August 2001
New
This Issue
Back
Issues
"The
Chase" Is On!
Months in the making and in conjunction with the launch of
the company's new web site, the inaugural edition of "The Paper
Chase", the industry newsletter from the staff at NCC, hit the
airways this month.
A major addition
to their new web site (launched July 2001), the new periodic newsletter
was created by NCC to keep their associate brokers informed of news
items and information impacting the cash flow industry. Upcoming issues
will feature breaking news, success stories, rate changes, computer
tips, marketing advice, broker question of the month as pulled from
the web site's "Forum", question of the month to be posed
to an industry "Expert", tips on negotiating and closing as
well as news on industry personnel and funding sources.
According to NCC
President Ed Lisogar, "The goal of the Chase is to provide updated
information on all facets of the industry that effect our brokers, and
not just about our company and it's programs. This will include articles
written FOR brokers BY brokers as well as a variety of interesting news
items and updates that impact all of us associated with the cash flow
industry. We also plan to include newsworthy information on financial
issues that have a bearing not only on the industry but on our brokers
lives in general".
Lisogar stresses
that it is not intended as a monthly periodical per se, but expects
"The Paper Chase" to come out every 4-6 weeks "or as
news dictates".
Lisogar encourages
readers to submit stories of their day to day experiences in the cash
flow industry. "Fellow brokers need to realize that a lot of the
trials and tribulations associated with being a broker are not just
happening to them!". NCC staff will review all submissions and
include those that they feel will be of interest to the general audience.
Also new at the
NCC site is the NCC "Forum". This is the perfect place to
get answers to ANYTHING related to the industry as it is broken down
into several specific topics. According to NCC Vice President, Sheba
Okumus, "brokers can post questions and comments on a new topic,
add to an ongoing discussion or comment on existing postings".
A "Broker Question of the Month" as taken from the "Forum"
will be featured each issue. "Whether you're buying for your own
portfolio or flipping notes, we want you to share your experiences with
your associates in the industry".
Says Lisogar, "Our
goal is to assist ALL brokers, new and otherwise, in their success in
the secondary market. Deals can now be submitted on line from the "Worksheet"
page of the site for faster turnaround. This, in turn provides increased
service to your clients and hopefully increased profits.
Stand back everyone…The
Chase is on!
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"High
Powered, One Day Session hits the West Coast Next Month"
Over the years you
may have had the opportunity to participate in one of Ed Lisogar's numerous
speaking engagements. Whether at The Paper Source, Noteworthy or annual
Cash Flow Conventions, Ed's no nonsense approach to all facets of the
cash flow industry guarantees standing room only sessions that are both
informative and entertaining. But make no mistake, the bottom line is
knowledge, and an expedited road to success for all of National Capital's
associate brokers.
A respected author,
Ed has written two books for brokers new to the cash flow industry.
Last fall, following years of demand for detailed information on the
topic, Ed released his critically acclaimed best seller: "The Business
of Business Notes"
The only instructional
manual on the market devoted specifically to the high profit arena of
buying and brokering seller financed business notes.
Now you can spend
an entire day with one of the most dynamic instructors, lecturers, authors
and public speakers in the cash flow industry, participating in a hands
on discussion of the fastest growing segment of the cash flow industry.
Ed Lisogar's one
day session on the high profit topic of seller financed business notes
will be presented one day only, September 15, 2001 in Los Angeles. Exact
location is still being determined however it will be an LAX hotel.
This will be the only trip to the West Coast this year.
Read all about this
intense, informative and FUN full day class by clicking on the following
link:
http://www.nationalcapitalcorp.com/pages/seminars.htm
Early registration
by August 31 for $149. After that its $199.
These powerful sessions
have limited seating for maximum instruction and sell out early so register
today.
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Private
Mortgage Investment Services Files Chapter 11 Bankruptcy; IRS Threatens
Private Mortgage Investment Services, the Malta, NY
company that only a year ago was trying to purchase a Canajoharie thrift,
has run into financial difficulties and has sought shelter in U.S. Bankruptcy
Court.
The 8-year-old company,
which is headed by 32-year-old Charles Cefalu, buys and sells private
mortgages, those held by individuals rather than banks. The company
filed for protection from creditors under Chapter 11 of the Bankruptcy
Code, meaning it plans to reorganize its finances and continue operating.
