David Farmer


September 13, 2011


By David H Farmer, PE, AICP
September 13, 2011
This time it really is Different--it's Personal

Most of what we read and see on television reminds us how bad our economy is doing. Some economists talk about our county's GDP while others talk about how Main Street is doing. Everyone seems to agree that small businesses create jobs and there is a lot of talk in Washington and locally about how to create jobs. If only we had more jobs, then folks would have more money to spend on stuff and then our economy would grow. At least that seems to be the conventional wisdom.

In past recessions, the nations growth as measured by GDP would decline for two consecutive quarters and there would be some layoffs by large companies and then a year or so later growth would pick up and the recession would be over. In fact, right now the recession has been "over" for a year or so now. The problem is it does not feel like anything is getting better for the those of us in the middle class. This time, it really is different. And not in a good way. America may be one big country but our economy is made up of millions of households. Many of these households are having their own personal long-term recessions.

According to the politicians if everyone that wanted a job today had one, the economy would immediately improve and everything would go back to "normal". The problem with this logic is a job does not mean you can pay your bills. Many of our country's households are carrying substantial debt or rather being crushed by their debt. Now if the household assets were more valuable than the debt, perhaps things would return to what normal used to be. We only wish it was that easy. This time average household debt far exceeds the household asset value. If present debt and income levels remain the same it will take decades just to repay the debt let alone save for retirement.

Being fiscally conservative it is hard to argue that debt should just be forgiven. After all, what incentive would people have to pay their bills if they knew nothing bad was going to happen if they bought a bunch of stuff and then refused to pay when the bill arrived. It is pretty clear something needs to be done and I am not sure the well intentioned folks in Washington are really bright enough to find a way out of this mess. One solution for troubled homeowners would be to convert the existing mortgages to zero interest loans with extended payment terms so that mortgage payments were affordable. The lenders would not make money on the loans but they would at least get their money back. Households that agree to the loan conversion would then be obligated to repay the debt as long as they were alive similar to the way Canadian mortgages work (these are called recourse loans).

Lenders would not be required to convert the home loans to this new program but they would then have to explain to shareholders and investors why they would not settle for 100 cents on the dollar and risk only getting 33 cents on the dollar. Homeowners who agree to the mortgage conversions would take a hit on their credit until the loan was repaid. Loan payments would have to be a reasonable percentage of household income. If a homeowner then defaulted on the zero interest loan then they would not be eligible for new credit (baring some horrific disability).

Households would have to learn to save again and think very hard about how much they are borrowing. Interest rates would probably rise making it harder for some people to get home mortgages but this factor would also help keep people in their homes by making them the most affordable option. There is also a good chance some households would be permanently converted to renters to maintain flexibility in their lifestyles.

If the goal is to get our economy back on track, something more than a few million new jobs is necessary. If our personal debt burdens can be restructured where both the lender and the homeowner have something to lose besides sleep at night then we may just have a foundation to rebuild the economy.

What about the many households that either do not have mortgages or have equity in their homes? They win by either being able to sell their homes or not lose sleep over an unpaid mortgage and their credit is not damaged for the next twenty years. Lenders may cry foul as they lent good money with the expectation the principal and interest would be returned. The home mortgages originators may need to be reminded that many investors and lenders are not getting back their principal investment let alone interest.

Something must be done to lessen the burden of debt for households. The ideas suggested here may or may not be the answer but the most important thing is to keep thinking about finding a solution where taxpayers are not bailing out lenders and homeowners are not found living in the streets.
January 1, 2011
How to Keep and Create Jobs

Taxes and job creation are hot topics these days.  While politicians and the media are busy debating the extension of the Bush tax cuts and their impact on job creation it seems small business owners and their needs/concerns are being neglected.  The focus seems to be on income and how much taxes you should pay if you make a certain amount of money.  The focus should not be on how much you make but how you make the money in the first place.  Consider a typical corporate CEO making $2 million per year versus a small business owner employing 100 people and netting $2 million in a given year.  The corporate CEO will probably make as much or more in the coming years.  The small business owner may or may not make money from year to year.  The corporate CEO can create jobs by expanding production (think Ford) or creating a new product (think Apple), yet CEO's are not rewarded for creating jobs - they are rewarded by maximizing profits and minimizing costs.  The small business owner creates jobs by hiring people to help get more work done and keep customers happy.

The US tax code is a powerful tool and if used properly to reward certain risks, the result could be great incentives for small businesses to create jobs and grow their businesses.  That is not to say we should tax corporations more than we do now, rather, we need provide incentives such as lower taxes to the people making the day to day decisions to take a risk and hire more people.  For the purposes of this discussion we will define  small business as those with an average income over a 10 year period of less than $10 million per year.  The word average is an important addition when we are considering taxes.  Many small business owner's incomes fluxuate significantly from year to year depending upon what costs they have had to absorb and what income has walked in the door. 

 True, tax planning could smooth out some of these issues by balancing capital expenditures with high income years but why make it so difficult?  Do we want businesses that are better at calculating their taxes than running their companies?

