The Ten-Day MBA 4th Ed.

by Steven A. Silbiger

  1. Attachment—In this process, the creditor obtains a signed written agreement describing the debt and the property. The debtor must have received value for the security interest and the debtor has legal rights to the property.

  2. Filing a Financial Statement—A security interest can be secured by filing a financial statement signed by the debtor and creditor. The statement must be filed with the appropriate state, county, or local authority considered valid in the state where the property exists or where the debtor lives. Banks usually make a UCC filing to protect their interests in the collateral for loans outstanding. The filing is a public record that puts others on notice that the property is attached.

  A special type of security interest is a purchase money security interest (PMSI). In these transactions, the consumer goods sold (such as cars, furniture, or other household goods) are the collateral for the loans the seller makes to finance the purchase. In these cases, no filing is necessary.

  Default occurs when a creditor does not pay or perform a contractual obligation. When property is seized by the courts to satisfy debts, a priority of claims governs who has rights to the property. The party that is first to perfect its interest in a property has priority over other creditors.

  SEVERAL ACTS BUSINESSPEOPLE NEED TO KNOW ABOUT

  Federal Trade Commission Act—The Federal Trade Commission (FTC) works to prohibit unfair and deceptive business practices. The FTC is especially active in regulating advertising claims and product labeling.

  Sherman Antitrust Act—This act governs those practices that “actually” restrain trade. Price fixing, setting production quotas in an industry to manipulate prices, dividing a territory to limit trade, deliberately excluding businesses from an industry, and tying arrangements among vendors are all prohibited. (A tying relationship is one in which a business is contractually obligated to buy products from a particular source to the exclusion of others.)

  Clayton Act—This act prohibits monopolistic practices and mergers that “lead” to lessened competition. In this way some mergers are not allowed by the courts because they “may lead” to lessened competition. For example, having the same people on the board of directors of several related companies in a particular industry could lead to lessened competition and be prohibited by the Clayton Act.

  Robinson-Patman Act—This act prohibits the discriminatory pricing of a product based on factors other than actual cost differences in making and delivering the product to the customer.

  In a nutshell, we’ve covered the abbreviated body of notes from a typical business law course taught at business school. Do seek the advice of an attorney if you need it, but at least now you “can walk their walk and talk their talk.”

  THE ONE-MINUTE MBA BUSINESS WRITING COURSE

  1. Present your purpose explicitly and as close to the first sentence as possible. Don’t waste readers’ time. Have a clear purpose for writing any memo.

  2. Keep your tone personal, accessible, and respectful. Write as if the receiver were sitting with you. Do not use too much technical jargon or try to impress others with your vocabulary. Do not write while you are either angry or upset: the memo will not go away if you have a change of heart. Do not blame someone or write anything negative about someone in your company unless absolutely necessary and you have all the facts.

  3. Use the active voice, not the passive voice if at all possible.

  Active: Steve Silbiger wrote this book.

  Passive: This book was written by Steve Silbiger.

  4. Eliminate extra words, facts, and long sentences. Use headings to break up different thoughts to eliminate transitional paragraphs. Try to keep your memo to one page. Additional information can be attached.

  5. Use “spell and grammar” check twice before you send a memo. Read the final draft before you send it.

  THE TEN-MINUTE REAL ESTATE INVESTOR

  Since a great proportion of the wealth of the world’s richest people was created investing in real estate, every MBA should know the basics of real estate. The object of real estate investing is to create wealth by leveraging your initial investment, taking advantage of government tax benefits, and selecting excellent undervalued properties.

  Cash flow is the critical element in real estate investing. Cash flow allows you to pay the bills and pay yourself. Cash flow is calculated by subtracting the mortgage payment and other operating expenses from the rent you collect. With the cash flow you can maintain and increase your property portfolio and pay yourself. For a residential property the lease is a simple monthly payment contract. Commercial property leases come in two types. In a gross lease the tenant pays the rent and the owner pays all operating expenses other than utilities. In a triple net lease, the tenant pays the rent, taxes, insurance, utilities, and maintenance.

  With the lease payments there are three types of operating expenses. Operating expenses have a fixed, a variable, and a planned portion. Fixed expenses include taxes and insurance, which are often paid in large payments annually or quarterly. Variable expenses include utility payments not assumed by the tenant, repairs, maintenance, and a provision for vacancies between tenants. In addition, planned expenses are those with a longer useful life, such as a new roof, furnace, or exterior siding or painting.

  A large part of your investment profit is from the reduction of mortgage principal paid for by the renters. As the balance of the loan is paid, your equity increases as time passes, even if the property’s value remains the same.

  As discussed in the finance chapter, leverage increases the return on your investment. This is one of the few transactions in which the average person can be engaged in very leveraged transactions. Mortgages with 5 percent down are leveraged at a twenty-to-one ratio. At 20 percent down, your gains are leveraged by a factor of five. That is why large returns are possible on a relatively small investment. As a property increases in value, you can borrow against the equity and invest in more properties or take cash. In an era of rising property values, fortunes are created. In declining markets, investments can be wiped out. However, real estate is far more durable than a biotechnology stock. Unless the property has an extreme environmental problem, one person’s bust lays the groundwork for another investor’s fortune.