The July 13 petition
lists assets as of Dec. 31 of $19.2 million and debts of $16.9 million.
Although assets were larger than debts, Cefalu lists several reasons
why Private Mortgage -- which he owns with about 80 other shareholders
-- entered bankruptcy court.
In an affidavit
filed with the petition, Cefalu said the primary factor was a problem
with the company's largest lender, First National Acceptance Co. of
North America. He complained that the East Lansing, Mich.-based FNAC
refused to extend Private Mortgage's credit lines beyond April 1 and
"wrongfully declared [the company] in default." He claimed
it also refused to honor a term-out provision in the loan agreement
and failed to establish a $5 million reserve account in Private Mortgage's
name. FNAC may sell the company's interest in the mortgage loans that
stand as collateral at what Cefalu called "distressed prices."
Cefalu said he plans
to take legal action against FNAC "to remedy the wrongs committed."
FNAC officials were not available for comment.
The second factor
in Private Mortgage's current difficulties was its attempt to acquire
Capitaland Funding LLC, a residential mortgage lender in Malta. After
announcing the deal in May 2000, the company discovered "serious
irregularities in Capitaland financial statements," according to
Cefalu's affidavit. It therefore called off the engagement. Cefalu estimated
the losses from the aborted transaction at about $500,000.
The third reason
for the bankruptcy filing is the fact that the company's largest institutional
buyer of private mortgages, Associates First Capital Corp., was acquired
by Citigroup in November. Citigroup decided to discontinue that line
of business.
The final problem
is that Private Mortgage has fallen behind in federal income taxes,
and the IRS is threatening to collect.
Cefalu said the
company expects to find new sources of capital to allow it to remain
in business. He predicts income of $200,000 in the next month, but said
expenses should total $210,600.
Private Mortgage
made a stir in the local financial services community last spring, when
it made a bid to buy Landmark Community Bank. TrustCo Bank Corp NY (Nasdaq:
TRST) of Glenville already had a deal to purchase the Canajoharie thrift.
Cefalu's tender offer was unsuccessful, and TrustCo purchased Landmark
last summer.
For Charles Cefalu,
putting his company into Chapter 11 was a strategic move designed to
settle an ongoing dispute with a lender over $40 million in assets.
Private Mortgage
Investment Services Inc., which 32-year-old Cefalu founded in 1994,
buys and sells private mortgages--those held by individuals rather than
banks. The Malta company sought protection from creditors July 13 in
U.S. Bankruptcy Court in Albany. By filing under Chapter 11, it signaled
an intention to reorganize its finances and continue operating.
Cefalu, who owns
80 percent of Private Mortgage, said the company has banks willing to
lend it money, as long as it first resolves its problems with First
National Acceptance Co. of North America. Meanwhile, business continues--albeit
with 12 fewer workers--with sales at better spreads than in the past.
"I am not trying
to screw anybody," Cefalu said. "My intention is for all our
creditors to get paid. If we can get this stuff with FNAC behind us,
we can wrap up this bankruptcy quickly and move on."
Private Mortgage
had worked with FNAC since 1997. The East Lansing, Mich.-based company
was a warehouse lender, providing Private Mortgage with the money to
buy loans that would then be pledged as collateral. Cefalu likened the
relationship to a mortgage lender's interest in property. If FNAC bought
part of a loan, it would be moved into a "participatory pool."
As of April, Private
Mortgage had a $16 million line of credit with FNAC and $40 million
in assets tied up in the two portfolios. It had about $4.6 million in
equity in the accounts.
But the relationship
was strained. Months earlier, FNAC had caught the eye of regulators
after charging off $5 million, or about 10 percent of assets. The lender
had to divest of $250 million in assets and began seeking buyers for
the loan portfolio. It also reduced what Private Mortgage could borrow
under the credit line, but would not let the company borrow from anyone
else.
Cefalu said FNAC
also admitted that it had failed to set up a promised reserve account
for Private Mortgage. The funds should have been set aside as money
was borrowed, and would have totaled $5 million.
Cefalu claims FNAC
assured him that the credit line would be renewed when it expired in
April, but it was not. The company continued to fund Private Mortgage
for a time, but then said it had not reduced its exposure as much as
it needed to. Cefalu offered to take charge of selling the loans, but
was rebuffed.