A simple proposition is to allow small businesses to defer a portion of their incomes to at least the next year if not 5 years.  Another proposition is to count the first half of a companies income as earned income and the second half as a long term capital gain.  If a small business makes $1 million in one year out of 5 years they would pay taxes that one year as if they made $1 million every year amounting to about $330,000.  If a CEO makes $200,000 per year for 5 years they will pay less than $250,000 for that same $1 million of income.  CEO's are like school principals, they are in charge but most do not own anything.  A small business owner may have their entire life savings invested in their company.  It would be more fair to small business owners if the tax code rewarded this investment the same way investors who buy stock in dividend paying companies are rewarded.  The funny thing is, ha ha, when a small business sells the company they can finally claim the sale of the company as a long term gain.  This needs to change  and NOW.

 I have a friend with a small construction services company.  In a given year he buys or replaces $100,000 in trucks and equipment.  When he makes these investments he can in many cases claim the entire deduction that year so that he does not have to pay taxes on the money earned but reinvested in the company.  That part is fair.  By investing in his company and buying equipment, he tends to make more money year after year.  Why is all of his net income considered just income instead of long term income on a capital investment?  The US tax code needs to be changed to reflect and reward how income is made and less on how much income you have.  Let's give small businesses an incentive to grow and invest in our communities.

 April 6, 2011

A Proposed Solution to The Lending Crisis
If you own commercial property, developed or not, your loan is most likely due to be refinanced in the next 1-3 years. If you have tried to get a commercial mortgage since mid 2008, you know how difficult it is to find financing—affordable or not. The good old days of easy financing with negative amortization are long gone. The next wave—make that tsunami—of commercial loans needing fresh funding options is projected to be 3.4 trillion in the next 3 years according to the Government Accounting Office.

From the bank’s perspective, they are under significant duress with low capital reserves and mounting loan write downs. Many lenders cannot make new loans or renew loans even to their best clients. These unfortunate circumstances are sure to feed back on the system causing more trouble for commercial property owners by lenders refusing (or being unable) to make loans.  With loans hard to come by,  big trouble for good projects can occur by forcing sales at steep discounts causing values to decline thus placing even more pressure on loan to value ratios.

Private equity is certainly available to these commercial projects as it always has been, but it comes at a significant cost. I once sought a loan from a private source and had to pay 4 % to originate the loan, 12% interest AND give 30% of the eventual profit to the lender. These lenders only lend on projects where they are in a position to take over ownership if the loans cannot be repaid or payments are missed (as opposed to foreclosure). Needless to say, these are less than ideal for a sane owner.

An employer of mine once told me that you are either part of the solution or you are part of the problem.  Here is my suggestion (solution) to lenders for future commercial real estate loans - tier structured loans.  I am not claiming this is an original idea, I just haven’t heard anyone talking about it as a way to move forward out of the lending crisis.  The problem with high LTV loans is it places most of the risk of asset devaluation with the lender.  The problem with low LTV loans is it forces the buyer to have a lot of cash up front, which is great for the lender but the pool of buyers with a lot of cash is very small. 

I propose lenders provide/offer a loan package consisting of two loans; first, a 50% LTV at a lower than average rate for commercial loans amortized over 25 years AND second, another (tier) loan from the same lender for 10%-30% of the remaining LTV (i.e. total LTV is 60%-80%) amortized over 15 years at a higher rate.  The blended rate of the two loans would be close to the market rate of a standard commercial loan.  Here is a sample calculation of how a loan would work for a $1 million asset:

 1st Tier = 50% LTV = $500,000 @ 5% over 25 years, monthly payment = $2,923

2nd Tier = 30% LTV = $300,000 @ 8.5% over 20 years, monthly payment = $2,603

Total Loan = $800,000; Total payment = $5,526; Blended Interest Rate = 6.75%

 After 5 years of payments the LTV is reduced to 70.7% and the BIR is 5.57%  

When the loan comes up for renewal after a 5 year term the loan balance will be $707,283.  This balance is approximately $18,000 less than what would otherwise be owed in a standard commercial mortgage.   If loan payback is viewed as a return of capital to the investor then the cash on cash return based on a $200,000 initial investment increases 1.2%.  If the cash on cash return to the owner was 20% at loan origination, the increased in yield on the cash on cash return is 6%.   The owner/borrower is also incentivized and rewarded for paying down the second tier early if cash flow permits. 

The proposed solution is not perfect but it would help investors buy commercial property by financing up to 80% of a purchase and it would help lenders mitigate risk for increased LTV's above 50%.  This tiered loan solution may not be practical for non income properties such as vacant land.

