Bridging The Divide With A Mezzanine Loan

November 21 2017

In their efforts to grow and succeed, many companies eventually reach the edge of a precipice. Across the divide lies a big step forward — perhaps the acquisition of a competitor or the purchase of a new property — but, financially, there’s no way across. The money is just not there.

One way to bridge that divide is with a mezzanine loan. These instruments (also known as junior liens and second liens) can bridge financing shortfalls — so long as you meet certain qualifications and can accept possible risks.

Debt/equity hybrid

Mezzanine financing works by layering a junior loan on top of a senior (or primary) loan. It combines aspects of senior secured debt from a bank and equity obtained from direct investors. Sources of mezzanine financing can include private equity groups, mutual funds, insurance companies and buyout firms.

Unlike bank loans, mezzanine debt typically is unsecured by the borrower’s assets or has liens subordinate to other lenders. So the cost of obtaining financing is higher than that of a senior loan.

However, the cost generally is lower than what’s required to acquire funding purely from equity investment. Yet most mezzanine instruments do enable the lender to participate in the borrowing company’s success — or failure. Generally, the lower your interest rate, the more equity you must offer. Importantly, mezzanine debt may even convert to equity if the borrower doesn’t repay it on time.

Advantages and drawbacks

The primary advantage of mezzanine financing is that it can provide capital when you can’t obtain it elsewhere or can’t qualify for the amount you’re looking for. This is why it’s often referred to as a “bridge” to undertaking ambitious objectives such as a business acquisition or desirable piece of commercial property. But mezzanine loans aren’t necessarily an option of last resort. Many companies prefer the flexibility of these loans when it comes to negotiating terms.

Naturally, mezzanine loans have drawbacks to consider. In addition to having higher interest rates, mezzanine financing has a few other potential disadvantages. Loan covenants can be restrictive. And though some lenders are relatively hands-off, they may retain the right to a significant say in company operations — particularly if you don’t repay the loan in a timely manner.

Mezzanine financing can also make an M&A deal more complicated. It introduces an extra interested party to the negotiation table and can make an already tricky deal that much harder.

Best financing decisions

If your company qualifies for mezzanine financing, it might help you close a deal that you otherwise couldn’t. But there are other options to consider. We can help you make the best financing decisions. Contact us by phone at (818) 789 1179 for more information.

© 2017

 

Tes’ Take: Providing Business Support In The Cannabis Industry

November 20 2017

Tes Macaraya is a partner and head of tax at Martini Iosue & Akpovi

Last November 8th, our firm, Martini Iosue & Akpovi and the law firm of Ervin Cohen & Jessup sponsored an event for the cannabis industry.  The goal was to have people in this sphere share their experiences, thoughts, ideas and concerns.  We had close to 100 people attend this event. It was exciting to see people from every aspect of the industry represented. There were representatives from the fire department, city of Los Angeles attorney’s office, growers, angel investors, people that sell edibles and supplements, and even researchers to name a few.

This event emphasizes that this industry is growing and the need for support is essential, particularly in the banking space. These businesses need to be given the opportunity to deposit their cash in a secure location.

I found this interesting article about a grower that was affected by the recent Redwood fires. Because of the inability to deposit cash from cannabis sales in banks, she buried the cash 2 feet underground.  When she returned to her farm after the fires, she dug up her box and found a lump of gold, silver, cash, dirt and pine needles. Click on the link below to access the article.

http://www.latimes.com/local/california/la-me-fire-weed-20171028-story.html

Cannabis in California is permitted – subject to regulations – for both medical and recreational use. In recent decades the state has led the country in efforts to legalize cannabis, holding the first (unsuccessful) vote to decriminalize it in 1972 and, becoming the first state to legalize it for medical use in 1996. In the November 2016 election, voters passed an amendment legalizing recreational use of marijuana.

If you have any questions on the tax matters in this industry, please call Tes at (818) 789 1179. 

