“We are excited to welcome Rachael Michael to our team at Focus Management Group,” said J. Tim Pruban, Focus President. “Not only will she take the reins with our current interactive marketing and SEO, but also help us identify and target new opportunities through her extensive background and creative insight.”

Michael comes to Focus with over 13 years’ experience in sales, marketing and entrepreneurship and brings with her a wealth of expertise, creativity and enthusiasm. In her previous roles she has successfully developed distribution networks, created and increased internet presence, managed client and vendor relationships, and promoted a variety of products and services within the events industry and the group health insurance industry.

Most recently Michael was the Social Media, PR & Marketing Coordinator for a premier, niche-marketed modern furniture rental business, FormDecor, located in Southern California. She cultivated a broader brand presence through increased engagement in established networks – Twitter, Facebook, LinkedIn, Google+, YouTube, Pinterest and the FormDecor blog – while also developing FormDecor’s audience on emerging social/business channels. Michael was also responsible for increasing product visibility through print and online marketing channels as well as managing various multi-media projects. Utilizing her writing background, Michael developed the FormDecor voice through blog posts, articles, and featured client interviews.

In addition to her prior Social Media, Marketing and PR experience, Michael has extensive experience in group health insurance sales and marketing. In 2001, she was part of dynamic sales team at Destiny Health that introduced HRAs, HSAs and High-Deductible Health Plans to the United States. Michael nurtured and maintained productive business relationships with brokers, sold and maintained both national and local accounts, educated the members, handed the enrollment process, and managed ongoing account servicing. In 2005, Michael was named Rookie Sales Consultant of the Year at Destiny Health. During her time she continually exceeded quota and earned additional sales accolades. Michael was one of five sales consultants, out of approximately 20 nationwide, to complete a rigorous ten-month internal certification program and was awarded special recognition.

Michael graduated in 1999 from Columbia College Chicago with a Bachelor of Art in Photojournalism. She can be reached at (773) 724-2082 or via email at r.michael@focusmg.com.

For more information about Focus Management Group call 813-281-0062 or visit www.focusmg.com.

By Jim Eddy, Senior Consultant, Information Technology, and Lori Launderville, Managing Director

For many companies, IT (Information Technology) budgets represent a material percentage of total expenses (often fifteen to twenty percent), yet stakeholders are often unable to receive the financial and operating performance reporting required, and management is unable to receive critical decision making information needed to be successful. The company suffers and stakeholders lose— all for no reason.

Effective IT management and decision-making tools create an environment for success. As with any business expense, it is imperative that IT dollars are well managed, and involve a thorough maximization of the impact on overall financial performance and cash flow. Focus Management Group has direct experience managing IT integration, IT conversions, and IT planning all of which are critical to performance improvement and success.

Proper IT budget management is required for ongoing performance improvement. Lack of innovation or lack of integration planning may doom an otherwise successful company.  Stakeholders often have an advance view of issues because they review performance data on a regular basis but without IT oversight, stakeholders might not understand IT underutilization and how it impacts the bottom line.

Focus Expertise in Information Technology

Focus Management Group is a proven partner in managing IT innovation success. Our Technology Success Strategy, developed by an experienced team of technology professionals, incorporates major contributors to recovery, management and capital preservation.

Focus Professionals are able to provide a variety of IT services to lenders and their portfolio clients across a wide range of industries. These services include the following:

• Interim COO of a technology companies,
• Interim CIO of any type of company,
• IT due diligence related to analysis of potential acquisitions,
• Technology project oversight and measurement to established performance indicators,
• IT assessment and strategy, and
• Change-in-Control Planning, with unique aspects related to technology planning and integration during merger and acquisition activity.

A Recent Technology Engagement Involving Performance Review, Planning and Implementation

A financial services company needed to reduce costs and increase customer acceptance of new products in order to maintain existing profit levels. The company’s IT department was operating 15 percent over budget. The successful achievement of cost reductions, customer acceptance, and maintenance of budgeted financial performance was imperative. This client provided a variety of insurance products to leading banking institutions in North America. Due to regulatory requirements and economic conditions, the Company was faced with enormous pressure to reduce product pricing on an annual basis.

The Focus professional was engaged to perform a complete revitalization of the Company’s technology systems. At the point of engagement, the company’s twenty year old operational support system (OSS) crashed daily, causing major interruptions in service and no ability to process payments. This resulted in both customer dissatisfaction, and cash flow problems for the company.  The company’s IT department was also hampered by its headquarters facility, which was housed in an old building without the infrastructure to facilitate a quality technology environment. Voice and data access to the outside world could only be provided by a single low-quality network provider, and the IT department lacked the skills and tools to support growth.

How Did Focus Create IT Success?

Using a combination of tax credits, contract renegotiation, cost audits, organizational restructuring and reciprocity, Focus was able to introduce an aggressive Cost Containment Strategy which brought the IT department from fifteen percent over budget to twenty percent below budget in six months.