"They said
they would sell the loans and if there was anything left, I could have
it."
Meanwhile, Cefalu
heard from other firms that claimed they had been stripped of their
assets and put out of business by FNAC. Determined not to be next, he
called his attorneys. But weeks of attempts at an agreement failed.
"They offered
me $250,000 to walk away. I told them they had to be crazy. They said
I didn't have the money to fight them, because they had all my money."
Mark McDonald, spokesman
for FNAC, declined to comment on Cefalu's allegations.
Cefalu considered
filing suit against FNAC but his attorneys told him that would not prevent
FNAC from selling the loans at firesale prices. To get an injunction,
he would have to post a bond of as much as $10 million.
"They said
it was time to talk about the `b' word," he said. "I said
`no, no way, that's not an option.' "
But the attorneys
explained that a Chapter 11 filing would immediately bar FNAC from selling
the assets and would ensure that when they are sold, it is for the best
possible price. Cefalu also would be able to file an adversary proceeding
against FNAC to compel the lender to produce the $5 million reserve
fund.
"Now we're
on the fast track to resolving this thing," Cefalu said.
Richard Weisz, a
bankruptcy attorney with Hodgson Russ Andrews Woods & Goodyear in
Albany, said there are some advantages to using bankruptcy court over
a federal courtroom.
"The main advantage
is that the automatic stay prevents the other party from taking certain
steps. In other courts you have to ask for a stay."
But Weisz, who is
not involved in this case, said the stay would only apply if the loans
are deemed Private Mortgage's assets and not FNAC's.
Although the dispute
with FNAC was the primary purpose for the filing, it was not the only
factor in Private Mortgage's financial difficulty. The company lost
its largest buyer of private mortgages late last year when Citigroup
purchased Associates First Capital Corp. and discontinued that line
of business.
Private Mortgage
also spent about $500,000 on its aborted attempt to acquire Capitaland
Funding LLC, a residential mortgage lender in Malta. The deal was struck
in April 2000, but a subsequent audit revealed problems, including undisclosed
litigation and liabilities and some questions regarding a title abstract
subsidiary, Cefalu said.
Charles Burton, president of Capitaland, declined to comment on these
matters, and questioned their impact on Private Mortgage. The two firms
still share space in Malta but "they are two entirely separate
companies."
The bankruptcy filing
comes at a time when Private Mortgage is in the process of a $5 million
offering of common stock and bonds. It has raised about $2.5 million
so far, bringing the total raised from investors to about $4 million
since 1995. Cefalu said the offering will be put on hold until the bankruptcy
process is complete, "and then we will amend the [SEC] filing and
continue to raise equity."
The company has
about 80 shareholders and more than 100 bondholders, and Cefalu plans
to meet with each one personally. He will explain that there were some
circumstances beyond his control. But he also will take responsibility.
"I'm not going
to sit here and say there aren't things we could have done differently.
It would be unfair to say that. We've learned some lessons."
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A
Funny Thing Happened on the Way to the Forum
Have a question
about a deal you're working? Not sure if there's a market for certain
cash flows? Wondering what's the best way to find certain note types?
There's a new clearing
house for questions like these and ANYTHING you have to discuss at the
NCC "FORUM"! Post questions or comments on a variety of topics.
Join in on an ongoing discussion. Respond to postings from other brokers
as well as investors. Share your experience with your fellow brokers.
It's all there for you at the "Forum". Click on from the Home
page at www.nationalcapitalcorp.com.
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Associate's
Closing Creates New Opportunities for Former Company Personnel
The shockwave
felt 'round the industry with the closing of The Associates secondary
market division hit hardest on those who's lively hood depended on their
employment with the Dallas based corporation. However, as the song suggests
"Only the Strong Survive" and three months following the announcement
several key personnel have moved on, it seems without missing a beat.
Robert Repass as
well as Jill Stone have both resurfaced with Interbay in Dallas, a division
of better known Bayview. (Jill has left Spokane, Washington and our
understanding is that she was relocating to New Mexico).
Lucille Johnson
and Mike McClelland have joined FSB of Little Rock, Arkansas although
their office is in Hurst, Texas.
Finally, John Zarillo,
head man at The Associates PMO is now with Liberty Lending and will
be introducing the retail note business to the Southlake, Texas company.