 

Watch Out For Potential Tax Pitfalls Of Donating Real Estate To Charity

November 20 2017

Charitable giving allows you to help an organization you care about and, in most cases, enjoy a valuable income tax deduction. If you’re considering a large gift, a noncash donation such as appreciated real estate can provide additional benefits. For example, if you’ve held the property for more than one year, you generally will be able to deduct its full fair market value and avoid any capital gains tax you’d owe if you sold the property. There are, however, potential tax pitfalls you must watch out for:

Donation to a private foundation. While real estate donations to a public charity generally can be deducted at the property’s fair market value, your deduction for such a donation to a private foundation is limited to the lower of fair market value or your cost basis in the property.

Property subject to a mortgage. In this case, you may recognize taxable income for all or a portion of the loan’s value. And charities might not accept mortgaged property because it may trigger unrelated business income tax. For these reasons, it’s a good idea to pay off the mortgage before you donate the property or ask the lender to accept another property as collateral for the loan.

Failure to properly substantiate your donation. This can result in loss of the deduction and overvaluation penalties. Generally, real estate donations require a qualified appraisal. You’ll also need to complete Form 8283, “Noncash Charitable Contributions,” have your appraiser sign it and file it with your federal tax return. If the property is valued at more than $500,000, you’ll generally need to include the appraisal report as well.

Sale of the property within three years. The charity must report the sale to the IRS, and if the price is substantially less than the amount you claimed as a tax deduction, the IRS may challenge your deduction. To avoid this result, be sure your initial appraisal is accurate and well documented.

Sale of the property to someone related to you. If the charity sells the property you donated to your relative (or to someone with whom you negotiated a potential sale), the IRS may argue that the sale was prearranged and tax you on any capital gain.

If you’re considering a real estate donation, plan carefully and contact us by phone at (818) 789 1179 for help ensuring that you avoid these pitfalls.

© 2017

 

Strong Internal Controls Help Reduce Restatements

November 14 2017

A recent study has found that fewer public companies are reissuing financial statements due to errors or omissions, in large part due to stronger internal controls. Want to upgrade your controls and reduce your risk of restatement? Savvy business owners and managers borrow best practices from the framework auditors use to evaluate their clients’ internal controls.

Drop in restatements

Research firm Audit Analytics found that the total number of restatements dropped to 6.83% (or 671 of 9,831 companies) in 2016. That’s the lowest number of restatements in 15 years. Why? The Audit Analytics study attributes the decrease in restatements, at least partially, to regulatory oversight.

I believe that the decrease in the number of restatements … is a result, to some extent, of improved internal controls over financial reporting,” said Don Whalen, director of research at Audit Analytics. Companies institute internal controls primarily to deter accounting fraud.

One resource used to improve internal controls is the Committee of Sponsoring Organizations of the Treadway Commission (COSO). COSO first published its Internal Control — Integrated Framework in 1992 to help prevent a repeat of the types of accounting frauds that occurred in the 1980s. In 2013, COSO revised its framework to reflect changes to business and financial reporting that have taken place over the last two decades.

COSO framework

The updated COSO framework outlines five basic components of internal controls, including:

1. Control environment. A set of standards, processes and structures is needed to provide the basis for carrying out internal controls across the organization.
2. Risk assessment. This dynamic, iterative process identifies stumbling blocks to the achievement of the company’s objectives and forms the basis for determining how risks will be managed.
3. Control activities. Policies and procedures are necessary to help ensure that management’s directives to mitigate risks to the achievement of objectives are carried out.
4. Information and communication. Relevant and quality information supports the internal control process. Management needs to continually obtain and share this information with people inside and outside of the company.
5. Monitoring. Management should routinely evaluate whether each of the five components of internal controls is present and functioning.

External auditors generally rely on the framework’s concepts when they assess internal controls. Likewise, business owners and managers can use the framework as a guide to establish, strengthen and assess their company’s controls. Following this framework can help safeguard your operations from inadvertent financial reporting errors and fraud.

Practical application

COSO offers 81 “points of focus” that provide practical guidance in designing and implementing effective internal controls. Our audit team can help you turn the framework’s abstract concepts into actionable items.

If you would like more information, contact us by phone at (818) 789 1179.

© 2017

 

Joe Fernandez, Senior Manager, Attends PrimeGlobal’s World Conference In Mexico City

November 13 2017

The conference brings together accounting firms from across the globe to collaborate, inform, network and build relationships. Business opportunities around the world continue to grow for any firm with an appetite to serve international clients. PrimeGlobal’s World Conference gives its members insights on what’s shaping the accounting landscape and what firms are doing to stay ahead of the curve.