• A new network, data-center, and voice system were sourced and installed, and applications to facilitate cost reductions and processes needed for making sound financial decisions were implemented.
• Testing, support and maintenance roles were introduced, which allowed the company to reduce the average salary and contract rates by fifteen percent while improving overall performance.
• An analytics platform was implemented that empowered loan officers to fine tune their sales activities with real-time data. As a result, loan officers raised their customer acceptance rate from ten percent to nearly thirty percent.
• Applications were re-written to accommodate the new business needs. Off-the-shelf solutions were researched and integrated into the custom solution to keep costs low while delivering fast performance improvement.
• The data-center, supported by a new, secure network, was moved from an inadequate facility to a state-of-the-art facility with better infrastructure and the ability to abide by all compliance frameworks.
• Hardware and operating systems used a virtualization strategy to reduce costs for personnel, power, space and licensing.
• Storage was centralized using a Storage-Area-Network (SAN) to provide speed, scale and security for accessing information, and robust disaster recovery.
• Desktop computers were virtualized, which greatly improved security and decreased costs.
• When the engagement successfully concluded, the company had cut its costs significantly yet innovated greatly. The company had a modern technology department—hardware and software—to help grow the business, while meeting the capital investment requirements of the owners.

An Example of IT Integration Success

A private equity group was interested in integrating several portfolio companies into one single, scalable and efficient IT infrastructure.  While this Focus client was involved in insurance, logistics, online healthcare services and professional sales, the need for fast, accurate decision making tools crossed all industries.

During the engagement Focus was able to assess the existing IT departments at each entity and develop a combined long-term technology strategy which road-mapped integration and allowed for expected growth.  Implementation of the Focus strategy resulted in a twenty percent decrease in the IT operating budget, while increasing on-time performance and availability.  The newly implemented system was able to achieve 100% availability during our twenty-four consecutive month engagement, and we delivered the IT projects with a 93.5% on time success rate.

When the engagement was completed, the client had achieved the objective of streamlining IT and reducing costs. All companies were operating on a single IT platform. This included an accounting system with integrated reporting and operating schedules across all entities. As a result, the company was able to add new products and additional entities with minimal costs for infrastructure. This approach to IT management also enabled more streamlined merger and acquisition activity, because technology simplified the process rather than becoming an obstacle to the process.

Published in the February 2012 issue of Trustee Magazine
By Daniel T. McMurray 

When nonprofit hospitals face financial challenges such as a lack of operating cash or limited access to capital for replacement and expansion, the board must make some tough decisions. In reviewing the hospital’s long-term strategic options to continue facility operations and improve community services through access to investment capital, the board may decide to sell the nonprofit hospital to a for-profit hospital ownership entity. But before taking this step, trustees must ensure that an open and fair process is used to reach the best decision possible for the organization and the community it serves.

When a nonprofit hospital board considers a sale to a for-profit operator, the attorney general of the home state is often required to provide an opinion regarding the protection of donated assets and the safeguarding of the health and well being of the state’s residents. Because nonprofit hospitals are often major health care providers in a state, and an associated sale involves significant dollars of donated assets and large employment bases, the attorney general will want to ensure that the nonprofit hospital board reached the the decision to sell in comprehensive and transparent way. In addition, a for-profit conversion can raise numerous community concerns about the continuation of hospital operations, essential services and charity, uncompensated and underinsured care. The board can shorten the approval process by following basic steps to ensure there is no conflict of interest, all options have been considered, and no charitable assets are transferred to the for-profit entity. By following these steps, the trustees and hospital leaders demonstrate that the transition from nonprofit to for-profit was a transparent process predicated on serving the community.

Review Process for Conversion

The following points outline a three-part conversion review process that a board should use when its decision will require the approval of the attorney general: background and process; review of purchaser; and legacy entity considerations. Documentation should be available from board and committee meeting minutes, outside consultant reports, confidentiality agreements, purchase and sale agreements, and filing documents to provide evidence of due diligence.

Background and process

1. Demonstration of a principled reason for the need for change rooted in the charitable purpose of the organization and not the interest of any buyer
2. Evidence of an open review and deliberation process. Information, including all consultants reports, should be available to all board members. However, this transparency must be balanced with the need for confidentially. For example, if information is prematurely released, physicians may leave the hospital or worry about an adverse impact on their practice
3. Absence of potential or actual conflicts of interest within the board or senior management
4. Demonstration that all viable strategic options, other than the sale to a for-profit entity, were considered. These alternatives should include remaining independent or merging with or aligning with another not-for-profit entity
5. Demonstration of consideration of any options that could best preserve the community’s interest and, as close as possible, continue to fulfill the hospital’s mission
6. Proof that an independent valuation process was conducted
7. Evidence that the short- and long-term risks of the hospital will be assumed and addressed as a result of the approved transaction
8. Demonstration that multiple offers have been received and considered.
9. Evidence in the board and committee meeting minutes that considerable deliberation occurred over a time frame that allowed for opposing board member opinions to be heard and considered.

Review of purchaser

10. Evidence of a review of the potential impact on the for-profit owner’s financial performance after overlaying the contractual terms for the potential transaction. This financial review should include the impact of continuing agreed-upon:
• operations as a hospital
• essential or core services, including those services that have been historically unprofitable
• charity care
• various research and educational programs
11. Determination of any terms and conditions of the sale that result in buyer obligations.

Legacy entity considerations

12. Evidence that the remaining legacy entity has sufficient funds to monitor compliance with the terms of the sale and to fund any required enforcement
13. Evidence that meetings for employees and physicians, as well as community forums, have been conducted to seek input and discussion regarding the conversion’s impact on potential stakeholders
14. Evidence that a plan has been developed to properly redeploy charitable assets according to the terms of the gifts and for the benefit of the community for which the gifts were directed
15. Evidence that the charitable entity receiving the proceeds of any assets of the nonprofit entity is not subject to direct or indirect control by the for-profit purchaser
16. Evidence that the transaction does not allow for future claims on the transferred charitable assets by the for-profit buyer
17. Evidence that any proposed foundations are created in keeping with the required charitable purposes of the donations
18. Evidence that the proposed board members of legacy entities, foundations and the buyer are not overlapping to create conflicts of interest.

