Cherrytree Group LLC Blog

By Kristina Rodriguez, Paralegal

As a result of the BP oil spill this summer, not only was the Gulf Coast victimized, another group of people were affected right here in New England; the BP gas station owners. Although they are affiliated with BP, many of them had no choice in rebranding their gas station with the BP logo due to contractual obligations. As the oil spill continued for days, then weeks and then months, the public became incensed and frustrated by BP’s inability to cap the destructive oil spill.

People wanted to punish BP for what they had done to our coast and began to protest by boycotting local BP gas stations in New England. I myself considered joining the boycotts so that I could personally serve some justice on the oil giant. I am from the Gulf Coast, so this situation hit home and was not just a distant incident that bore no direct relation to me. The news of this monstrous oil spill leaking millions of barrels into “my Gulf” left me utterly devastated. I grew up swimming in those clear aqua green waters and eating the best seafood I had ever tasted. To think that all this would be contaminated for years to come because some oil company refused to stop drilling when pressure levels were unsafe was infuriating! Though I was upset, I realized that if we boycott local BP gas stations, these local station owners who are members of our community will go out of business. Though BP might go bankrupt, this would not help since they would not be able to pay any of their claims. The better way to hold BP accountable for its extreme negligence is to demand compensation for all of the damage they have inflicted on innocent people.

In July I met with one of the local BP gas station owners for the first time. His station was the target of boycotters and sales had dropped significantly. This man, who is now our client, had invested all of his money in this business with the hopes of attaining the American dream and was now faced with losing his livelihood, the means to provide for his family. Because of this I became even more determined to hold BP accountable. I immediately began setting up a claim package on his behalf to submit to BP. Every news article, proof of boycotts, and financial records were gathered to show the direct causation between the oil spill and the gas station’s sudden loss of income. All of these items have been submitted with the hope that BP will approve the claim and compensate the claimant. It is a tedious process that takes time more so now than ever since BP has transferred the claims process to another facility. But The Cherrytree Group believes in giving our clients a voice to exact justice and in holding corporations accountable for their avaricious recklessness. This firm works hard to create and submit claim packages to BP on behalf of our clients in return for just compensation for their losses.

Hopefully this spill has been a wake-up call for all of the oil companies to practice more caution and exercise more safety measures. Their profits were not worth the eleven lives lost and the thousands of lives destroyed.

... By Warren Kirshenbaum

In order to jump-start the economy and defuse some of the economic hardship caused by the recession, the American Recovery and Reinvestment Act of 2009 (the “Act”) attempted to infuse financial benefits and incentives into the economy. One of the sections of the Act benefits supporters and investors of renewable energy. The US is determined to be in the fore front of the renewable energy industry, and the government hopes that the industry continues to prosper despite the volatile economic times. Specifically, Section 1603 of the Act (the “grant” or “grants”) provides grants from the federal government to eligible “persons” (a legal construct including entities) who develop renewable energy systems during the recessionary period. The Federal government already provides tax credits that benefit the renewable energy industry that is credit that reduces dollar for dollar an eligible tax payer’s tax liability, if the taxpayer engaged in a qualifying renewable energy program. However, fearing that investors in renewable energy will not be able to successfully monetize tax credits, Section 1603 provides grants in lieu of the tax credits to interested investors. The purpose of Section 1603 is to temporarily fill the gap that was created by a lack of demand for tax credits from investors and simultaneously decrease American’s dependency on non-renewable energy sources while creating or retaining jobs.

The grant is for qualifying persons who install specified energy system on property during 2009 or 2010. The Treasury will provide grants up to 10% or 30% (depending on the energy system) of qualifying expenses. Persons eligible for the grant include government agencies, 501(c) organizations (non-profits), entities as qualified under IRC sec 54(j) paragraph 4, and partnerships or other pass-thru entities, or any direct or indirect partner of such entities.