There were a variety of different seminars and this photo was taken during an interactive workshop called Lego Serious Play: Overcoming Change Management Challenges. All members were asked to build Lego sets to express specific situations (including finding resolutions to issues).

There were also lots of networking opportunities with the international delegates. Joe is pictured with his wife (who is also a CPA and was attending the conference), at the Gala Dinner.

For more information about how we work with our international clients please contact us by phone at (818) 789 1179

 

Put Your Income Statement To Good Use

November 9 2017

 

 

By midyear, most businesses that follow U.S. Generally Accepted Accounting Principles (GAAP) have issued their year-end financial statements. But how many have actually used them to improve their business operations in the future? Producing financial statements is more than a matter of compliance — owners and managers can use them to analyze performance and find ways to remedy inefficiencies and anomalies. How? Let’s start by looking at the income statement.

Benchmarking performance
Ratio analysis facilitates comparisons over time and against industry norms. Here are four ratios you can compute from income statement data:
1. Gross profit. This is profit after cost of goods sold divided by sales. This critical ratio indicates whether the company can operate profitably. It’s a good ratio to compare to industry statistics because it tends to be calculated on a consistent basis.
2. Net profit margin. This is calculated by dividing net income by sales and is the ultimate scorecard for management. If the margin is rising, the company must be doing something right. Often, this ratio is computed on a pretax basis to accommodate for differences in tax rates between pass-through entities and C corporations.
3. Return on assets. This is calculated by dividing net income by the company’s total assets. The return shows how efficiently management is using its assets.
4. Return on equity. This is calculated by dividing net profits by shareholders’ equity. The resulting figure tells how well the shareholders’ investment is performing compared to competing investment vehicles.
For all four profitability ratios, look at two key elements: changes between accounting periods and differences from industry averages.

Plugging profit drains
What if your company’s profitability ratios have deteriorated compared to last year or industry norms? Rather than overreacting to a decline, it’s important to find the cause. If the whole industry is suffering, the decline is likely part of a macroeconomic trend.
If the industry is healthy, yet a company’s margins are falling, management may need to take corrective measures, such as:
  • Reining in costs,
  • Investing in technology, and/or
  • Looking for signs of fraud.

For example, if an employee is colluding with a supplier in a kickback scam, direct materials costs may skyrocket, causing the company’s gross profit to fall.

Playing detective

For clues into what’s happening, study the main components of the income statement: gross sales, cost of sales, and selling and administrative costs. Determine if line items have fallen due to company-specific or industry-wide trends by comparing them to public companies in the same industry. Also, monitor trade publications, trade associations and the Internet for information.

Contact us by phone at (818) 789-1179 to discuss possible causes and brainstorm ways to fix any problems.

© 2017

 

Steve Martini Included In The 200 Most Influential Leaders In The San Fernando Valley

November 7 2017

 

San Fernando Valley Business Journal Presents The 200 Most Influential Leaders In The Valley Area

Originally published by the San Fernando Valley Business Journal October 2017

Steven Martini, 60, is a partner with the accounting firm of Martini Iosue & Akpovi in Encino.  He’s also one of the owners and the managing director of ProVisors, a network of senior-level trusted advisors.  Martini is a CPA and business advisor with a focus on tax, consulting and management advisory services.  He also has experience on the client side; he was president and chief financial officer of a publicly traded company he helped to start.

Why this career?

I had a great accounting professor in college for my first accounting course – he made it interesting.

Best advice?

The senior partner at my firm always told me to listen to the client.

Economy in a year?

Flat. My clients do not seem optimistic

You in high school?

Jock / Hippie

Retirement age?

I will start slowing down in 5 years and will then see how my golf game is.

Please contact Martini Iosue & Akpovi by phone at (818) 789 1179 if you have questions or would like more information about this article.

 

Michelle Germain Joins MIA As A Senior Tax Accountant

November 6 2017

Michelle joins Martini Iosue & Akpovi as a Senior Tax Accountant.