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Secondary
Market Veterans "Burnt Out"
Paper
industry veterans Bill and Alison Mencarow are cleaning up from a devastating
fire that has turned their lives upside down.
According to Bill,
"We had been out of town for two weeks at our farm. We received
a phone call about 11:00 Thursday night (7-26-01) from the fire chief
telling us our house had burned to the ground with everything in it.
We're OK, as is the business (it's not in our house). The important
losses were sentimental." Even through what for most would be a
heart-wrenching ordeal, Bill retained his classic sense of humor. "The
story is on our website under "Hot News," if you can believe
that. Right under the fire logo (I didn't put it there for our fire,
it's been there for years)."
Bill and Alison
are owners and publishers of The Paper Source which is in its fifteenth
year. In addition to the monthly periodical there is also the Paper
Source web site and annual Paper Source convention which this year will
be in the form of a luxury boat cruise.
Says Bill, "We're
still hoping this is just a long nightmare and that we will wake up
in our own bed any moment. The fire investigators were very thorough
and professional. Several of them worked full-time for 4 straight days.
The lead investigator said it was one of the most difficult fires of
his 160-fire career. Their conclusion is that it started on a worktable
in the garage by a careless, smoking handyman who was working with an
oil-based stain."
As always The Mencarows
looked to the bright side. "We are very blessed. No one was hurt
or killed, the fire didn't affect our business and we have a guesthouse
that was all ready to move into."
Here's wishing them
all the best.
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Avoiding
'Plagues' on the Internet
Today's
fast-spreading viruses are capable of sending themselves without the
knowledge of the user. Two types of potentially harmful code can hit
via e-mail. One is a "virus" and the other is a "worm."
A virus requires
human interaction of some sort to spread, and a worm is capable of propagating
on its own.
A particular virus
that you may receive can actually be a combination of the two. It requires
a human to open an attached file that has the virus, but once the file
is opened, the virus automatically propagates itself to other e-mail
users.
No antivirus program
can protect you from 100 percent of the five to 10 virus variants (variations
of existing code) discovered every day.
Cyberattackers can
test their creations with antivirus programs, so they generally have
the upper hand.
Learn how to spot
potentially hazardous e-mail before you open attachments. Most technical
people have not contracted a virus in years by following these simple
rules:
*Never open an attachment
to a message unless you have prior knowledge of it from a previous message
or a phone conversation.
*Always scan an
attached file before opening it. Manually save the attachment to a hard
drive then scan it, or use an automatic scanner.
*Trust no one! The
most likely sender of a virus is someone you know, because you are in
his or her address book.
*If you send attachments,
as a courtesy, get in the habit of sending two messages. If you have
not had a verbal conversation explaining the contents of a forthcoming
e-mail attachment, send a simple message ahead of the attachment that
explains what is coming in the next message.
*Update your antivirus
program weekly. Most programs will automatically update themselves on
a schedule, so check "auto-update" settings.
Viruses are a fact
of life. The good news is you have total control over your destiny if
you follow the rules.
Ken Colburn…Computer
Corner/KTAR, Phoenix
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We've
Always Done it that Way
The
US standard railroad gauge (distance between the rails) is 4 feet, 8.5
inches. That's an exceedingly odd number. Why was that gauge used?
Because that's the
way they built them in England, and English expatriates built the US
Railroads. Why did the English build them like that?
Because the first
rail lines were built by the same people who built the pre-railroad
tramways, and that's the gauge they used. Why did "they" use
that gauge then?
Because the people
who built the tramways used the same jigs and tools that they used for
building wagons, which used that wheel spacing.
Okay!
Why did the wagons
have that particular odd wheel spacing?
Well, if they tried
to use any other spacing, the wagon wheels would break on some of the
old, long distance roads in England, because that's the spacing of the
wheel ruts.
So who built those
old rutted roads?
Imperial Rome built
the first long distance roads in Europe (and England) for their legions.
The roads have been used ever since. And the ruts in the roads?
Roman war chariots
formed the initial ruts, which everyone else had to match for fear of
destroying their wagon wheels. Since the chariots were made for (or
by) Imperial Rome, they were all alike in the matter of wheel spacing.
The United States
standard railroad gauge of 4 feet, 8.5 inches derives from the original
specification for an Imperial Roman war chariot.
