THERE HAS BEEN much focus on the plight of those trapped in negative equity in the residential property market in Ireland. There have been many calls for measures to be introduced by the banks and government to ease this burden for which there is no medium or even, perhaps, long-term hope of repayment. When the loan size is so much greater than the value of the asset, many have simply walked away and sent the keys of the property by post to the lender. During the last property crash in the USA this was so prevalent it became known as ‘Jingle Mail!’.
It has happened here with cars too. In recent years, as many of our immigrant workers returned home due to the downturn in employment here, they simply left their low-cost leased cars in the airport parking lots and flew home. These parking lots became the first place the finance companies looked to when seeking to repossess these vehicles for non payment of rentals. In most cases the amounts outstanding were significantly greater that the market value of the vehicles themselves; it was yet more negative equity.
In both cases above, the credit rating of the person who walked away is destroyed. In the USA, they have a simple form of personal bankruptcy that allows people to start over with a new mortgage on a new property after about 2 years. Car jingle mailers are going to another jurisdiction and probably could not care less as their credit rating at home will be unaffected.
Negative equity is also a serious issue for many private Irish businesses. While the plight of those caught in boom time-priced property leases has been well rehearsed, the same cannot be said about regular businesses trapped in negative equity with commercial property loans. I am not talking about property developers or investors but rather the businesses that use the property to house their business activities. They may be limited companies or indeed self employed sole traders or even partnerships.
During the boom, with low interest rates and high rents, it was cheaper to buy a commercial property than to rent it. Commercial property prices have fallen significantly – more steeply than residential properties in Ireland – and as many companies face cashflow difficulties they become unable to service these loans and are stuck in a negative equity trap. The outstanding loans are much more than the value of the property, for which there is probably no buyer at any price! To make the problem even worse, personal guarantees were typically demanded from the owners by the financial instituions too.
There is however a business group who are even worse off – let’s call them commercial property user pension owners. Slick advisors and brokers packaged schemes where the new property would be bundled into the proprietors new fangled hybrid self-administered pension scheme and they would charge their own business a rent. The rent would cover the interest and capital repayments and at the end of the day, you would own the building tax free. The business would tax relief on the rental payments; in other words, happy days all round.
Fast forward a couple of years and these asset only pension schemes are in serious deficit and along comes the outrageous new pension fund levy – and they only take cash! And there ain’t any. Try asking a bank to lend you money to pay any kind of taxes, you would have to have the neck of Pee Flynn and you would get about as much credence.
Small business owner managers are just ordinary folk with all the usual financial demands on them to keep family and home together, put food on the table, deal with utility bills and education costs, as well as deal with a mortgage that would reflect the cross section of Irish mortgage profiles, a significant percentage of which are in negative equity.
Whatever comes in the delayed personal insolvency legislation, it should address the two headed monster that could be called ‘Jingle Jingle Mail’. These small businesses employ not just the owners but many others too. SMEs, the lifeblood of the economy and our way to salvation? We shall see.
Peter Faulkner is chairman and owner of Faulkner Packaging, which was founded on Friday 14th September 1860. He lives in Dalkey and has three adult children. He is a former chairman of the SFA and was one of the founders of ISME. He was a member of the government Taskforce on Small Business. His sites include www.discountpackaging.ie, www.snazzybags.com, www.snazzybags.co.uk, www.faulkner.ie, www.alububble.ie, www.95kpabags.com, plus a bunch of micro sites.
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