Specified energy systems include large wind, closed-loop and open-loop biomass facilities, geothermal, landfill gas facility, trash facility, qualified hydropower facility, marine & hydrokinetic, solar, fuel cells, microturbines, combined heat & power, small wind, and geothermal heat pumps. Qualifying persons will continue to be eligible for the grant even when the renewable energy project is completed after 2010, for so long as the qualifying project began in 2009 or 2010. Beginning a qualifying project is defined as conducting physical work of significant nature either on or off site, costing at least 5% of the total cost of the project. Furthermore, the original use of the energy system must begin with an applicant. Accordingly, a person will not be eligible for the grant by simply purchasing an already installed renewable energy system. The applicant, however, may use pre-owned parts in the facility, but their costs may not exceed 20% of the total cost of the facility.

If less than 5% of the total cost is incurred during the 2009 or 2010 period or only preliminary work was completed during that time, the persons seeking the grant will be disqualified. Preliminary work includes planning or designing, securing financing, exploring, researching, clearing a site, test drilling, or excavation to change the contour of the land. On the other hand, excavation for the foundation or the pouring of the concrete pads of the foundation will be considered as the start of construction. The start of construction also includes the start of manufacturing components, even though the manufacturing is completed off-site.

The Act includes a powerful tool for businesses and individuals who support and are involved in the development of the renewable energy industry. The grant, although currently offered for a temporary period of time, offers an incentive to continue to build renewable energy systems in one’s community. For those who began constructing a renewable energy facility in 2009-2010 period, applying for the Section 1603 grant should be a priority. Although the application for the grant is complicated and often confusing, obtaining up to 30% of the eligible expenses offers a significant resource to assist in making your project a success. Cherrytree Group LLC and Kirshenbaum Law Offices can provide to you the expertise needed to decipher whether you qualify for the renewable energy grant and assist you in applying for and obtaining the grant as well as assist you in monetizing your tax credits.

Thayer Morgan interviews Warren Kirshenbaum Esq. on Distressed Properties and Tax Credits on Brownfields, Renewable Energy, New Markets, Historic and Low Income Housing.

To visit Thayer Morgan's website, Click here

...By Warren Kirshenbaum

Renewable energy is not yet able to be produced in quantities that will satisfy global energy demand, and renewable energy is more expensive than energy produced from fossil fuels, but great strides have been made in recent years in these areas. Furthermore, the costs that the production of fossil fuels are imposing, both on our environment, and financially on the companies producing oil and gas are not factored into the cost per gallon or kilowatt hour of energy production, and perhaps this is a line item that we should start to factor into the cost of the production of energy from fossil fuels if we are going to make a push toward serving the world’s energy needs with renewable resources.

This year, the Deepwater Horizon oil spill (which was both the biggest oil spill in U.S. history and the largest accidental marine oil spill in the history of the petroleum industry) released 185 million gallons of crude oil into the Gulf of Mexico for about three months and has inflicted devastating environmental and psychological damage on the coastal communities in the Gulf, affecting tourism, fishing and drilling, as well as subjecting residents to ongoing restrictions on fishing and shrimping that have affected the livelihoods of thousands of people. BP’s Gulf Oil Spill resulted in the deaths of 11 workers on the rig and injuries to 17 others. BP’s financial expenditures from the oil spill have so far reached $3.12 billion, excluding the $20 billion compensation fund they have set up to reimburse residents and businesses for their losses. Also this year we endured the Copiapo mining accident in Chile, which occurred when the copper/gold mine owned by San Esteban Mining Company collapsed and 33 men were trapped 2,300 ft below ground for 69 days. Fortunately, all of the 33 men were rescued with only one man suffering from pneumonia, and a few others experiencing dental problems. The cost to rescue the men was $20 million. The San Esteban Mining Company has allegedly violated mining regulations previously, and 8 of its employees have died at the mine in 12 years. Adding to the year’s disasters at fossil fuel production sites is the Pike River Mine accident in New Zealand where an explosion at the coal mine has left 29 miners trapped 4,900 feet from the mine’s entrance. The miners are still trapped in the mine and may not be alive. Gas sampling is being tested to ensure that any accidental spark will not ignite the mine when search and rescue operations are undertaken. The Gulf Oil Spill, Copiapo mining accident, and Pike River Mine accident were stark reminders that our pursuit of energy derived from fossil fuels is causing an irreversible deterioration of our planet, its natural resources, our environmental balance, and is subjecting us to unacceptable losses in human life.

