management develops, owns and operates OceanView at Falmouth and Highland Green in Topsham.  Chris’s team on the Falmouth Schools Redevelopment project at OceanView received a 2014 MEREDA “Notable Project” award, and OceanView also received the 2017 Eco Maine “Top Business Leadership” award.

Chris has a background in Political Science with a focus on Environmental Politics, Energy Policy, and National Security as it relates to national resources.  Chris completed his MA in Political Science from the University of New Hampshire in 2010, and was one of two students selected to participate in a Pilot, Independent Study Project on Sustainable Politics and Policy.  Chris’s research and political interests have led to a focus on Clean Energy and Energy Efficiency in his career in Real Estate Development primarily in the Senior Housing Industry.

Registering for this Event:

MEREDA Member: $45 each  | Non – Member: $55 each

Register After April 19:  Member: $55 each  |  Non-Member $65 each

Your RSVP is requested by April 19. Payment is expected at the time of registration. No refunds will be granted to anyone who registers, but fails to attend or who cancels after April 19.

This MEREDA “Morning Menu” Breakfast Event is Sponsored by Norway Savings Bank, Drummond & Drummond and OceanView at Falmouth

Visit www.mereda.org for more information and to register.

 

 

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Save the Date: MEREDA’s Annual Spring Conference – ‘YIMBY’ism: YES in my Backyard – Why Development is Good

MEREDA’s Annual Spring Conference – ‘YIMBY’ism: YES in my Backyard – Why Development is Good

Construction Photo from Lucas Royalty Free

In recent years, many American cities and towns have witnessed a renaissance, with destination cities in particular seeing dramatically increased interest.  Typically, the impacts of such demand are felt on a regional scale.  From San Francisco to Portland and beyond, a degree of pressure corresponding to this renewed interest in city life has been placed on communities to build in unprecedented ways. With the rise in popularity of living in urban areas, opinions about how such places should develop are also increasing.

Recognizing the crippling effect of NIMBY, or “not in my backyard”, ways of thinking on housing prices, economic stability and general diversity of communities, some forward-thinking activists have begun to affirmatively make a case for growth and development.  

Coined “yes in my backyard”, or YIMBY, this movement is an overt counterargument to oppositional mindsets–and it’s gaining traction quickly.  In 2016, the first-ever YIMBY conference was held in Boulder Colorado, shining a national spotlight on an often-silent perspective that it’s actually good for cities to grow.  The movement encompasses a variety of vantage points which lead to this conclusion, from those grounded in environmental concerns to social equality and housing prices, and is far from an industry-led lobbying effort.  As such, YIMBYism may represent the beginnings of a fundamental shift in the way a broad range of Americans thinks about growth and its associated elements.

MEREDA is pleased to welcome Jesse Kanson-Benanav -a Boston-area pioneer in the YIMBY movement who has been instrumental as a leader on the front lines of this potential sea change in the conversation about development-for a discussion about its present status and implications for the future.  His perspective will be augmented by a panel of local professionals who will anchor this national trend in local context.  Attendees can expect to gain insight into the near future of community conversations about development, and what it means for the real estate industry more broadly.

Join us on May 18th for what is sure to be an eye-opening and informational event!

Meet our Local Experts:

  • Moderator: Elizabeth Boepple, BCM Environmental & Land Law
  • Jim Brady, Brady Enterprises
  • Jeff Levine, City of Portland
  • Dana Totman, Avesta Housing
  • Patrick Venne, Redwood Development Consulting

EVENT DETAILS

Thursday, May 18, 2017

Registration | Exhibits:   

12:00 PM – 1:00 PM

Program:  

1:00 PM – 5:00 PM

Networking:  

5:00 PM – 6:00 PM

DoubleTree by Hilton

363 Maine Mall Road, South Portland, ME

REGISTERING FOR THIS EVENT

Registration Fees before May 11th* (per person):

  • Members: $85.00
  • Non-Members: $105.00
  • Non-Profit Rate: $55.00
  • Students: FREE**
  • Municipal Officials & Employees: FREE**
  • Legislators & Agency Employees: FREE**

* Prices increase by $15 after May 11th

** MEREDA is pleased to provide subsidized admission for students and municipal officials. Call MEREDA at (207) 874-0801 for details.