  Appreciation in property values come from inflation, supply and demand in the market, and the opportunities for other uses for the property. If a residential property has commercial possibilities, it can become more valuable. That is called the property’s “highest and best use.” Real estate investing is a local business. Prices differ greatly by city, neighborhood, and block. If you think that the value of the investment lies in fixing up the property, then get competent appraisals of the fixes required.

  The deductibility of loan interest for tax purposes is a tax shelter provided to all property owners that subsidizes your purchase. As opposed to nondeductible credit-card interest, the government helps you by lowering your after-tax cost of borrowing. The U.S. government also has programs from the Department of Housing and Urban Development (HUD), Federal Housing Administration (FHA), and the Veterans Administration (VA) that can help you obtain the financing required to buy properties.

  Tax depreciation is another way the government subsidizes your purchase with a tax deduction. Tax depreciation for U.S. properties is 27.5 years for residential properties and 39 years for nonresidential. The value of the land must be subtracted from the cost of the property being depreciated. Check your property tax bill for the assessed value of the structure and the total assessment. Use that ratio to multiply by your purchase price to estimate the depreciable portion of your investment.

  Profits realized in real estate transactions can be rolled over into new property purchases without a tax on the profits. It’s a unique asset in that way. In an IRS 1031 tax-deferred exchange, you are able to roll over your equity much the way you roll over the profits of an individual retirement account into another IRA account. In this case your real estate investing can create a considera
ble nest egg without a great deal of risk. In these exchanges you must roll the entire proceeds into “like-kind” property and not take any cash, debt relief, or other things of value out of the rollover transaction.

  There are several ways to evaluate properties. The capitalization rate method is a simple way to value an investment property. The value of the property equals the net income from the property (rent less operating expenses) divided by a capitalization rate. The capitalization rate is what investors expect to make on their investment based on the prevailing interest rates, appreciation, and the riskiness of the rents. A capitalization (cap) rate in 2011 of 8 percent was a common goal. In the case of property that has a net income of $10,000, it would be valued at $125,000 using this method. Of course if improvements can be made to improve the net income, the property may be more valuable under the new owner’s management.

  Another valuation is a thumbnail method of using a gross rent multiplier, but it is fraught with inaccuracies. The most accurate valuation method is to complete a full NPV analysis of the cash flows and expected appreciation, discounted at a rate that compensates you for the risk of ownership as explained in the finance chapter. Also the analysis should include some variation analysis of key variables to test the robustness of the projections.

  Financing the investment can take the form of a conventional bank loan, government loan, mortgage, or seller financing.

  The plan for real estate success is summarized in a five-part plan:

  1. Learn about real estate as an investment.

  2. Research properties in your area.

  3. Plan how to invest your money.

  4. Invest according to your plan.

  5. Manage your investment to meet your goals.

  The worksheet below can help you calculate the return on a prospective real estate investment.

  PROPERTY ANALYSIS WORKSHEET

  THE TEN-MINUTE LEADERSHIP COACH

  One of the newest areas for MBA education is leadership. Personal leadership coaches are the rage for corporate executives, and they cost hundreds of dollars an hour for their advice. I discussed the theories of leadership in chapter 4, “Organizational Behavior,” but many MBA programs have created leadership courses so that their students can be leaders themselves and, down the road, become large donors to their school.

  Being an effective leader involves having the self-confidence to make decisions, motivating others, and assuming responsibility for your actions. In a nutshell, to become an effective leader you have to overcome your fears and anxieties. It goes beyond a weekend of climbing ropes. Most of the fear and anxiety of business leaders is over losing control. Other fears that stem from this include the common fear of going insane, fear of embarrassing yourself in front of others, and fear of failure. You create fear within yourself, and only you can calm yourself to be effective. “If you knew that you could handle anything that came your way, what would you possibly have to fear?” Therefore “all you have to do to diminish your fear is develop the trust in your ability to handle whatever comes your way.” This wisdom comes from Susan Jeffers, Ph.D., the author of Feel the Fear and Do It Anyway. “Whatever happens to me, given any situation, I can handle it.” But what about really horrible things? You may experience uncontrollable events, but if you do your best, then you cannot ask for any more of yourself.

  Many things create the fear within you. Lucinda Basset’s From Panic to Power pinpoints your family and upbringing as the primary causes.

  You may have had a strict upbringing that controlled you through fear and guilt.

  Your family did not easily express emotions and did not easily give you praise or approval.

  Your parents may have had high expectations for you that you could not possibly meet.

  You may have overreacting family members who created a negative environment of nervousness in your house.

  You may have lost a family member or had one incapacitated by disease or addiction.