There are a multitude of renewable resources, but this post will focus on solar and hydro energy production, as these methods of renewable energy production are, in my opinion, poised to experience significant growth in the next few years.

Solar energy production is significantly more expensive than hydro, due to the cost of the solar panels themselves. Hydro has languished for decades as a method of creating renewable energy, mainly due to the environmental objections that a hydro project creates, and the expensive federal regulatory requirements of such projects. However, both forms of renewable energy are attractive. Solar projects, unlike wind projects do not create a danger to birds, cattle, and other animals, solar fields are not large and aesthetically displeasing, and do not generate loud whirring sounds that intrude on people’s quality of life. Consequently, as solar installations have very little negative environmental effect, they are generally easy to permit. Solar energy is, however, expensive to produce, as the technology that underpins the solar panels have traditionally made the installation of solar fields expensive enough to impede their development as a commercial enterprise. As with all technology, as solar technology develops, its cost has begun to decline, which should make solar projects more viable. Hydro, is very clean and unobtrusive to the environment, and is relatively safe to produce, but it can affect the migratory pathways of fish, and a dam breach could be detrimental to downstream human habitats. Consequently, new dams have not been constructed in many years. In fact, the stock of dams has decreased over the decades. Moreover, the prospect of new dams being built is relatively slim (due to the environmental challenges and the time period involved in getting Federal Energy Regulatory Commission (FERC) approval). Inorder for hydro production to increase, the capacity of existing facilities would need to be expanded. Legislative changes that limit environmental objections to the process of FERC approval, renewal, and re-licensing would need to be implemented to help to stimulate hydro production, this will require intensive lobbying, but it can be done.

Nevertheless, the point being made here is that, despite the higher cost of producing renewable energy, the cost of energy production from fossil fuels is enormous,not only the monetary cost, but the environmental cost as well as the cost of human life. This is more of an IOU being tagged to the planet than a current cost, which leads to the conclusion that we have no choice but to pay the higher monetary price for renewable energy now and retire the bigger IOU that future generations will inherit.

By Warren Kirshenbaum

The Federal Reserve's plan to purchase $600BN in US Treasuries has wide ranging consequences, including the devaluing effect that the influx of such a large amount of dollars will have on the dollar itself. A devalued dollar makes US produced goods cheaper, causing exports to rise. As a deficit nation, the US benefits from an increase in exports, but it comes at the expense of other countries. Therefore, this plan has been roundly criticized by many countries who claim that the US is manipulating its currency, and as the issuer of a global reserve currency such as the dollar the US has a responsibility to keep the dollar fairly valued. It is certainly an interesting position for currency manipulating countries like China to take, but nonetheless this is the position they are taking, and as we will discuss below their influence on our domestic interest rate environment is significant.

So, what effect will the Fed plan have on mortgage rates? As the Federal Reserve's monetary policy has been to keep the Federal Funds rate at less than 1% for some time now, long term interest rates have remained low. Mortgages are generally priced off the 30 year Treasury bond, which is currently yielding 4.25%. Average 30 year fixed mortgages are pricing at 4.625%. In that a bond's yield increases as the price of the bond decreases, if the prices of US Treasuries decline, then yields will increase. Bond prices have been trending higher for several days now on concerns of inflation and uncertainty about the Fed's plan to buy treasuries.