CONTINUING EDUCATION CREDITS 

This course has been approved for 3.00 hours of Broker, Legal, Architect and Appraiser Continuing Education Credits.

For more information or to register, please visit www.mereda.org

MEREDA’s Annual Spring Conference is sponsored by NBT Bank, PDT Architects, ReVision Energy, AAA Energy Co., Pierce Atwood, Mainebiz, Onyx Owl, Sevee & Maher Engineers, People’s United Bank and Verrill Dana

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Succession Planning with an Employee Stock Ownership Plan

by Eric D. Altholz, Vice Chair of Verrill Dana’s Employee Benefits and Executive Compensation Group and A. Robert Ruesch, Chair, Chair of Verrill Dana’s Construction Law Group

According to the National Center for Employee Ownership, there are roughly 7,000 true employee stock ownership plans (“ESOPs”) nationwide, covering about 13.5 million employees and holding assets of approximately $1.2 billion.  More than 15% of those plans are sponsored by construction companies.  We are currently experiencing a major spike in ESOP activity nationally driven in large part by the desire of Baby Boomers to pull cash out of their businesses and retire.  That is why any discussion of succession planning for a successful company is likely to include consideration of an ESOP.

Construction companies are especially well-suited to ESOP transactions because the sons and daughters of the founder may have no interest in carrying on a challenging business, third party purchasers are often hard to find, and founders tend to feel strongly connected to their long time employees.   For the right business owner, the establishment of an ESOP may unlock the door to financial independence.  But like any significant business decision, it’s critical for the owner to understand the moving parts and feel well informed about the subject before getting too far down the road.

What is an ESOP and what are some of the benefits of having one?

An ESOP is a tax-qualified, defined contribution retirement plan – governed by the Internal Revenue Code and the federal Employee Retirement Income Security Act of 1974 (“ERISA”) – that is designed to invest primarily in the stock of the sponsoring corporation (or a parent or subsidiary of the sponsoring corporation).  It is that feature – the hardwired investment in employer stock – that sets ESOPs apart from ordinary defined contribution plans and drives the key financial benefits of the plan.

Stock may be contributed by the employer or it may be purchased by the ESOP from the shareholders of the corporation using cash provided by the corporation.  This transfer of stock to the ESOP allows a corporation and its owners to facilitate the reduction (or even elimination) of corporate level taxes, address succession planning issues, and deliver a meaningful cash-out event for business owners.  At the same time, ESOPs provide unique benefits for eligible employees and can be a powerful tool for developing a strong “employee ownership” culture.

Two Critical Concepts to Understand

Two critical concepts affect the basic operation of an ESOP.  First, unless the ESOP holds a sufficient amount of employer stock to begin receiving dividends, the sole source of cash for the ESOP will be contributions from the employer.  Annual cash contributions will be required to pay debt service if the ESOP borrows money – typically from the employer, using money it borrowed from a third party lender – to fund an initial stock purchase and to fund future stock purchases or repurchases from the accounts of terminated employees.  Second, even though ESOPs benefit from special rules and exceptions, they are still subject to many of the same federal tax rules that govern the operation of other defined contribution plans, such as 401(k) plans.  One such rule limits the amount contributed to an ESOP annually by the employer to 25% of the total compensation paid to the employees participating in the plan.  Both the need to contribute cash and the 25% contribution limit play a major role in determining whether the personal financial goals of a business owner can be realized.

Building a Team and Exploring an ESOP

Most business owners embrace the mantra: “keep it simple.”  Unfortunately, that rule is hard to follow when it comes to the exploration of an ESOP.  The establishment of an ESOP – and a sale of stock to an ESOP – has many moving parts and generally requires the involvement of a well-chosen team of advisors.  In most transactions, that team will include: (1) an ESOP consultant; (2) a qualified, independent valuation firm; (3) legal counsel familiar with ESOPs; and (4) an accounting firm familiar with ESOPs.  (A couple of other team members – a trustee and a plan recordkeeping firm – will have to be added later in the process.)