Protecting the Community

The conversion of a nonprofit hospital to a for-profit hospital must be a decision grounded in sound financial analysis and informed decision-making. Trustees must undertake a comprehensive review process to ensure the hospital’s service mission will be continued after the transaction is complete. It is their responsibility to  investigate options to provide ongoing service, and to vet potential purchasers.

Outside experts can enhance the transparency of the process by providing valuation, process and transaction review, as well as ongoing performance review of both of the hospital and the charitable entity. In a recent conversion situation, experienced advisors enabled the hospital and the attorney general required to provide an opinion regarding the transaction to better structure the sale transaction. This structure ensured the trustees performed their responsibilities both during and after the conversion by providing funding during the transaction to monitor and enforce the charitable purposes clauses in the purchase and sale agreement.

“We are excited to welcome someone like Joe who has built such strong and long-standing relationships within this industry,” said J. Tim Pruban, Focus President. “Joe’s dedicated work ethic and strong interpersonal skills make him the right fit for our business development team. I know he will help facilitate the firm’s growth in this increasingly competitive marketplace.”

Before Karel joined Focus he spent several years at the Turnaround Management Association (TMA) global headquarters where he served as the Director of Fund Development and was responsible for the development and sale of all marketing opportunities offered at TMA.

Karel graduated from Columbia College in Columbia, Missouri with a Bachelor of Science in business with an emphasis in marketing and a minor in meeting and convention planning.

For more information about Focus Management Group call 813-281-0062 or visit www.focusmg.com.

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The ongoing impact of the decline in real estate values is resulting in the need for expert testimony to establish reasonable lending structures, reorganization plans, market oriented reconciliation of valuations, and highest and best use review. Focus professionals regularly supply this expert testimony and litigation support on behalf of debtor and creditor counsel. Our expert testimony and litigation support assists counsel in achieving the best outcomes for their clients.

The work out process related to real estate loans has been evolving over the past few years. The first stages involved amending existing loans and establishing new repayment plans. When those repayment plans were not successful, the second stage required additional amendments, or bankruptcy protection. In many cases the borrower/lender relationship is in a new stage — one which involves litigation related to reasonable lending structures, achievable reorganization plans, values, and lender liability.

Case Example 1: Reasonable Lending Structures

In a recent case, a Focus professional, with several decades of real estate lending experience, was able to quickly survey the current market for loan structures and provide Expert Testimony regarding the reasonableness of a lending structure proposed by the borrower. In this example, the Focus professional supported lender’s counsel in establishing reasonable current advance rates, interest rates, and repayment strategies. When dealing with a troubled lending situation, Focus professionals are uniquely qualified to understand and opine regarding the reasonableness of a proposed lending structure.

Case Example 2: Achievable Reorganization Plans

In another case, a Focus professional reviewed the borrower’s reorganization plan to establish achievability. During the review of the real estate property entitlements, the Focus professional discovered the borrower had failed to meet certain requirements related to property tax abatement. The financial impact of this issue was significant to this case and resulted in the need to develop an alternative reorganization plan. Without the review of the Focus professional, this problem would not have been discovered until well into the reorganization time period and would have caused the plan to fail.

Case Example 3: Valuation

In another case, our Professionals provided fairness opinions and related expert witness support in confirmation of the prices paid and recovery generated by the sale of projects and divisions of real estate entities. The opinions prepared by Focus professionals assisted the client company in finalizing the sale closings at market prices. By contrast, without those opinions, the purchasers would have required reduced prices and the lenders would have been unwilling to release assets. The timely preparation of the opinions, and the expert testimony support, allowed the divisions of the company to be sold quickly and at market prices.

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In order to incentivize the development and renovation of affordable housing properties, the government has provided tax benefits to developers and their investors. Tax credit property owner/operators have unique rules governing their actions, and are subject to unique requirements from the various regulatory authorities involved with their respective properties. These rules and regulations must be dealt with adeptly in a workout scenario.

The federal government and housing constituencies discovered decades ago that the private sector was much more adept than the public sector at providing affordable housing to individuals, families and seniors. In order to incentivize the development and renovation of affordable housing properties, over the years, the government has provided tax benefits to developers and their investors.

Since 1986, these tax benefits have come principally from federal tax credits provided pursuant to Section 42 of the tax code. These tax credits provide developers with an economic benefit that has been successfully utilized to attract equity capital to these affordable properties. This equity provides the funds needed to supplement loans and grants, such that debt service can be maintained at a level that allows for affordable rents, as well as provides for a profit component to the developer.

In addition, subsidies are often made available to developers through a variety of sources and in a variety of forms. Taken together, the tax credits and various subsidies have provided the means for the private sector to be successful in fulfilling a necessary public purpose in the provision of affordable housing properties. Nonetheless, it is not uncommon to see that a combination of an overly aggressive financing strategy coupled with an unrealistically low expectation of operating expenses can cause affordable housing properties and their owner/operators to struggle, just as with market-rate properties.