So let us analyze this situation. As a deficit nation, we spend more than we receive. The only way to sustain such behavior is to borrow funds to finance the shortfall. Many nations have large stockpiles of US dollars from trading with us, and many more hold their reserves in dollar denominated assets. These dollars need to be put to work, and the value of dollar denominated assets need to remain steady for these countries to continue to run surpluses which are need to finance their economic growth, provide infrastructure and provide basic services for its citizenry. Therefore, there are a large number of countries buying US debt in the form of US treasuries. If other countries, like China decide that the US economy is shaky and they reduce their purchases of treasuries, or even begin to sell off the treasuries they currently own, bond prices would fall and yields will increase. That would mean that other countries would be unwilling to finance our debt at the same levels as they have been. In that case, with the Fed itself buying US treasuries, there will not be an excess supply of treasuries, which will keep their prices steady, or even cause an increase in bond prices. It would appear, however, that if we were in a deficit to begin with, the only way the Fed could buy treasuries would be to print more money to do so, which will improve the cash position of the US but deflate the dollar, and obligate us to greater borrowing costs. An increase in the US cash position, together with an increase in exports could have a formidable effect on our current account surplus and reduce our deficit, but clearly we are devaluing the dollar and annoying our trading partners whose point is well taken. They say that the US should be able to increase its exports by improving its competitiveness not devaluing its currency. Nevertheless, this seems to be a short term plan on the part of the Fed. Basically, increased export production can lead to the creation of jobs, and a lowering of the unemployment rate, which leads to a rise in consumer confidence. Mortgage rates and other borrowing costs could increase, which would lead to manufacturing price increases and, therefore, an increase in the prices of consumer goods, i.e. inflation.

So we are trading deficit reduction and job creation for inflation and higher borrowing costs. What all of this will do for our businesses and economic outlook is anyone's guess, but it is certainly shaping up to be a challenging time period.

By Warren Kirshenbaum

In the recent election, Question 2 on the Massachusetts ballot asked whether voters should “repeal the law allowing developers of projects that include low- or moderate-income housing to apply for a single comprehensive permit from a city or town’s zoning board” The law in question is M.G.L. Chapter 40B, which is an expedited permitting statute. Chapter 40B creates an expedited permitting procedure for those developers that include an affordable component to their development. Specifically, in order to receive a permit under 40B, 25% of the housing units to be built must be considered affordable housing. The towns in the Commonwealth that are subject to 40B are those towns whose affordable housing stock does not exceed 10% of their total housing inventory. 40B subjects the Zoning Board to a streamlined procedure greatly reducing the time and cost of the permitting procedure, and limiting the ability of the town to deny the permit.

On Tuesday, November 2nd, Massachusetts voters, in a decisive victory of 58% to 42% voted not to repeal 40B.

This trend in the voting patterns comports with conversations that I had with people, in which it seemed that there was a lot of non-information, and even misinformation on this issue, and as this movement to repeal 40B could resurface again, I am hoping to shed some light on the issue in this post.

The main underlying issue that I sensed is the NIMBY one. Not in My Back Yard is understandable, and is a concern about falling property values and the denigration of a neighborhood when some of the housing is affordable. Declining property values is indeed a fallout of affordable housing, as the financing options discussed below are very favorable to developers or affordable buyers and, therefore, their properties. These affordability factors lower the market value of a single family home, or a multifamily property, and, therefore, affect the comps of other sellers in the area. This effect is a micro-economic effect, and a relatively minor one at that, as lower comps would affect a financing appraisal in small part, and the market value of a sale with even less consequence. In any event, 40B historically has mostly been used for multi-family construction, and 95% of the projects permitted under 40B are multi-family apartment complexes or condos.

Practically speaking, if a condo development were built near your home, whether it was affordable or market-rate your property value and property enjoyment would decline, so this is not an affordable housing, or 40B issue, as much as it is a land-use or urban planning issue.

Secondly, people I spoke to understood 40B to be a financing statute, and assumed that it gave developers funding to pursue their affordable housing projects. 40B is an expedited permitting statute that allows an override of municipal zoning authority to promote affordable housing. It is not a financing statute. There are forms of financing that are available to developers of affordable housing, such as the Federal Low Income Housing Tax Credit, HUD insured mortgages, tax-exempt bonds, Community Block Grants, and other state and federal sources of funding, and developers use these sources of funding once they are permitted, whether pursuant to 40B or otherwise. 40B is not a preamble to these sources of financing.

While realizing that concern over retaining a leafy suburban lifestyle, or holding on to a paper appraisal of a home value may be important to some in the micro-economic sense, it is not a positive economic trend in the big picture that justifies the repeal of a statute such as 40B. Consider this: a community is more than just our home values; it is a collection of individuals, families, homes, stores, houses of worship, and so forth. While we are happy when we see a fire truck scooting off to tame a brush fire near our neighbor’s yard, we would be foolish to attempt to exclude the possibility that the first responders on the fire-truck also be given the opportunity to live among us in our community by creating affordable options here, and not force them to be relegated to living in a far-off town for affordability reasons.