Selling Stock to the ESOP

These days, most new ESOPs are set up specifically to purchase all (or a large percentage of) the company stock from current owners.  The key question in determining the viability of the stock sale – the question that the ESOP consultant will answer – is how much stock can the ESOP purchase.  If the owner wants to sell stock to the ESOP, the ESOP will likely have to borrow the money from the company (which loan ultimately will have originated with a bank) in order to pay cash to the selling shareholder, or the ESOP can pay the purchase price in the form of a promissory note.  Of course, the ESOP might pay a portion of the purchase price in cash (with money borrowed from the company) and pay the remainder in the form of a promissory note.  Recall that either way the company will have to be able to make annual contributions to the ESOP sufficient to cover the debt service.

Where an ESOP is “leveraged” through the borrowing of money, the stock held by the ESOP will be pledged as security for the loan and allocated to participant accounts only as the loan is paid down.  If the loan is to be amortized over many years, it will take a long time before the financial benefits of stock ownership can be realized by plan participants.

After the valuation has been completed, the purchase price has been set, and the financing arrangements have been made, the stock sale itself can be documented and implemented and a plan will be established concurrent with the stock sale.  The key documents in the transaction typically will include: (1) an ESOP plan document that meets the formal requirements of the Internal Revenue Code and ERISA; (2) a summary plan description, explaining the ESOP to employees; (3) a stock purchase agreement; (4) a loan agreement and promissory note between the company and the ESOP; (5) a promissory note issued by the ESOP to each selling shareholder; (6) a trust agreement, between the company and the trustee of the ESOP trust; and (7) an administrative services agreement with the ESOP record keeping firm.

Other Legal Compliance Issues

Because an ESOP is a tax-qualified retirement plan, it must be maintained in accordance with the qualification requirements of the Internal Revenue Code and the requirements of ERISA.  This means, among other things, that: (1) the company will have to obtain an independent valuation every year in order to confirm the value of the stock and allocate stock to participant accounts; (2) a Form 5500 that includes audited financial statements for the plan will have to be filed with the U.S. Department of Labor each year; (3) a record keeping firm will have to be engaged to handle basic plan administrative tasks; and (4) a prudent fiduciary governance structure – including a plan administrative committee and an independent trustee – must be established in order to ensure that the fiduciary standards of ERISA are consistently applied by those charged with overseeing the administration of the plan.

A business owner must tackle many issues before making a decision to establish an ESOP.  But in most cases, a properly implemented ESOP can deliver a significant financial advantage for a business owner and meaningful benefits of ownership to employees.

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Home Building’s ‘Elephant in the Room’ … a manifesto from operations guru George Casey.

Without innovation, today’s home building business models risk extinction

by George Casey, CEO of Stockbridge Associates, LLC

Over the past several weeks, I have had the opportunity to attend a variety of fall industry conferences: the Urban Land Institute (ULI) fall meeting in Dallas, a Vistage Construction Network CEO Roundtable in Boston, and John Burns’ Fall Homebuilding Conference in New York.

The latter was held the day after Election Day about two blocks from the New York Hilton. An interesting time to be in New York, to say the least.

I enjoy the mix of the conferences, because of the variety of viewpoints they provide.

ULI gave the industry view from home builder, master planned community developer, financing and technology perspectives. Big picture and long-view stuff with a national and international perspective. The Vistage Network CEO Roundtable involved construction and construction service CEOs from New England and covered both commercial and residential, but Northeast focused. John Burn’s conference was expansive and deep on home building, residential community development, finance, and demographics on a national basis.

As I processed all of the information, a recurring theme kept coming back, kind of like that “It’s a Small World After All” song from Disney World. Once you get it in your head, it never leaves.

The theme was that many of the major players in the industry are not fully recognizing and attacking one of the core challenges for the industry: the inability to generate enough housing supply to meet the current and even-greater-tomorrow demand that is on the way. The focus of many in the industry is actually on yesterday problems and solutions.

An inability or unwillingness to see the issues that are new and with us today and which lack focus or solution seems to be a blind spot for many leaders.

At ULI, a panel of home builders and community developers on the developer/builder relationship in master planned communities spent the bulk of its effort talking about demographic trends, the need for more product segmentation to drive incremental velocity, and the rapid introduction of ever-more sophisticated technology tools to target buyers, to get to know more about them, to show them Virtual Reality model homes, and, generally, how to drive more sales to accommodate the coming millennial demand that is now, finally, upon us.

