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

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

I was meeting with a commercial tenant representative today over coffee, and during our discussion about what trends he was noticing in business, he said that he had been accumulating leads more rapidly over the past few months. His view was that people were starting to consume more, or at least entertain thoughts of consumption and expansion efforts in business. They’re not feeling more confident because the economy is on an upward trajectory, they’re just tired of being depressed. I think he’s absolutely correct. When you get hammered by a lot of bad news, eventually you don’t care anymore. It gets to a point that you become sensitized toward bad news, and you just start moving forward with plans, and loosening the purse strings for no other reason than you become tired of the ways things are.

This is the new normal.

Thinking about this, I realized that, although my set of circumstances differ, and my perspective is shaped by the view from my seat, my conclusion is the same.

Things changed in the Fall of ’07, and have not been the same since. 2009 was an improvement, challenging but good. Business in 2010 is different to the way it was in 2009 — things are changing rapidly. There’s more activity, but not greater volume; clients are focused on cost cutting, do not have the ability to risk their remaining resources, are being smarter about their spending, and are less likely to ride with a project for as long as they had done in earlier years. These factors are pressuring the market for services to change from the a la carte delivery of specific services to a more all-encompassing pre fixe. Clients are demanding the delivery of those services in a way that adds value to their projects. This is leading to more price stability for buyers of services, more specialization and niche building by sellers of services, and a movement away from the traditional ways in which services were priced and delivered.

Once again, a new normal.

Naturally, the question of whether we “are at the bottom” and “when is the economy going to return to normal” will be asked. Well it isn’t going to — there’s a new normal.

Our economy has lost millions of jobs during this recession, and even if we could replace them, it would take many years to do so. Current business conditions, however, discourage small businesses from adding new workers. Specifically, health care costs, taxes, data privacy concerns, payroll costs and employee benefits are a major discouragement to hiring new employees. At the same time, new technology has made it easier to outsource job functions than to hire more employees. A company that needed 8 employees 10 years ago, can now achieve the same output with only 3 employees. It’s possible now to bank online and make deposits from the office; bookkeeping and accounting are easily outsourced as online software programs download banking, billing, revenue and expense data and process the data into registers and reports; billing and accounting information can be accessed from the internet by an outsourced independent contractor; printing, copying, marketing, advertising, internet strategy, as well as informational technology are all outsourced, and administrative and secretarial services are shared between companies that have co-located in larger office space, with any excess services needed being handled by virtual assistants.

My point being that the old jobs lost are not going to come back, big companies will shrink, and small companies will try to remain small. Jobs are being created, and will continue to be created but they are being created by new businesses, not existing businesses. The new jobs are in different fields, and workers will need new skills.

Once again, this will be the new normal. The new normal is to adapt or die. Adaptation will need to be done quickly, and will require one to be nimble. Large entities are by their nature not nimble and cannot adapt quickly enough to create significant opportunities in the new normal. It’s up to us little guys to do that. I’m up to the challenge, are you?