  It sounds horrible, yes, but most families, mine included, have elements from the list that have formed our personalities, habits, and dispositions. They lead people to be perfectionist, guilty, obsessive, nervous, sensitive, overreacting, overly concerned about the opinions of others, and apparently in control all the time. Many of these same traits have driven you to be successful as a student and as a businessperson, but at a point, they hold you back from being a great leader.

  The first step of improvement is to recognize that you have these fears and can conquer them. When you have this feeling of a loss of control, which is the basic core fear, you accept it. The anxiety is created by an external source in most professional situations. That creates an internal anxiety, such as nervousness or a sweaty brow. It is your choice how you react. Don’t fight the anxiety, understand it.

  When you deal with external events, your mind tends to create cognitive distortions of the real situation causing you needless anxiety. As explained by David Burns, M.D., in Feeling Good, the ten categories of these poisonous cognitive distortions to watch out for are:

  1. All-or-nothing thinking: If it is not perfect, it is a failure.

  2. Overgeneralization: A single negative event is a never-ending pattern of defeat.

  3. Mental filter: Filter out the entire positive and concentrate on the negative.

  4. Disqualify the positive: Reject positive as it does not count and maintain negative beliefs regardless.

  5. Jumping to conclusions: Anticipating negative reactions from people and negative consequences.

  6. Magnification or minimization: Exaggerate the importance of a negative event or minimize the importance of a positive one.

  7. Emotional reasoning: Your negative emotions reflect the reality of the real world around you.

  8. Should statements: You motivate yourself with shoulds and shouldn’ts as if you need to be whipped and punished to do something. The consequence of these musts and ought tos is guilt.

  9. Labeling and mislabeling: Negatively label yourself a loser or others as idiots.

  10. Personalization: You are the cause of negative external events that you are not responsible for. This causes guilt.

  When stressed, take a few breaths and use a “positive inner dialogue” to get over it. Positive thoughts create positive feelings. Negative thinking is a bad habit that you can break . . . with practice. Training the noise in your head, “the chatterbox” as Jeffers calls it, is your key. You can choose to have this voice constantly berating you, doubting your decisions with countless what if scenarios and regretful I should haves. Alternatively, you can choose to have a kind internal voice tell you, “You are a capable and talented person, and if things don’t work out, you can handle it. You can’t control the world, but you can control how you react to it and learn along the way to make better decisions in the future.”

  Jeffers suggests that when you make a decision, look at what you can gain, not what you can lose. Do your homework to make sure you have all your facts to make a realistic and informed decision, establish your priorities, and trust your intuition and lighten up. Any decision that you make will not result in nuclear holocaust. Everyone survived the collapses of Enron, WorldCom, and Bernie Madoff’s Ponzi scheme. Martha Stewart went to jail and she recovered.

  After making a decision, do not wed yourself to what you thought “should be” the outcome: throw away that picture. If things do not work out perfectly, accept responsibility and correct the situation. Avoid wasting your time trying to “protect” the righteousness of the decision that you made. You cannot change the past: you can only affect the future. Feeling guilty is not a productive treadmill to run on. Forgive others and yourself and be solution-oriented.

  If you are having negative thoughts, Basset suggests that you need to recognize the thoughts for what they are and raise the “stop sign” right there. Ask yourself if the thoughts are true, realistic, rational, and reasonable. Use your positive internal voice to put things into perspective and assure yourself th
at you can handle it, and make yourself feel positive. Positive self-talk is better than a bad habit of negative talk. In a positive and powerful mental state, you solve the problem by doing, not worrying. If you are busy doing, you are not busy worrying. “Change your mind and change your mood.” The distraction of being active solving your problem, or perhaps taking some time out to exercise, listen to some music, or do something else positive, will provide time for the initial anxiety to pass. That enables you to become a more positive and productive leader for your next challenge.

  Many other experts have similar advice. Spencer Johnson’s The Present is a great book about an old man’s sage advice about becoming happy as a result of focusing on action in “the present.” “Be in the present, focus on what is right now. Use your purpose to respond to what is important to you. Learn from the past. Learn something valuable from it and do something different in the present. Plan for the future and see what a wonderful future would look like and make plans to help it happen. Put your plan into action in the present.”

  In Johnson’s Who Moved My Cheese?, with examples of mice and little people caught in a maze, he focused on taking action in the face of a changing world. He advocated accepting change as part of life, proactively anticipating change, and dealing with it. Accepting change and dealing with it is more productive and better for your well-being than being paralyzed by fear and anxiety.

  Leadership coaches touch on the practical as well as the big life-planning issues. Tools that leadership coaches suggest include keeping organized and prioritized by creating daily to-do lists. The lists enable you to check things off during the day and feel productive, even though you are not solving every issue at your company. Don’t overschedule your day; it is a method of avoidance. To effectively network and keep connected, you must keep an updated contact list. If you include significant keywords with your entries, such as Masters with someone whom you met at the Augusta golf classic, you can more effectively find people when you don’t remember their names.