August 1, 2009
Florida Water Quality
 In July 2010 the State of Florida will be adopting new rules regulating the quality of water discharged into the state's waterways.  The new rule requirements will be based on quantifiable and measurable numeric values.  Presently, Florida’s water quality standards are in narrative form versus a numeric form. Florida Administrative Code (FAC) states that “in no case shall nutrient concentrations of body of water be altered so as to cause an imbalance in natural populations of flora or fauna.” The narrative criteria also states that (for all waters of the state) "the discharge of nutrients shall continue to be limited as needed to prevent violations of other standards contained in this chapter [Chapter 62-302, FAC].  The purpose of the new rules is to provide “better means to protect state waters from the adverse effects of nutrient over enrichment” according to FDEP’s website.
On one hand, water quality rules and criteria are nothing new to Florida.  In fact, Florida’s original stormwater rule was adopted in 1981 and went into effect in February 1982. On the other hand, new rules presently being drafted will have a much wider impact in terms of cost to new development, redevelopment and municipalities than existing standards.  To be fair, the FDEP is not looking for ways to make life more difficult; rather, the department is reacting to a mandate by the EPA to adopt or enforce higher standards for water quality throughout the state (or else!).   
Water quality is measured in terms of nutrient loading.  The most common substances of concern are nitrogen and phosphorous.  Limiting and reducing nutrient loads is important for the sustainability of the environment. High nitrogen and phosphorus concentrations in stormwater runoff impact wildlife and human health. Nitrates may be toxic and can cause liver damage and cancer. Phosphorus may trigger toxic algal blooms and excessive aquatic weeds in fresh water bodies as well as endanger the source of drinking waters.  Other common pollutants of concern include ammonia, nitrite, orthophosphate and total dissolved phosphorus.    Nitrogen, particularly nitrate, easily moves from the land into surface and groundwater, including lakes, streams, rivers, and estuaries.  Florida aquifers are particularly vulnerable to impacts related to runoff from land development activities in high recharge areas where the ground water (aquifer) is not confined by a layer of clay or cap-rock. Nitrate concentrations have been steadily increasing in aquifer springs since the 1950s.
In March 2009, the state set the stormwater rule standard level of treatment as 80% nutrient load reduction (95% for discharges to OFWs i.e. most property in SWF) OR post-development nutrient load not exceeding predevelopment nutrient load (where predevelopment is native vegetative).
What does this rule change mean to you?  The answer is complicated but one very important variable is the depth from the ground surface to the water table.  If the depth to the water table is more than 2’, the impact will be minor.  If the depth to the water table is less than 2’ the impact could be quite significant.  Typical residential and commercial projects in Southwest Florida permitted after July 2010 may require an additional 30% of water management area to meet the new rule requirements.  In round numbers, new developments may lose 4% or more of precious developable (buildable) property.
What will the impact be to the bottom line?  A 10 acre commercial site could lose over 17,000 square feet of buildable land.  In South Florida that means about $300,000 in permanently lost revenue.  The same 10 acre site developed as residential could lose 2-3 lots due to the new rules resulting in a $50,000-$300,000 revenue reduction.  Neither case above is going to bring an end to development, but added to existing government regulations there will be an increase in risk with a decrease in profit.
What can be done for your clients?  After the new rule has been formally adopted, all new development projects will be required to meet the new standards.  Now is the time to start planning and determining how this will affect a given project.  In a recent meeting with Water Management District representatives, we were notified that if a permit has not been issued by the time the rule is adopted the project will have to be redesigned to comply with the new rule.
To summarize, the state’s existing water quality rules will be updated and enforced with numeric standards in July 2010.  The new water quality rule will impact all new development and municipal sewer discharges in the State of Florida.  Now is the time to get informed  and make your voice heard by attending a public workshop on July 22, 2009 at the Marco Island Marriott Beach Resort in the Coconut Meeting Room from 8:30 am until noon.

Author Bio

David H. Farmer is a Developer, Licensed Real Estate Broker, Certified Planner, Civil Engineer, State Certified General Contractor and Department of Environmental Protection Qualified Stormwater Management Inspector. Dave is the managing principal of Keystone Development Advisors, LLC as well as founder and editor of FloridaDevelopmentNews.com.


Dave has been active in the South Florida real estate development industry since 1989. Committed to serve the community, Dave sits on the Code Review and Design Board for the City of LaBelle, the Collier County Rural Land Stewardship Area Review Committee (RLSA), the Horizon Study Master Plan Committee for Golden Gate Estates, the Golden Gate Utility Advisory Board for the Florida Governmental Utility Authority (FGUA), the Clam Bay Advisory Committee, the Value Adjustment Board for Collier County and has served on the Executive Committee of the Urban Land Institute’s (ULI) Southwest Florida District Council since 2003. He managed the acquisition, entitlement and development of property for Keystone Companies from 2000-2008 before starting KDA in 2008.


Early in 2009 Dave recognized a need for a consolidated source of news, information and updates on changes in Florida law that affect land use and land development professionals in the State of Florida. In July of 2009 Dave launched the Florida Land Development newsletter as well as FloridaDevelopmentNews.com to provide a single source of pertinent new information.


Many consultants are very specialized and only focus on one aspect of the development process (i.e., finance, construction or acquisition of specific permits). Dave has been actively involved in all aspects of the processes for many of his projects from the creative and financial inception, land and permit acquisition, to development completion. His company handles entitlements, due diligence, project management and consultation for the development sector; feasibility assessments for the commercial banking sector; pro-forma and investment potential analysis for the investment sector.
Contact Information:
David H. Farmer, PE, AICP
Keystone Development Advisors
Florida Land Development News
12355 Collier Blvd. Suite B
Naples, Florida 34116
Office (239) 263-1100
Fax: (239) 263-1103


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