Michelle graduated summa cum laude from Tulane University and obtained her Masters of Taxation degree from the University of Southern California.  Michelle spent two years working at PricewaterhouseCoopers in the financial services line of service, during which she focused on taxation of large insurance corporations.  She then spent one year at Solomon, Ross, Grey expanding her knowledge of passthroughs and individuals.

In her free time, Michelle enjoys spending time with family and friends, playing with her dog, and traveling.

Welcome to the team Michelle!

If you would like more information about working at Martini Iosue & Akpovi, please contact us by phone at (818) 789-1179.

 

Tes’ Take: Tax Cuts and Jobs Act (H.R.1)

November 3 2017

Tes Macaraya is a partner and head of tax at Martini Iosue & Akpovi 

After months of speculation over what would be included in Trump-era tax reform, legislative language is finally here, with the release of the Tax Cuts and Jobs Act (H.R. 1). The 429-page document would reshuffle the existing scheme of tax incentives and burdens that have become entrenched facets of financial decision-making in the United States, at both a business and personal level.

There are some key issues that would have a significant effect on businesses such as limitation of the interest expense deduction for businesses with average gross receipts of over 25M, increase in section 179 deduction, limit deferral of gain on like-kind exchanges, repeal of the deduction allowed for domestic production activities, and disallow certain entertainment expenses.   Although the proposed legislation lowers the corporate tax rate to 20% and creates a maximum rate of 25% on pass through entities, the net tax benefit to businesses might not be as significant as originally thought. This document provides more detail.

With Republican leadership hoping to enact legislation before the end of the year, stakeholders will have to act quickly to digest the bill and determine how their interests would be affected.

If you would like to discuss how the new legislation would affect your circumstances, please call Tes at (818) 789 1179.

 

Wills And Living Trusts: Estate Planning Imperatives

November 3 2017

Well-crafted, up-to-date estate planning documents are an imperative for everyone.  They also can help ease the burdens on your family during a difficult time.  Two important examples: wills and living trusts.

The Will
A will is a legal document that arranges for the distribution of your property after you die and allows you to designate a guardian for minor children or other dependents.  It should name the executor or personal representative who’ll be responsible for overseeing your estate as it goes through probate.  (Probate is the court-supervised process of paying any debts and taxes and distributing your property after you die.)  To be valid, a will must meet the legal requirements in your state.

If you die without a will (that is, “intestate”), the state will appoint an administrator to determine how to distribute your property based on state law.  The administrator also will decide who will assume guardianship of any minor children or other dependents.  Bottom line? Your assets may be distributed — and your dependents provided for — in ways that differ from what you would have wanted.

The Living Trust
Because probate can be time-consuming, expensive and public, you may prefer to avoid it.  A living trust can help. It’s a legal entity to which you, as the grantor, transfer title to your property.  During your life, you can act as the trustee, maintaining control over the property in the trust. On your death, the person (such as a family member or advisor) or institution (such as a bank or trust company) you’ve named as the successor trustee, distributes the trust assets to the beneficiaries you’ve named.

Assets held in a living trust avoid probate — with very limited exceptions.  Another benefit is that the successor trustee can take over management of the trust assets should you become incapacitated.

Having a living trust doesn’t eliminate the need for a will.  For example, you can’t name a guardian for minor children or other dependents in a trust.  However, a “pour over” will can direct that assets you own outside the living trust be transferred to it on your death.

Other Documents
There are other documents that can complement a will and living trust.  A “letter of instruction,” for example, provides information that your family will need after your death.  In it, you can express your desires for the memorial service, as well as the contact information for your employer, accountant and any other important advisors.  (Note: It’s not a legal document.)

Also consider powers of attorney.  A durable power of attorney for property allows you to appoint someone to act on your behalf on financial matters should you become incapacitated.  A power of attorney for health care covers medical decisions and also takes effect if you become incapacitated.  The person to whom you’ve transferred this power — your health care agent — can make medical decisions on your behalf.

Foundational Elements
These are just a few of the foundational elements of a strong estate plan.  We can work with you and your attorney to address the tax issues involved. Please call us on (818) 789 1179 if you have questions or would like further information.

© 2017

 

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