Yet, the reality is that in many markets in the country right now, builders cannot keep production up with the current sales level, forget one that is significantly stronger. More sales in this environment equals extended delivery times and eroding profits (just look at the recent batch of public builder operating metrics for case studies) and, most likely, really ticked-off customers.

There simply is not enough skilled labor to build what is being sold in many markets, and the prospect of more labor coming in time to make any kind of short- or medium-term difference is not very bright. Further back in the chain, the existing skilled labor pool for construction is relatively old and retiring out at rates that are becoming concerning.

The historical response to this issue has to bring in immigrant labor (both legal and illegal) to fill this gap. However, in the current political environment, this solution seems taboo.

The reality is that if any of the existing non-working population really wanted a pretty good paying job, the existing demand in construction would have been filled long before now. It seems that the truth is that the hard manual outdoor labor required for site-built construction in the current business model does not fit the fancy or inclination of the remaining unemployed.

The logical conclusion is that we are stuck, most likely, with a continuing and worsening labor shortage in all of construction, whether it is residential, commercial, or the services to the industry.

I asked the panel why they were focusing on the generation of even more demand when it appears that the real problem is how to generate more housing supply in a world where the labor supply to the industry is relatively fixed. Not surprisingly, no one had an answer or had thought much about it (other than to complain).

In fact, it is a relative new and vexing problem.

In the last housing cycle (1991-2008), we filled many construction jobs with baby boomers who didn’t mind working outside and immigrant labor from Central and South America, the former Communist Eastern Europe, and, particularly Mexico. Before that, the non-college-educated blue collar population of the country plus immigrants provided the labor in every cycle before.

The structural immigration changes we have made and the relative demonization of manual labor for millennials has left the cupboard bare.

The bottom line is that some of the smartest people in the industry were back focusing of the intellectually stimulating, tech and demographic fun stuff of marketing, sales, and demand generation, because that was the solution when production constraints were minor in the past.

The fact that the current problem (structural supply constraint instead of demand constraint) is not the past problem, but a new one, had not garnered much intellectual capital for solution.

Meaningful and permanent innovation in production was not on anyone’s radar.

At John Burns’ Homebuilder Conference, that perception was reinforced again through many of the presentations.

Great and thoughtfully analyzed demographic data from John’s team showed a surge of demand coming for both the millennials finally starting households and baby boomers needing retirement housing. A rosy demand picture for the foreseeable future.

A panel of Wall Street analysts and bankers, however, when questioned on why home builder stocks had not appreciated since 2012 in any meaningful way, despite a growth in orders, closings, and revenues, hit on a root problem. They noted that the builders continually overestimated their deliveries, and their margins are continuing to be under pressure and are declining.

These are not good stories to drive stock valuations higher.

In some cases, stock prices are being buoyed by returning capital back to shareholders, rather than re-investing in the business. The stated culprit was that labor was in short supply, which drives up production costs faster than sales pricing and inhibits any reasonable ability to fully dictate deliveries.

Most of the home building participants in the room took this rationale as the non-adjustable norm. Same as it always was; same as it always will be.

When queried about innovation in the industry, new floorplans, the adoption of better CRM software, and better demographic targeting were cited. No one even tried to approach the issue of productivity, nor the possibility that the current business model for builders might be outdated. Not on anyone’s radar.

All I know is if I go into Delta’s faucet plant, Whirlpool’s stove plant, Ford’s F-150 plant, or Boeing’s airplane factory, that factories look significantly different than they did 40 years ago. Robotics, offsite sub-assemblies, lean manufacturing, just-in-time delivery, and other innovations have been brought into those industries in order to become more productive and profitable.

The businesses look much different in so many ways than a generation or two ago.

Yet, when I look at home building, the way the business is run and the way production is done have not changed markedly in that same 40-year period.

The house sales and production processes today are only marginally different than in 1960. Yes, the tools might be better (a pneumatic nail gun vs. the old 16 oz. “Thunderstick” hammer), but fundamental ways the business operates have not changed much.

