SPE 1031

GLOBAL CREDIT CRUNCH, SECURITIZATION OF CUSTOMER LOANS AND SECTION 1031 EXCHANGES OF INTANGIBLE ASSETS

Except those individuals sleeping under a rock, the rest of the world is becoming more and more familiar with the credit crunch and how it is affecting the economy.

What was a key trigger of the credit crunch? One was the collapse of several Investment Banking Firms on Wall Street.

How do Investment Banking Firms work? These non-deposit taking financial institutions were permitted to provide loans to borrowers. They borrowed from their clients or pledged securities lent by their customers to raise capital to lend funds. Their “loan to capital ratio” was as high was 40:1, e.g., 40 dollars of loans to 1 dollar of capital. As the pledged securities fell in value, the investment banks were forced to scramble to raise cash to maintain their capital requirements.

How does this affect Businesses located on Main Street, USA? After all, we don't borrow from investment banking firms, we borrow from Banks. However, Banks also have limits on the amounts they can lend, based on the amount of capital and deposits they have on hand. In the recent past, Main Street Banks multiplied the amount of loans they could make by bundling the loans they made and selling these loans to Investment Banking Firms on Wall Street. Therefore, they could re-lend the same funds again and again.

The Problem. With the demise of these firms, we are already seeing intra-bank lending seizing up. Even solid businesses are unable to tap into credit. The commercial paper market has contracted significantly as investors fly to the safety of Treasury paper. Main Street Banks will be limited in the amount and number of loans they can make. Therefore, businesses will be competing for fewer and fewer number of loans. Companies need credit to grow and expand.

The Solution. Section 1031 Exchanges allow businesses that are selling any type of business asset, including intangible assets, to reinvest those sale proceeds received into similar assets without paying income taxes on the gains. Proceed directly to GO and do not pay income taxes in today's new version of Monopoly!

In other words, Section 1031 Exchange is the only legal and tax preferred method to recycle the cash flow of the business from the sale of assets and reduce the funds that may be required to acquire new business assets.