Looking at the future

Overcoming the negative effects of the
recession will take some doing

BY ROGER T. GINGERICH, CPA/ABV, CVA

In 2009, the Real Estate and Construction Group at Skoda Minotti once again conducted its annual survey of the real estate and construction industries in Northeast Ohio. The survey results were gathered in May of 2009. The survey was conducted via e-mail and was sent out to Northeast Ohio real estate and construction professionals, including the local membership of several construction and real estate trade associations. The construction industry survey further strengthens the major trends that we saw in the 2008 survey: there is a lack of work and the work that is available is bid extremely competitively.
When asked, “What do you see as the biggest threat to your business over the next 12 months?,” the vast majority of respondents (81%) chose “lack of work.” The work that is available is subject to extremely competitive bidding. The majority of jobs (78%) are seeing five or more bidders and 29% of jobs are seeing 10 or more bidders. This is causing jobs to be bid very tightly with no room for contingencies, thus leaving contractors very vulnerable.
Because contractors are finding it tougher than ever to secure work, when they do secure work, their contracts are subject to much more scrutiny. Looking back to last year’s survey, contracts are becoming a major priority. Last year, 34% of respondents considered contracts a “top priority.” This year, the number increased to 43%.

Credit and bonding
The credit crunch has had a serious impact on the construction market as well. A majority of our construction survey respondents (78%) have found it more difficult to find their own financing over the past year. Also, a majority (58%) of those respondents that have found financing are seeing that lenders have asked for more financial information, such as interim financial statements, cash flow projections, bank covenants and business plans.
In regard to the bonding market, 67% of the survey respondents believe that the credit crisis will make it more
difficult for them to obtain bonding. Based on our dealings with contractors, it is very evident that sureties are paying attention to two things:
1. Whether banks have renewed lines of credit in the past.
2. The state of a company’s working capital.
The survey revealed that the vast majority of contractors (92%) are being forced to cut budgets. Items most likely to be cut were discretionary expenses, such as bonuses and profit sharing (76%) and payroll (54%).
Insurance rates and worker’s compensation were listed as the first and second most impactful political issues that will affect contractors in the coming year. Trade imbalance/material prices, the top concern in 2008, dropped to sixth this year due to falling construction costs.

Areas of activity
Looking forward, the most active area of the construction market will be governmental projects. Almost half of our respondents (49%) believe that government work has the most potential for growth over the next five years. This is most likely due to the projected increase in government spending through measures such as the $787 billion American Recovery and Reinvestment Act (ARRA).
The ARRA also contained additional benefits for contractors to take advantage of, such as bonus depreciation for capital investments a net operating loss carryback opportunity. Bonus depreciation is basically a faster way for a company to write off new equipment and other qualified property purchases. A provision for bonus depreciation was included in the Economic Stimulus Act of 2008 and expired December 31, 2008. The most recent Act extends that 50% bonus depreciation on new assets placed in service through 2009, retroactive to January 1, 2009. The Act also extends the bonus depreciation through 2010 for certain property with a recovery period between 10 and 20 years, transportation equipment and certain aircraft.
For companies with net operating losses arising in tax years ending after 2007, the ARRA allows taxpayers to carry back these losses for three, four, or five taxable years, rather than the current two taxable years. The provision applies only to businesses with average annual gross receipts of less than $15,000,000 (taking into account the gross receipts of certain related taxpayers) for the three tax year periods ending with the loss year.
Finally, the Work Opportunity Tax Credit is a federal hiring incentive that provides tax credits to businesses hiring employees from “targeted groups.” The ARRA adds unemployed veterans and disconnected youth to the list of targeted groups eligible for the Work Opportunity Tax Credit. This provision applies to individuals who are hired and begin work in 2009 or 2010.

Real estate survey summary
A major theme of this year’s survey is the increasingly tight credit market. In terms of getting a deal done, “credit” was listed as the most significant obstacle by 54% of survey respondents. When asked about the greatest challenge that their company currently faces, “Financing of new and current projects” and “Finding creditworthy tenants,” were indicative of common challenges faced by our survey respondents.
Because of the increased difficulty to obtain credit, the real estate industry has left no stone unturned when searching for potential credit sources. In fact, when asked, “How are you funding new construction and acquisitions?,” at least a quarter of our survey participants had turned to one of six different sources, such as: regional
banks (46%), private equity (43%), seller financing (39%), national banks
(39%), individual investments/private placement (25%) and tax credits, TIF and other public funds (25%).
Due to the fact that credit markets are so tight, the issue of cash flow is front and center for the real estate industry. Our survey revealed some potentially alarming results. When asked if current cash flow was sufficient to support existing properties and projects, 32% indicated that was not the case. Of our survey options, attempting to sell assets (25%) was the most common reaction to improve cash flow. Other survey responses included accessing existing liquidity (18%), borrowing (14%) and adjusting rents to increase occupancy (11%).
The lack of cash and credit in the market has led to an overall decrease in business opportunities in Northeast Ohio. In our 2008 survey, 55% of the respondents were optimistic that their business would have more opportunities in Northeast Ohio. This year, that figure dropped to 46%.
For more on this survey, as well as many charts and graphs, go to www.skodaminotti.com. BXM
Roger T. Gingerich, CPA/ABV, CVA, is with Skoda
Minotti Real Estate and Construction Group.