Specifications and
bureaucracies live forever. So the next time you are handed a specification
and wonder what horse's ass came up with it, you may be exactly right,
because the Imperial Roman war chariots were made just wide enough to
accommodate the back ends of two war horses.
Now the twist to
the story...
There's an interesting
extension to the story about railroad gauges and horses' behinds. When
we see a Space Shuttle sitting on its launch pad, there are two big
booster rockets attached to the sides of the main fuel tank.
These are solid
rocket boosters, or SRBs. The SRBs are made by Thiokol at their factory
at Utah. The engineers who designed the SRBs might have preferred to
make them a bit fatter, but the SRBs had to be shipped by train from
the factory to the launch site. The railroad line from the factory happens
to run through a tunnel in the mountains. The SRBs had to fit through
that tunnel. The tunnel is slightly wider than the railroad track, and
the railroad track is about as wide as two horses' behinds. So, a major
design feature of the Space Shuttle, the world's most advanced transportation
system, was determined over two thousand years ago by the width of a
horse's ass.
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Broker
Question of the Month
Question:
Every issue the staff at NCC select a question from the NCC Forum to
share with our newsletter subscribers.
Got
a question, comment, story or experience to share? Post it at the NCC
Forum.
This issue's posting
is by Don Baylor who wrote:
I have a seller
that is selling a working equestrian facility in California. The real
estate appraisal says the "land and improvements" are worth
$800,000 and the business is valued at approximately $1,000,000.
Is this a business
note? I thought business notes didn't have any real estate?
The sale is not
yet complete so is there anything I should tell the seller about how
to set up the note he'll be carrying? He wants to sell right away, can
that be done? Is that what's called a simultaneous closing?
Your help is appreciated.
-- Don
Response:
By Ed Lisogar on 7/25/01 6:02:56 PM :
Welcome to the world
of "Hybrids". We devote an entire chapter in The Business
of Business Notes" to Hybrids (see the Instructional Manuals page
at this site).
When RE and a business
sell together and the seller carries one master note to cover the entire
enchilada, that's a hybrid...thats also a problem. As paper investors
we are forced to view it in either one of two fashions. We have to either
a) look at it strictly as a business note, ignoring RE value and utilizing
higher industry yields or b) look at it as a RE note, using lower industry
yields for real estate BUT (and this is your big but) we'll be limited
as to how much we can invest by ITV perameters for RE paper.
The quote in scenario
a) will provide a big discount, b) will in all likelihood mean we can
only do a partial. Oddly enough the full in a) often is close to what
the partial in b) will be so what's the better deal? B) of course. The
problem is that you need to educate the seller and show WHY it is the
way it is and hopefully convince him to do the partial. In many cases
sellers are totally unrealistic about the market for their notes (no...REALLY??)
and all the educating in the world will do you no good when the seller
expects PAR or a minimal discount...you know, like 99%.
Of course THE BEST
CASE SCENARIO is when you're contacted PRIOR to the sale closing. IMPLORE
them to create 2 notes...one for the business sale, one for the RE sale.
You can mirror the terms and conditions so that the resulting monthly
payment for the Payor is the same as if they created ONE note however,
now the seller can sell one or both notes on their own strengths. What
typically happens is the seller keeps the business note for income and
liquidates the RE note.
EL
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...And
finally
The American Dream...
Joe Smith started
the day early, having set his alarm clock (made in Japan), for 600 A.M.
While his coffee pot (made in Japan), is perking, he puts his blow dryer
(made in Taiwan) to work and shaves with his electric razor (made in
Hong Kong). He puts on a dress shirt (made in Taiwan), his designer
jeans (made in Singapore), and a pair of tennis shoes (made in Korea).
After cooking up
some breakfast in his new electric skillet (made in Philippines), he
sits down to figure out on his calculator (made in Mexico), how much
he can spend today. After setting his watch (made in Switzerland), to
the radio (made in Hong Kong), he goes out, gets in his car (made in
Germany), goes looking as he has been for months, for a good paying
American job.
After the end of
another discouraging and fruitless day, Joe decides to relax for a while.
He puts on a pair of sandals (made in Brazil), pours himself a glass
of wine (made in France), and turns on his TV (made in Japan), and ponders,
once again why he can't find a good paying American job.
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