Almost every builder uses exclusively sub-contract labor to site-build their homes. The training and management of those trades are left to others and most builders have little or no idea who will be showing up each day to advance the production of the homes they (the builder) have sold to a customer. Even worse, most builders do not even know whether the labor will show up.

Therein lies the risk and the opportunity.

If skilled trade labor is no longer as plentiful as it was in the past, yet demand looks like it will be considerably higher than our current and forecast ability to produce well into the future, perhaps someone should recognize the elephant in the room and be looking to fundamentally change the business model of the business.

Rather than buying back stock, shouldn’t the largest home builders reinvest in another way to create homes that involves less labor and more automation, and achieve higher productivity?

It would seem that the very existence of builders depends on how this question is answered and the value of their companies either ride higher or lower based on how they address the issue.

Shouldn’t Boards of Directors of home builders address this existential question before either the activists come in and turn the company upside down or market forces slowly eviscerate the franchise?

I wonder what the reaction in the marketplace would be to a builder CEO who, when asked the question regarding how they were innovating, had a response that sounded something like this:

“We recognize that this industry cannot operate any more like it has historically. The days of abundant and qualified sub-contract labor seem to be coming to an end.

We cannot afford to embrace a business model that thinks it is okay to deliver homes in 6-12 months and where we have little control over who builds our homes each day.

We have looked at other industries and see that, on our current track, we are destined to extinction in the face of a surging demand that our current business model does not permit us to meet at levels of margin and capital return that are acceptable and industry-leading.

We, instead have chosen to take a different path that will involve some short term pain, but will position us as a leader in the new housing economy.

We are going to take a meaningful portion of our cashflow and, rather than reinvest it back in land or stock buy-backs, we will invest in new methods of producing our homes, using a high degree of automation, new materials, and a dedicated workforce consisting of full-time team-members of our company.

We will use the best people and ideas from other manufacturers and home builders from around the world to help drive this innovation. Our belief is that we can deliver homes in under 60 days from the day the customer signs a contract with us, and at net margins and returns on assets of over twice what we achieve currently.

Even more, we are choosing to reorganize our company to continue to invest in the research and development needed to drive the continuous innovation and improvement that we see will be needed to keep us at the top of the competitive heap.

We will be innovative in our use of technology, materials, business systems, and people in this drive.

We know that, if we do not make these fundamental changes, we stand a high risk of extinction, and we will not ignore that fact.”

Wouldn’t that be interesting?

If our current crop of home builders cannot make that speech, my sense is there are others from outside of the industry or outside of the country who see this opportunity and will take it and run with it.

If this elephant of a question is not addressed, the current crop of builders risk a fate similar to those companies in other industries who failed to see the changes that drove new companies like Walmart, Amazon, and Apple to dominate spaces where more established companies had operated. Those companies that did not change with the times and environment ultimately became either extinct or food for the new.

So, if leaders and directors of current home builders continue to work in the old business model and on innovations with a small “i” and a 3-font, rather than innovations with a capital “I” and a 128-font, they will be truly picking up peanuts while the elephants run wild, and, (to mix metaphors) risk becoming the extinct dinosaurs more quickly than they realize.

Originally published in Builder Online on November 28, 2016 and can be found at http://www.builderonline.com/builder-100/strategy/home-buildings-elephant-in-the-room_o?utm_source=newsletter&utm_content=Article&utm_medium=email&utm_campaign=BB_112816%20(1)&he=acb26dfc22037f8627bb26d072d9871f0bba5969

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5th Anniversary ‘Strikes for Scholars’ Bowl-a-Thon Fundraising Event

DSC_5297MEREDA is proud to host its 5th Annual “Strikes for Scholars” Fundraising Event at Bayside Bowl in Portland on May 4, 2017 “Strikes for Scholars” supports scholarships for Maine students pursuing studies in building trades, architecture, construction, engineering or a business program at a Maine Community College (MCCS), or the College of Science, Technology & Health at the University of Southern Maine.

MEREDA strongly supports a strong education system.  In fact, over the past 4 years, MEREDA is proud to have raised and donated over $47,000 in scholarships helping over 30 Maine students by making it a little easier for them to achieve their goal of obtaining a college credential. Last year alone, we raised enough funds to provide 16 $1500 sponsorships!      