When this occurs, the problems facing the owner/operator can quickly become compounded and impair its ability to see its way through to a successful resolution of its financial issues due to the restrictions and penalties that come with affordable housing tax credits.

The Fundamentals of Tax Credit Properties

Tax credit properties operate pursuant to Section 42 of the Internal Revenue Service Code. In order to operate as a tax credit property, a developer needs to apply for and receive an allocation of tax credits from the agency within its state responsible for such allocations. Once received, these allocations provide tax credits over a ten-year period in a set amount to the developer, so long as the property is operated in compliance with the provisions of the tax credit program.

These provisions require, in part, that the properties rent their units to qualifying tenants at qualifying rental rates throughout a 15 year period. If units are not appropriately rented, then the developer stands to not receive the tax credits attributable to such units during that year. Additionally, and critically, such failure to qualify units or to have the property fall out of compliance with the provisions of the tax credit program can cause the developer to have to recapture a portion of tax credit already received, along with an interest penalty. This recapture — or repayment of tax credits — can be severe in amount.

In practice, upon receiving an allocation of tax credits, developers are in the position to bring in equity capital through a ready market of investor funds — typically provided directly from corporations or “tax credit funds,” which have been established as vehicles through which corporate investors can pool their funds to invest in multiple properties. The developer will have structured the property ownership interest as a limited partnership in which it, or an affiliated entity, is the general partner owning 1 percent (or less) of the economic and tax benefits associated with the property, with the investors owning the residual 99 percent (or more) share of these benefits.

Therefore, over the 10 year tax credit delivery period, the investors are receiving 99 percent of the tax credits delivered by the property. As part of the transaction to sell the investors the 99 percent interest, and, hence, the tax credits, the developer typically guarantees the investor that the tax credits will be delivered and that any tax recapture will be reimbursed by the developer.

Tax Credit Property Restrictions

In order to receive tax credits, as mentioned above, the developer must rent the property to qualifying tenants at qualifying rental rates throughout a 15 year period. However, these may not be the only restrictions that are imposed on the developer and property.

The tax credit application process in a given state often requires that the developer agree to additional restrictions above and beyond the 15 year restrictions imposed by the Tax Code. In addition, in order to receive subsidies through various federal or local agencies, developers are often required to abide by further restrictions. For example, deed restrictions can be brought into play with such deed restrictions not allowing the conversion of the “affordable property” to a market rate property or restricting to whom the property can be sold to at the point of disposition.

If the property’s ownership entity has been qualified as a non-profit enterprise and is receiving an exemption from the local municipality from the payment of ad valorem taxes, then the property is faced with a self-imposed constraint.  Often, such tax exemption is critical in the profitable operation of the property. Therefore, a loss of the tax exemption can be devastating to the economics of the property. Any sale of the property must take this into account. Subsidy programs, whether through the Department of Housing and Urban Development (HUD) or through other entities or enterprises, often come with extensive regulatory compliance obligations. These obligations come at an expense and in many forms. Developers with properties that participate in such programs often require personnel to ensure that compliance is taking place and to provide the requisite reporting expertise needed.

When Trouble Arises

Typically, multifamily developments are financed within special purpose entities which have some form of nonrecourse debt associated with the property purchase or development. This is normally the case with tax credit partnerships. However, the tax credit delivery and tax credit recapture guaranties are not non-recourse. Further, the absolute dollar amount of these guaranties can be quite large and it can be questionable as to the guarantor’s ability to make good on its guaranty.

In such cases, the limited partners “take it on the chin,” as they must come out of pocket to reimburse the tax credit recapture (or at the very least have the recapture amount offset against tax credits being received by them from their other tax credit investments). As limited partners invest under the reasonable expectation that they have, by definition, “limited liability,” this requirement to repay recapture amounts can be unexpected and dramatic.

Simply selling the property is problematic. A sale of the property can trigger a full recapture of tax credits, unless the purchaser is willing to indemnify the seller for this exposure. Further, the regulatory agencies, including the tax credit allocation authority, referenced above, will often have restrictions on a sale of the property, making such a disposition significantly more of a problem than with a market rate property. If the owner/operator is a 501(c)(3) entity, the disposition can be even more difficult.

Suffice it to say, when trouble arises with a tax credit property, the tax implications and regulatory restrictions cause the workout to be significantly more involved than that encountered with a market-rate property.

Recent Example

The recent case of ABC Housing Co.¹ provides an example of what can go wrong in the case of tax credit properties. ABC Housing Co. was a not-for-profit apartment owner/operator, which amassed interests in a large number of apartment complexes. These properties included properties acquired through the issuance of tax exempt bonds, properties purchased utilizing conventional financing, and properties that had received allocations of low income tax credits under Section 42 of the tax code and had been syndicated with outside investors.

Troubles Facing ABC Housing Company

Due in large part to over-leverage and overly optimistic projections of expenses, serious cash flow problems developed, which eventually resulted in the Company being forced into bankruptcy. The Company struggled in bankruptcy. As in many cases, issues arose between the competing interests and motivations of creditors and management. It struggled with a complicated web of company owned interests in more than 100 special purpose entities (SPEs) that had been established to facilitate the company’s ownership of apartment properties and for use as investment vehicles.