It should also be pointed out since its enactment, 40B has been credited with spurring upwards of 80% of the new development in Massachusetts, and there are several new developments, as well as many ongoing ones that would not have been built, or will not now be completed were 40B to be repealed, or if it didn’t exist in the first place. This construction has created jobs, spending, and economic activity that we rely on for our stability, and, particularly in our economic malaise, we can little afford to repeal a statute that has created such substantial growth and employment.

The Citizens Housing and Planning Association (“CHAPA”), a prominent Massachusetts non-profit that plays a decisive role in encouraging the production and preservation of affordable housing claimed that this vote evidenced the largest victory margin of any ballot campaign. CHAPA claimed that, “over 1.2 million voters and 80% of cities and towns affirmed their support for protecting the affordable housing law for seniors and working families in urban, suburban, and rural communities all across the state.” While this is true, an analysis of the voting results shows that the larger urban centers voted strongly in favor of not repealing 40B, constituting the largest slice of the 16% victory margin, while the voting in many towns was closer than this 16% victory margin suggests. Many towns actually voted in favor of repeal. Cities and towns such as Worcester, Somerville, Quincy, Arlington, Boston, Brockton, Lawrence, New Bedford and Cambridge opposed repealing 40B in large numbers, and they were joined by the suburban bastions of Newton, Needham, Lexington, Brookline, and Milton, which all together carried the NO vote on this question. Significantly, however, there were also several towns that voted to repeal 40B, such as Abington, Amesbury, Billerica, Bridgewater, Sudbury, Stoughton, Wilmington, Westford, Chelmsford, Tewksbury, Walpole, and Canton.

... by Warren Kirshenbaum

It is my opinion that banks really do not have much incentive to lend money. Banks can borrow money from the Fed at rates that approximate zero, and they can then purchase US Treasuries and return a 3 point spread with little to no risk. Accordingly, why would they be willing to incur the time consumption of due diligence, the transaction expenses, and the inherent risk of loaning money to consumers and businesses when they can be profitable borrowing from the Fed, lending to each other, and engaging in hedging transactions. Nevertheless, as their apparent mandate is to take in deposits and then loan those funds out to borrowers while maintaining a reserve of funds to maintain net capital requirements, they need to put some money out to work in loan transactions but their documents, loan covenants, underwriting requirements, equity requirements, and debt-service coverage ratios are very restrictive, and in some cases are either unprofitable for borrowers or are putting businesses in the position of having to run business decisions by their bankers prior to accessing necessary working capital or credit line funding. I have been promoting for some time now that businesses need to create their own sources of funding, in order to decrease their reliance on bank financing, which is fast becoming a scarce resource. Private equity or corporate debt issuance is a viable option in these economic times, and I urge businesses of all sizes and levels of growth and development to formulate a plan to tap their non-bank resources for capital funding.

Interestingly, a midterm election that changes the majority party in Congress, such as the 2010 Midterm elections did can have a profound effect on the business plans of many different types of companies. For example, those businesses that supply the defense industry may find that under a Republican controlled Congress there are more dollars appropriated to defense spending, and will benefit from such a political change. Those businesses that are non-unionized may find that a Democratic Congress or state administration would be more favorable to union labor and open-shop employers may find that the cost of labor would dramatically increase, effectively turning a company’s cash flow upside down. Any of these factors would cause a company to need to seek financing to smooth out the edges while it re-formulates its business plan and carves out new market niches for itself.

My message is that if you are hoping to seek bank financing, you should add to your quiver of options the possibility of raising funds using private equity, or by issuing corporate bonds or debt instruments. As you are setting the terms of the offering or issuance you are in more of a position to control and accept provisions, terms, covenants and this will be beneficial to your business interests, and that will spur, and not hamper or restrict growth. We, as small business people are in need of capital and funding to execute many, if not most of the objectives of our business plans, but the sources of capital have become restrictive, unwieldy, and stifling. It is time to change the terms of this game, and look for alternate sources of funding.