Many thanks to Landry / French Construction Company, AAA Energy Service Company, and Mainebiz for their continued support on our 5th Anniversary!

We are looking for:  

  • 24 Teams, up to six people
  • 2 Additional Food Sponsors at $1000 each (Contact the MEREDA Office before March 20th in order to make the Mainebiz Ad print deadline!)
  • Not able to bowl?  Come anyway, cheer on our teams, network, buy raffle tickets and support this worthy cause!

What you get:

  • “Pay it Forward” with 100% of net proceeds funding the scholarship program
    Sponsorships provide high visibility on press releases, publications, social media mentions, the MEREDA website and signage at the event.
  • Opportunity to be creative!  Best Team Shirts gets a Summer Bowling Party!
  • Opportunity to purchase raffle tickets for Cash Prizes!

What are you waiting for? REGISTER NOW! It fills up fast! Please Download our Registration Form and return to info@mereda.org by April 1st.

We look forward to bowling with you soon!

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Keys to an Effective Environmental Risk Management Program (ERMP)

By Donald McFadden, C.G., Director of Environmental Services, St.Germain Collins

Managing environmental risk in commercial real estate (CRE) lending can be challenging. Although it’s something the lending community has been doing for decades, it has historically been viewed as unnecessary and routinely forgotten.

In today’s lending climate though, environmental risk cannot be ignored.  When properly implemented, an Environmental Risk Management Program (ERMP) can be efficient, inexpensive, and an asset to both the lending institution and the customer.

There are four key elements to an effective ERMP:

1.  Consider Current Guidelines and Best Management Practices (BMPs) in the Policy.

A strong ERMP starts with a policy that includes current regulatory guidance.  Banking regulators that provide guidance include the OCC (Office of the Comptroller of the Currency) and FDIC (Federal Deposit Insurance Corporation).  Consulting the regulator’s website is a good place to get the latest guidance that applies to the lending community.

The U.S. Small Business Administration (SBA) also has developed BMPs as part of their Standard Operating Procedure (SOP) for environmental investigations.  This document details when to use a questionnaire, a Records Search with Risk Assessment (RSRA), a Transaction Screen, or a Phase I Environmental Site Assessment (ESA).  Lenders can choose to follow the SOP or consult the BMPs even when they are not engaging in SBA lending.

2.  Functional Review Procedures.

The review process needs to function efficiently. Being able to make operational adjustments without having to make frequent changes to the policy is important.  Having detailed procedures will allow a lender with any level of experience to easily follow procedures from initial environmental review conversations with the borrower, to the types of review tools used at each level of the process, to managing allowable exceptions.

3.  Informing Customer of Value.

The tone of the initial fee conversation with the borrower can highlight how an environmental review can benefit the borrower. If performed properly, the environmental review can provide valuable data to a borrower prior to purchase.   The risk for contamination may be identified, giving the borrower an opportunity to renegotiate with a seller for specific financial or remedial steps prior to sale. This ensures more financial stability for both the borrower and the lender.

4.  Involve Environmental Expertise.

Both OCC and FDIC guidance emphasize the need for expertise when evaluating environmental risk.  The responsibilities of the ERMP are often delegated to a lender’s in-house staff who may not have the experience or the desire to meet the demands of the position. The in-house individual often has many responsibilities that fall outside the environmental risk management program and the environmental review process falls to the bottom of their list of priorities.

Smaller institutions may not maintain the volume of CRE lending to justify dedicating responsibility to a properly trained full-time employee or hiring an environmental expert. However, it does not need to be expensive to retain a highly qualified environmental consultant to ensure the quality of the ERMP. A fee-based structure allows the transfer of the environmental review directly to the customer, making it a cost-neutral program for the lender.

Although there are many aspects to consider when developing and maintaining an ERMP; consideration of current guidelines and BMPs in the review policy, functional review procedures, valuation, and involving environmental expertise will go a long way to establishing an effective program.  When developed and maintained correctly, an ERMP can be very beneficial to both the lending institution and the borrower.

This article was originally published on November 14, 2016 and can be found at http://stgermaincollins.com/2016/11/14/ermp/ 

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