It also struggled as senior management departed the company. Further, its apartment properties struggled. Generally speaking, debt financing was non-recourse and was on properties owned within the non-debtor special purpose entities.  However, in an effort to keep the “kingdom” afloat in the years leading up to the bankruptcy, cash resources at the ABC Housing Co. were depleted and properties at the SPE levels were, in many case, deprived of needed capital expenditures.

Actions of the Appointed Chapter 11 Trustee

After a lengthy period of time, a Chapter 11 trustee was appointed who brought in experienced bankruptcy counsel and a seasoned financial advisor. In the division of duties, the financial advisor was charged with determining which properties offered value to the estate and then determining how to best realize this value.

For the most part, the analysis and resulting recommendations were straight-forward and consistent with those found in traditional multi-family operations. Non-recourse debt at the special purpose entity (owner) level limited the exposure of the debtor entity. However, the issues involving the syndicated tax credit properties were complicated. Each of the tax credit properties were owned by a limited partnership.² Tax credit funds had acquired the 99 percent limited partnership interest in each case, with ABC Housing Co. — or an ABC Housing Co. — owned LLC, owning the 1 percent general partner interest.

Each of the partnerships had separate partners and a separate partnership agreement dictating the rights and obligations of each party. Additionally, partnership agreements were unique in form, but generally speaking, provided for certain guaranties by the general partners which included, among other provisions, a guaranty to reimburse the tax credit partners for any tax credit recapture incurred.

Further, in most cases, there were separate guarantees executed by the Company wherein it guaranteed the obligations of the general partner. Thus, although ABC Housing Co. was not, in most cases, a general partner, through separate guarantees it assumed the guaranty obligation of the general partner for tax credit recapture.

The limited partners asserted extensive claims in the bankruptcy. A large portion of these were contingent claims emanating from the various guaranties by ABC Housing Co., including those related to the reimbursement of limited partners for tax credit recapture. These claims, if allowed in full, would have significantly diluted the distributions available to other creditors.

The claims were complicated and difficult for the parties that were not experienced with the IRS provisions relating to these low income housing tax credits. The key point was that the bulk of the tax credit investors’ claims were contingent- recapture had not yet occurred. The justifiable concern was that the debtor, in realizing that there was little or no value available in its equity interest in the various partnerships, would choose to essentially hand over the keys to limited partners or lenders. This in turn could result in large recapture liabilities to limited partners.

The Resolution

The ultimate resolution with respect to the tax credit properties was a negotiated settlement wherein the limited partners agreed to substantially limit their claims in return for the debtor agreeing to maintain its general partner interest in the respective partnership for a limited period of time in order to provide for an orderly transfer of its partnership interest in a way that minimized the likelihood or impact of a recapture event. Further, during this period of time the debtor agreed to use its best efforts to cause the general partners to continue to fulfill the regulatory obligations of the respective partnerships.

This resolution provided for a mitigation of the allowed claims in the bankruptcy which was in the best interest of the limited partner-creditors as the distributions on their claims would have been substantially less than the actual damages that they would have incurred from the recapture event. Further, the settlement avoided dilution in the distribution to the other unsecured creditors in the case. The resolution was a somewhat counter-intuitive as it did not provide for an increase in equity for distribution to creditors. Rather, it provided for a decrease in the total claims and an increase in the distribution to remaining creditors.

To be clear, there were and continue to be numerous other issues involved in this bankruptcy. Notwithstanding, an understanding of the tax implications of the plan being imposed and of the regulatory obligations relating to the properties involved in the estate was critical in advancing the plan.

Summary

Tax credit property owner/operators have unique rules governing their actions, and are subject to unique requirements from the various regulatory authorities involved with their respective properties. These rules and regulations must be dealt with adeptly in a workout scenario.

A successful workout of a tax credit property owner/operator, therefore, requires multiple layers of expertise. Guidance should be sought from experts with specific experience in the tax credit property arena. Such a team includes a financial advisor, a real estate broker, and legal counsel — with the financial advisor and real estate professionals having specific expertise in dealing with tax credit properties.

In other industries or subgroups within real estate, using just one of those experts may be sufficient. In this tax credit real estate niche, the experienced team will be critical to unraveling all of the unique aspects of each project’s financing, ownership, deed restrictions, ownership restrictions, and countless other variations.
__________

¹ The actual name of the not-for-profit housing development has been changed due to privacy issues.
² In some of the partnerships, the limited partners owned in excess of 99 percent and the general partner less than 1 percent.

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Focus Management Group has prepared an economic industry overview and restructuring strategy discussion to assist stakeholders in their review of portfolio poultry industry operators.

For a copy of our detailed analysis, download the PDF.

Executive Overview

The U.S. poultry industry exhibits many unique characteristics, which combine to create challenges for stakeholders seeking to develop turnaround or restructuring strategies for poultry companies. This Paper seeks to provide the reader with an overview of the poultry industry, and to provide insight related to turnaround and restructuring considerations in this niche market.

Our study analyzes the changing relationships between broiler prices (chickens raised for meat) and feed costs, and assesses the resulting complex decisions facing poultry processors regarding flock management, further processing, optimal bird weight, etc. We also identify how the interaction of key performance indicators can serve as a pivotal tool in determining the viability of a poultry operation. In the case of non-viable operations, we discuss at length the factors that must be addressed when considering a poultry processor liquidation.

Finally, the Paper outlines in detail how potential fluctuations in the commodities markets in 2012 may result in additional margin compression for poultry processors, exacerbating an already challenging situation existing today in the U.S. poultry industry.

