Real Estate Prices Deal A Double Blow To Small Businesses
Randy Truckenbrodt has just as many headaches as he does properties. The co-owner of Randall Industries, an Elmhurst, Ill.-based company that rents and sells construction equipment, has spent more than 20 years acquiring personal, investment and business real estate, including a home in Indian Head Park, Ill., an investment property in New Buffalo, Mich., two small farms in Lockport, Ill., and three business properties in Florida.
This growing empire has become not an asset but a drag on his business as many of these properties are now underwater, with some vacant and others tied up in major disputes with banks. Like many small-business owners, Truckenbrodt has used his properties to leverage his business, and since his assets have lost value, he's unable to rent them out to raise money for his business. "What affects me personally affects the company," Truckenbrodt said.
In recent years his company's employee count has dropped from 195 to about 115. The proceeds from his Florida business property rentals have declined from $15 million in revenue four years ago to $3.5 million.
Entrepreneurs like Truckenbrodt who own small businesses and real estate may be suffering from a one-two punch following the Great Recession, with declines in both their companies' income and their real estate's value. Many of these small-business owners might experience financial difficulty until the real estate market recovers.
And this involves a large majority of entrepreneurs. About 92 percent of small-business owners own some form of real estate, according to a study last month by the National Federation of Independent Business. About 89 percent of small-business owners own a home, while more than 20 percent own their place of business and 35 percent own investment properties, according to William J. Dennis, a senior research fellow at the federation and author of the report.
"What [entrepreneurs] have frequently done in the past is either mortgaged the proceeds and put that back into the business or collateralized it for business purposes," Dennis said. "When the housing market fell apart ... they took a huge nosedive. They lose an enormous amount of value, which means not only can't they borrow on it, but there's also a wealth effect, in that you tend not to spend when you don't think you have anything to back it up."
Truckenbrodt is feeling the pain. "Instead of investing in my business, I'm doing everything I can to pay debts down," he said. "I used to leverage [these properties] for business, and now I'm just trying to get out of the grasp of these banks."
Their grip has tightened as Truckenbrodt has tried to get a new mortgage on his home and keep up with his existing property loans through the recession. Though he previously owned his home outright, he wanted to take out a new mortgage but was turned down as a result of his company's losses.
"They almost do a strip search to get a loan approved on a mortgage," Truckenbrodt said. "It's unbelievable the information they're asking when you think just a few short years ago, people were walking in off the streets with virtually no verification of employment. It's gone totally in the other direction."
And the decline in real estate value and demand pose a huge burden. Truckenbrodt's commercial buildings were assessed at half the amount he bought them for four years ago. "We have an empty building," he said. "There are empty buildings everywhere."
Perhaps the most frustrating situation Truckenbrodt has encountered was when a bank wanted to charge him $85,000 in fees for a fairly standard loan covenant waiver and, when he balked, said it would raise the interest rate to 13 percent on his $5.5 million loan instead.
Though the bank eventually backed down, Truckenbrodt claims that being a business owner who meets his financial obligations in a punishing real estate market is a challenge. "The banks are coming in and whacking anyone who can pay their bills. If you can show any hint of staying power, they're going to come after you, raise your rates, try to hit you with penalties," he said.
"Banks have seen a lot of pressure from the regulators to address underperforming or underwater loans," said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a trade association representing 100 of the largest financial services firms. That pressure from regulators is part of the reason why banks are toughening their standards, he said.
"The reality is real estate, whether it's your home -- or the land on which your business is built -- has declined, and this decrease in assets makes it harder to get access to credit," Talbott said. "Financial services firms are working harder to help homeowners and business owners deal with the decrease in real estate, primarily through loan modifications."
When it comes to helping small businesses recover fully, politicians and bankers need to look at broader economic issues raised by the recession, said Dennis of the National Federation of Independent Business. "This is all tied together, and any single-minded approach really misses the point."