 ... by Warren Kirshenbaum

In this period of difficulty obtaining adequate bank financing, it benefits developers to structure the financing of projects using mechanisms that allow for less of an equity contribution.   Owners/developers of affordable housing are able to receive low-income housing tax credits (“LIHTC’s”) by providing for an indirect federal subsidy of qualified low-income housing.  Owners receiving LIHTC’s will rent to tenants earning 80% or less of the area’s Average Median Income (“AMI”). These tenants will qualify for a below-market rent, which the tax credits effectively subsidize in exchange for the project’s commitment to restrict rents, and to rent to low-income people for a designated time period.  LIHTC’s offset federal taxes on a dollar-for-dollar basis for a ten year period and are awarded to owners of low income housing by application to the State’s housing department. Developers “sell” the tax credits at a discount to syndicators (investors) to raise the project’s equity, resulting in less or no equity being needed from the developer.  The developer is required to restrict rents to below market rates, making the property affordable to low-income individuals, and this restriction can remain in place for 15 years or more.  Tax credit investors usually claim a limited partnership interest with a 99.9% interest in the limited partnership, as well as participation in cash flow or sale proceeds.  Although tax credit deals have many variations, developers usually utilize 9% tax credits for new construction, or substantial rehabilitation with no federal subsidy.  These tax credits subsidize 9% of the project’s qualified building costs every year for ten (10) years; or 4% tax credits for federally subsidized new construction or acquisitions of existing buildings.  This program subsidizes 4% of the project’s qualified building costs every year for ten years.  As with most deals, the equity and debt are funded in periodic draws from the project with requirements stipulated by agreement.  These projects must restrict their rents and benefit low-income tenants for a fifteen year compliance period.  This restriction is usually detailed in a recorded Land Use Regulatory Agreement (“LURA”).  Consequently, a tax credit financed project requires constant monitoring of the rents and income requirements of the tenant population to avoid a recapture of the tax credits by the IRS.  In an affordable housing transaction, a Stipulated Sum contract is awarded for the construction, and a property management company will manage the project, thereby shouldering the compliance responsibilities of IRC $42.  Various other funding sources add to the multi-layered financing structures of these deals.  

We, at Kirshenbaum Law Offices and the Cherrytree Group have experience in all aspects of LIHTC transactions, from the development and construction related issues to the financial structuring and tax credit implications and structuring of the transaction.  Specifically, we can assist in many of the issues that arise in LIHTC deals, such as:

• Purchasing affordability restricted apartment complex(es);
• Obtaining bridge loans or pre-development loans;  
• Assistance with loan conversions;
• Post Compliance Period Restructurings;  
• Historic tax credit rehabilitation transactions with or without an affordable component;
• HUD transactions; and
• New Construction for Multifamily and Seniors.  

Business Financing in a new economy ... by Warren Kirshenbaum

Back in March, 2010, I wrote in a blog post that we are facing a period of increased unemployment, and a sea change in our economy.  We are now in that new economy, an economy that has lost millions of jobs during this recession; jobs that in all likelihood will not come back.  Increased health care costs, taxes, data privacy concerns, payroll costs and employee benefits are a major discouragement to hiring new employees and creating jobs, while technological advances have made it easier to outsource job functions than to hire more employees.  

As I have said before, the jobs that have been lost in this recession are not going to come back.  Larger companies will expand by acquisition, and not job creation, and smaller companies will try to remain small.  Jobs are being created by new businesses, not existing businesses. These new jobs are in different fields, and workers will need new skills. Therefore, it is my opinion that new jobs will not be created in great numbers in this post-recession economy, but rather that businesses facing an uptick in demand for their products and services will add a variety of outsourced services to make up what in the past would have constituted an increase in hiring.  Additionally, the financial marketplace itself is in flux. Most recently, the Federal Reserve Bank has been indicating that it will increase its balance sheet by approximately $500 billion by purchasing assets and government bonds in an effort to reduce inflation and lower unemployment.  Analysts have speculated that we will end this year with unemployment rising above 10% from its current level of 9.6%, which does not bode well for consumer confidence and politicians running for re-election. Similarly, banks tend to restrict lending practices in such an economic climate.  