Industry Overview

• The U.S. poultry industry is highly concentrated: two poultry processors represent 40% of the market, and over 90% of the market is captured by two dozen companies. Exports represent 20% of broiler production. A majority of exports are shipped to Russia, China and Mexico.
• Poultry prices are not determined in publicly traded markets, in contrast to markets which establish prices for commodities such as corn, cattle and hogs. Though the establishment of a poultry futures market has been attempted in the past, all such efforts to date have failed.
• Instead, prices for poultry are negotiated between individual suppliers and purchasers, with average daily prices being reported to the Georgia Department of Agriculture, which then posts these prices, effectively creating the “market price” for poultry.
• The U.S. poultry industry is currently experiencing a period of increasing input costs (feed) and increasing output prices (meat). However, price increases for outputs have lagged input cost increases, thereby creating financial distress for many industry participants.
• Feed costs fall outside the direct control of industry participants. For example, the price of corn (a major feed component for the poultry industry) has risen in recent years in part as the result of increased demand for corn arising from ethanol production. While industry participants are able to vary their feed component mix within set parameters, during times when all feed components increase in price, the net impact to poultry producers will be reduced profitability.
• Poultry processing improvements have produced faster time to market and larger bird weights, (currently 47 days and 4.5 pounds, respectively). These improvements have been in response to steady increases in poultry consumption from 48.0 lbs/person in 1980 to a peak of 86.0 lbs/ person in 2006. However, recent increases in meat prices have caused total consumption per person to drop from the 2006 peak to 83.6 lbs/person in 2010.
• The poultry industry is currently in distress. Bankruptcies, liquidations and consolidations are becoming ever more frequent. The survival of the industry’s participants will depend upon their individual ability to maximize efficiency and minimize cost until equilibrium can once again be achieved between feed costs and poultry prices.

Turnaround & Restructuring Alternatives

• When analyzing the performance of a poultry processor, it is important to differentiate between the impact of day-to-day management decisions and the impact of larger macroeconomic factors. Critical to any performance recovery is an understanding of the root cause of financial performance problems.
• Turnaround success is centered on understanding the operating performance of the individual poultry producer. Throughput is a key element to reducing production costs. Availability of throughput metrics, including downtime, yield per line per hour, etc., is critical to evaluating turnaround and restructuring options. Also, critical is an understanding of vendor and customer contracts and their impact on cash flow.
• The Focus Poultry Performance Matrix provides a unique tool for understanding the combinations of performance which can result in a poultry producer achieving success. The output from this Matrix, when coupled with analysis of a poultry producers’ various metrics, contracts, etc., provide stakeholders with an ability to assess the likelihood of an industry participant attaining these combinations of performance that result in positive financial performance.
• Restructuring measures may be required if a financial and operating performance turnaround cannot be achieved under prevailing conditions. Such restructuring options include both in-court and out of court alternatives, ranging from direct lender negotiations to Chapter 7 liquidation.
• Turnaround and restructuring options in the poultry industry are complicated by the existence of potentially millions of live birds in production at any point in time. It is not possible to immediately close an operation that is struggling or failing. Careful planning is required in order to avoid significant loss of value.
• The industry-specific characteristics outlined in this Paper create diverse challenges for poultry processors and their stakeholders. Continued increases in feed cost, combined with lagging market prices for poultry products and reduced consumption, have created margin stress on all aspects of the industry.
• In the face of such margin stress, processors and their stakeholders must quickly and carefully examine all factors affecting operating throughput to obtain advance warning of possible liquidity issues.
• Failure to closely monitor poultry producers for signs of negatively trending performance metrics, and rapidly address issues identified at poorly performing operations, can result in unnecessary loss of collateral and/or recovery to stakeholders.
• The output from this Matrix, when coupled with analysis of a poultry producer’s various metrics, contracts, etc., provide stakeholders with an ability to assess an industry participant’s likelihood of attaining those combinations of performance that would result in positive financial performance.

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The explosion of condominium construction from 2002 to 2007 is contuing to create some unique problem loan situations today. Following the real estate market collapse in 2007, countless condominium developments have run into financial distress and failure due in part to collapsing demand and resultant oversupply of such units in the market. Initially most lenders worked with existing ownership to attempt a restructure, yet many condominium towers remain incomplete, units remain unsold, and condominium home owners’ associations (often referred to as “HOA” or “COA”) deficit operations continue.  The common thread is that lenders are being asked to fund failed condo development completion costs and owner associations operating deficits, yet a positive performance outcome continues to elude all parties.

A recent example that illustrates this situation involved a lender to a condo developer with two related buildings in a resort area.  The 40 unit buildings were originally developed to be condominium mid-rise towers appealing to the second home or investor purchaser.  In this example, both buildings were completed in 2007.  Currently, Building One has 15 units sold and 25 unsold units.  Building Two has sold eight fractional share ownership units and the remaining fractional shares are unsold.  The lender has been working with the owner from 2007 to 2011.  The buildings are currently being leased by the night as vacation rental properties.  The lender is not receiving interest or principal payments and is being asked to fund ongoing operating shortfalls.  In addition, the wear and tear on the collateral is continuing and deferred maintenance is accruing.

For this lender, it is difficult to imagine an appropriate workout strategy.

How does a Lender approach this problem?

Unfortunately outcomes which result in lenders recovering their total outstanding loan balances in failed condo developments are rare. Typically a lender must make difficult choices in such situations.

