August 7, 2017 – Our last blog post emphasized the example of conducting collateral field examinations on rediscount facilities which are essentially revolving lines of credit (“RLOC’s”) extended to factoring companies that are in the business of purchasing A/R and funding private enterprises. Here we look at Corporate Relocation services along with Buyer Value Options and Guaranteed Buyouts.
Mobility management and talent relocation companies provide an array of corporate relocation services to commercial entities that need to consolidate their workforce, enter new markets, right size or move key people around the country or the world to maintain their going concern. Asset Based Lending RLOC’s finance movement of household goods by outsourcing or operating van lines, storage of records, home search, reimbursable expenses incurred for house hunting, rent of temporary housing, tuition fees of family members and the list goes on.
Corporations additionally are in need of offering home sale incentive programs to ensure a seamless move or transfer to their employee. Once an employee has committed to relocating, he or she is already thinking ahead and desires to sell the home quickly, for a reasonable price, and settle into a new community without the burden of prolonged temporary housing and the burden of attending the closing and paying the selling expenses. The IRS considers any corporation’s employee reimbursement of real estate related costs to be taxable income to the employee. Where is the added incentive on the employees’ behalf?
Buyer Value Option (BVO) and Guaranteed Buy Out (GBO)
The Buyer Value Option (BVO) home sale program is then offered by relocation companies to employees to circumvent the IRS tax treatment. Instead of taxable expense reimbursements to employees, the home sale costs can be converted to non-taxable business expenses of the corporation. A simple two-step process is required, the employee transferee is counseled by the relocation company to set a price for the sale. When a bonafide third party buyer is located, the relocation company qualifies the buyer to expedite the purchase/sale. The corporate relocation company will purchase the home from the transferee on behalf of the company/employer. The relocation company immediately calculates and pays out the equity and the transferee’s portion of the sale is complete. The relocation provider immediately re-sells the home to the bonafide third party initially contracted and awaits closing. The relocation company bills the corporate client for selling and closing costs including the equity advance which could be quite sizable depending on the transferee’s position. There is no taxable event to the employee/transferee and any costs incurred by the company become non-taxable business expenses.
Guaranteed Buyout (GBO) programs are similar to BVO transactions with one major difference. The relocation company agrees to buy out and purchase the transferee’s home. This allows the transferee to receive the equity from the immediate sale regardless of a third-party buyer under contract. An important side note: GBO programs are critical in serving the government relocation space because the federal government is not permitted to own property under any circumstance.
Participating in BVO and GBO programs offered to the corporate client are highly capital intensive and secured lenders will work outside existing RLOC’s and offer separate Equity Lines of Credit for the sole purpose of funding this unique specialty funding niche. Collateral is a security interest in the property titles properly held in blank on properties that are actively marketed. GBO transactions become inventory held by the relocation company.
Equity Field Examinations
A collateral examination is similar to a traditional ABL field exam, and a Field Examiner can add tremendous value throughout the process. The Field Examiner will concentrate his or her efforts on the corporate relocation company’s programs offered (GBO and BVO) and the documentation of all equity advances made on behalf of the transferees. The Examiner will review in detail the brokers marketing analyses (BMA’s) used to support the collateral value of purchased property, the contract itself between the relocation company and the transferee, appraisals on the collateral value of GBO’s and the current marketing ability of the relocation company’s partners to sell and close existing inventory of GBO’s and BVO’s that potentially fall through (additional risk to be understood by the examiner).
Additional capital requirements have incentivized corporate relocation companies that participate in and offer BVO and GBO home sale programs to seek out additional funding sources. This has opened the door to specialty secured lenders to establish an equity funding facility to finance the activity. There may be situations where an inter-creditor agreement is required to act outside existing operating RLOC of a senior lender though specialty lenders should realize and understand the basis and reasoning of why corporate clients need to offer these programs and incentivize their talent to relocate seamlessly with no additional burdens associated with the move. Secured lenders can take advantage of experienced field examiners who understand the audit process and collateral risk associated with corporate relocation.
What can Dopkins Offer?
Dopkins & Company ABL Consulting (DAC ABL) Field Examiners maintain and continuously develop experience based skills to effectively consult traditional secured lenders who provide working capital to commercial and industrial (C&I) entities. DAC ABL consultants also are experienced with highly specialized finance facilities.
Whether it’s the collateral underlying a traditional rediscount RLOC facility, or the underlying collateral quality supporting a monthly recurring revenue (MRR) facility, alternative financing and alternative perspectives on collateral evaluations is where the DAC ABL expertise comes to light. In addition, we routinely advise secured lenders facing the situation where a client’s working capital requirements extend further and beyond the current working capital RLOC facility.
About the Author
Joseph A. Heim CFE, CPA
Joseph Heim has over 25 years' experience investigating matters involving white-collar crime, fraud and corruption. He provides forensic accounting, litigation support and expert witness services to businesses, attorneys and commercial finance lenders. He is the Partner in charge of Dopkins Asset Based Lending Consulting Services.