An expansion in the number of startup businesses, and a forced increase in entrepreneurship will cause our future economic expansion to come from the new small businesses that will be formed to service the increased demand for outsourced services in the marketplace.  Obtaining the necessary financing for these new businesses will be a challenge with the restrictive manner in which banks are currently underwriting loans.  The tightening of underwriting standards and the contraction in the supply of available capital financing does not, however, only affect small businesses and startups.  As I mentioned in a previous post, larger businesses are, and should be searching for alternatives to bank financing due to the restrictive and somewhat anti-business loan covenants and provisions that are making their way into financing agreements.  Simultaneously, with interest rates on savings accounts and money market funds being close to zero, and the volatility of the stock market discouraging households from investing, there will be fewer places to invest funds and receive a return that keeps up with the rate of inflation.  Private investment will, therefore, become a far greater resource for business funding, and businesses, as well as investors, will become far more comfortable in seeking and finding investments that are sensible, meet their expectations and risk tolerance.  Private investment will fill this void.  Raising capital in a private placement, investing into a private equity fund, private lending between individuals or small groups of individuals and companies will become more prevalent and necessary in our new economy.

The Cherrytree Group and Kirshenbaum Law Offices have extensive experience in advising clients on structuring and completing private equity offerings.  We can provide creative solutions to the most complex issues in evaluating, structuring, negotiating, and consummating private equity transactions.

Private Equity as a Banking Alternative ... by Warren Kirshenbaum

Banks are approaching lending practices with a stranglehold mentality.  Not only have underwriting practices tightened since the financial meltdown began in 2007, making it more difficult for businesses to secure financing for their operations and acquisitions, but banks are inserting and enforcing loan covenants that are causing business owners to reevaluate their use of bank financing.  

Recently, potential clients have requested meetings to discuss the possibility of raising private equity in order to pay off existing bank credit facilities, and for use as working capital and for acquisitions.  The necessity to extract one’s banker from becoming an unwitting business partner is an inbred business owner mentality.  Because bank credit facilities sometimes contain loan covenants that require a company to maintain certain pre-determined profit levels, limit a company from accepting new business from a large client, require the maintenance of a high level of raw materials or inventory, and discourage new equipment financing, the successful operation, growth and sustainability of an enterprise is being choked by the banks' credit facilities, rather than such capital acting as a growth engine for business.  It is a paradox for institutions that have existed in principle to provide capital to facilitate entrepreneurial growth and development to be having a restrictive effect on business, but that is the way it has become in today’s economy.  Banks are forcing business owners to convince its banker to fund routine business activities, such as those that result in an increase in business because the banker is concerned that the increased business is coming from one large customer rather than several smaller customers.  Such a discussion is heresy for a business owner --- these are business decisions, not banking decisions!  Moreover, securing financing for acquisitions has also become difficult, and with the economy as it currently is, expansion by companies is more likely through acquisition than it is through job creation.  

Accordingly, private equity is becoming more attractive as a source of funding for many businesses.

Structuring and completing a private equity offering is a complicated, but worthwhile endeavor.  Private offerings are exempt from Federal and State securities laws so long as the issuer (i.e. the company raising the funding) complies with the statutory exemptions of Regulation D of the 1933 Securities Act, and its State counterparts.  Some characteristics of Reg. D offerings are that they are limited in size and investor type; must identify accredited vs. non-accredited investors, and can only include a maximum of 35 non-accredited investors; must fully disclose all salient terms of the offering as well as applicable disclaimer language for forward-looking statements; and cannot use general advertising and solicitation.

The Cherrytree Group and Kirshenbaum Law Offices have extensive experience in advising clients on structuring and completing private equity offerings.   We can assist with many different types of private equity transactions, including mergers and acquisitions, financing and formation of funds, as well as tax and employee benefits. The Cherrytree Group, LLC can provide creative solutions to the most complex issues in evaluating, structuring, negotiating, and consummating private equity transactions.