The first question to be answered is “At what price would this project clear the market?”  This requires the lender and its advisors to actively pursue a third party buyer to determine the market floor.  Before additional decisions regarding funding operations and collecting interest can be made, the lender needs to understand the true current value of the property – the cash price a buyer would be willing to pay in today’s economy.

The second question relates to the market price established in answering the first question, namely “Is the lender able to absorb any loss required to clear the market at the third party price?”

If the answer to the second question is “no” then the lender will need to fund operations and employ management talent to ensure the collateral is maintained.

If the answer to the second question is “yes” then the lender should evaluate the outlook for market conditions and offset any potential gains associated with a hold strategy against operating costs which will need to be funded during the hold period.  If the lender perceives a positive net gain over the hold period, the lender may elect to hold the asset for a period of time and fund operations.  If the lender perceives an additional net loss, the lender should move to sell at the current market price.

At What Price Would the Project Clear the Market?

Lenders are required by law to receive FIREEA-compliant appraisals on real estate held as collateral.  During the recent real estate downturn many appraisals established values with the caveat that the highest and best use of a particular property would be to hold the property until more normal market conditions return.  More normal market conditions, in this case, means there are more willing buyers active in the marketplace.  The appraisal, therefore, establishes a value of an illiquid asset, while the lender is interested in the value at which the collateral can be converted to cash.  As a result, lenders need to consider other avenues for testing values.

One approach is to request a Broker Opinion of Value (BOV).  The key to this approach is to engage a broker that has specific experience in the collateral’s product type, comparable sales in this product type and geographic market, and marketing successes. Another approach is for the lender to review its own loan portfolio for recent sales of the product type in the geographic market. A third approach is to hire a Financial Advisor to consider all the aspects mentioned above, plus provide an independent view of the local market conditions.  This expands the review beyond an analysis of sales and re-sales, to include further analysis of market conditions and the operations of the specific collateral.  This approach also provides a smooth transition to the comparison of hold time, projected value, and ongoing operating costs.

Forecasting Operating Costs

Imperative to the analysis of hold time, project value and ongoing operating costs is the ability to effectively forecast operating costs.  Typically a development is run by a property management group (PM) hired by the original developer until such time that the management of the building can be transferred to the unit owners based on the condominium Declarations.  To assist in preserving value, the lender needs to understand the owners’ association operations.

While the property management group is purported to be a third party, the decisions that a PM makes are driven by the Board of Directors of the HOA – usually the original developer, who typically serves as the HOA president until the Declarations allow the transfer of management to the unit owners.  As a result of this symbiotic relationship, the level of deferred maintenance may not be openly shared with the lender.  Perhaps maintenance on the elevators or the roof (two areas difficult to assess) has not occurred and is negatively impacting recovery value.

Other potential problem areas are association dues and real estate taxes.  The owners’ association manager should know which owners are delinquent in the payment of association dues, property taxes, etc.  Often the original developer is one of the owners who is delinquent on association dues.  This can result in reduced recovery to the lender as units sell, because unpaid association dues must be remitted to the HOA or COA upon sale of a unit.

The board of directors of the HOA instructs the owners’ association manager and influences the operating rules of the association, which establish cost structures and maintenance plans.  A developer may be keeping HOA or COA dues artificially low to reduce the payments upon sale to the HOA or COA.  However this creates a situation where operating costs may be unfunded and pushed to the lender.  Alternatively, the HOA or COA dues could be increased to bring more cash in from the third party owners immediately, while reducing future recoveries from unit sales.

Often, the Board of Directors for the owners’ association needs to be formed and brought up to compliance with the Condominium’s Declarations.  Condominium laws are different in each state and regulations regarding proper management of an owners’ association often require a professional manager to ensure compliance.  Legal counsel skilled in condominium law may need to review the current status of issues facing the owners’ association.  These areas can result in legal fees which developers may elect to avoid, thereby creating legal problems that Lenders are left to solve in the future.

Analysis of Hold Times, Values and Operating Costs

The lender or the financial advisor needs to use the information described above to develop a graph comparing hold times to net values.  The table below is an example of the outcome of this type of analysis.

The example represented in the graph above depicts a property with a current market value of $7 million and a current debt balance of $9 million.  It assumes that the market value will improve rapidly during years four through seven.  It also assumes that debt and holding costs will increase by 10 percent per year.

This type of analysis helps illustrate the challenge which lenders have to resolve regarding the difference between current appraised values and market clearing values, and the costs to carry real estate assets.  In the example above, if a Lender believes these assumptions for market changes are real, the Lender would likely opt to incur the holding costs for the next 5 years in order to have an opportunity to sell at break-even or at a gain in years 6 and after.  The key risk lies in the assumptions used to determine market appreciation, compared to the hold costs.

Conclusions

Condominium workout situations are not easy – either for the lender, the developer, or the current unit owners.  Lenders are confronted with seemingly impossible to overcome property development situations – complicated to unravel, difficult to understand, expensive to fund.  The use of a third party financial advisor provides an opportunity for a second set of eyes with established property management skills to review all aspects of a condominium project and provide risk assessments related to the current operations, as well as future operating assumptions.

Focus Management Group (Focus) is serving as Financial Advisor (FA) for Downey and is guiding the hospital through its Chapter 11 bankruptcy proceeding. In this capacity Focus has worked with Downey to improve the overall revenue cycle management, computer system capabilities and management reporting of the hospital.

A key component of a revenue cycle management process is the implementation of a contingency plan to provide ongoing revenue cycle capabilities during unforeseen events such as natural disasters or vendor problems. In the case of Downey, this contingency planning work became critical to Downey’s success when the hospital decided to replace its revenue cycle management supplier. It was this successful planning and implementation work that resulted in Downey receiving MedAssets’ “Best Practice Award for Rapid Implementation.”

The Problem and the Solution

Prior to fully converting to MedAssets for its revenue cycle management platform, and following an evaluation by Downey and Focus of various vendors for this contingency planning service, Downey began utilizing MedAssets as a “hot back up” as an integral component of its contingency plan. An additional benefit of this contingency plan is the increased certainty provided to Downey’s asset-based lender Midcap Financial that cash flows would continue uninterrupted.

Focus’ extensive experience in revenue cycle management allowed Downey to make an informed decision regarding contingency providers. Downey and Focus visited MedAssets operating sites, viewed specific reports and systems, and evaluated work inflows and outflows. During this review, Focus worked with Downey to assess MedAssets’ claims management capabilities, including its process for handling denied claims. The MedAssets platform differentiated itself by providing real time views into the reports and the metrics that would be used by Downey management to gauge performance. Following the decision to use MedAssets for the contingency plan, Focus worked with Downey to set up MedAssets as the “hot back up” and to test the systems and procedures.

Less than two months after the “hot back up” contingency plan was established, Downey elected to switch to MedAssets for full time revenue cycle management support. A full conversion to MedAssets was accomplished in 72 hours with no interruption to patient billing – and therefore no interruption to Downey cash flow.

Ken Stropel, Chief Executive Officer of Downey, commented, “Contingency planning is an imperative when it comes to the financial management of a hospital. MedAssets and Focus rose to the occasion to provide the support required for our lender and the hospital in a cooperative and timely fashion.”

Lessons Learned

The need for contingency plans in any industry is critical. Given the level of reliance on electronic data management today, hot back up sites and contingency plans have become a necessity.

The experience of Focus, specifically in the revenue cycle management process for health care providers, enabled Downey to make a highly successful transition to a new revenue cycle service provider – even with the concurrent complexities associated with Downey’s ongoing bankruptcy proceeding.

Contact Us

For further information regarding revenue cycle management or any aspect of health care operations and financial management, contact Focus’s health care team James Hopwood, Dan McMurray, Edmund King,  or Juanita Schwartzkopf  by calling 813-281-0062.

For further information regarding contingency planning and analysis, contact Focus’s business operations team Bob Riiska, David Tolly or Mike Grau.

Focus Management Group (Focus) is serving as Financial Advisor for Downey and is guiding the hospital through its Chapter 11 bankruptcy proceeding. In this capacity Focus has worked with Downey to improve the overall revenue cycle management, computer system capabilities and management reporting of the hospital.

A key component of a revenue cycle management process is the implementation of a contingency plan to provide ongoing revenue cycle capabilities during unforeseen events such as natural disasters or vendor problems. In the case of Downey, this contingency planning work became critical to Downey’s success when the hospital decided to replace its revenue cycle management supplier. It was this successful planning and implementation work that resulted in Downey receiving MedAssets’ “Best Practice Award for Rapid Implementation.”

The Problem and the Solution

Prior to fully converting to MedAssets for its revenue cycle management platform, and following an evaluation by Downey and Focus of various vendors for this contingency planning service, Downey began utilizing MedAssets as a “hot back up” as an integral component of its contingency plan. An additional benefit of this contingency plan is the increased certainty provided to Downey’s asset-based lender Midcap Financial that cash flows would continue uninterrupted.

Focus’ extensive experience in revenue cycle management allowed Downey to make an informed decision regarding contingency providers. Downey and Focus visited MedAssets operating sites, viewed specific reports and systems, and evaluated work inflows and outflows. During this review, Focus worked with Downey to assess MedAssets’ claims management capabilities, including its process for handling denied claims. The MedAssets platform differentiated itself by providing real time views into the reports and the metrics that would be used by Downey management to gauge performance. Following the decision to use MedAssets for the contingency plan, Focus worked with Downey to set up MedAssets as the “hot back up” and to test the systems and procedures.

Less than two months after the “hot back up” contingency plan was established, Downey elected to switch to MedAssets for full time revenue cycle management support. A full conversion to MedAssets was accomplished in 72 hours with no interruption to patient billing – and therefore no interruption to Downey cash flow.

Ken Stropel, Chief Executive Officer of Downey, commented, “Contingency planning is an imperative when it comes to the financial management of a hospital. MedAssets and Focus rose to the occasion to provide the support required for our lender and for our hospital in a cooperative and timely fashion.”

Lessons Learned

The need for contingency plans in any industry is critical. Given the level of reliance on electronic data management today, hot back up sites and contingency plans have become a necessity.

The experience of Focus, specifically in the revenue cycle management process for healthcare providers, enabled Downey to make a highly successful transition to a new revenue cycle service provider – even with the concurrent complexities associated with Downey’s ongoing bankruptcy proceeding.

Contact Us

For further information regarding revenue cycle management or any aspect of healthcare operations and financial management, contact Focus’s healthcare team: James Hopwood, Dan McMurray or Edmund King  or by calling 813-281-0062.