Two hot topics California businesses will be thinking about as 2016 gets going are a minimum wage increase and a split property tax proposal for businesses that own real estate.
Whether you view these changes as opportunities or challenges depends on your point of view, says JC Timmons, senior vice president, Southern California Corporate Banking, at Bridge Bank.
“This minimum wage escalation and the attendant politicization is only in the beginning cycle, so it’s likely not going to go away,” Timmons says. “But this is clearly a 2016 and beyond item that companies are budgeting for, factoring not only into their profit margins, but also into their supply chains.”
Cost increases along that supply line in California could lead to some difficult decisions on labor and managing to those relationships is important, Timmons says.
“If you’re doing business across state lines with different wage thresholds, those pressures in the supply chain need to be watched carefully,” Timmons says.
Smart Business spoke with Timmons about the split property tax proposal and other factors that will affect businesses in 2016.
What is the split property tax proposal?
California has Proposition 13, which limits the assessed value of properties to no more than a 2 percent increase per year, as long as the property is not sold.
Senate Constitutional Amendment No. 5 (SCA-5) would leave residential real estate untouched, but it would single out commercial and industrial property ownership, opening those properties up to greater annual valuation and tax increases.
This proposal has not been met warmly in California’s business community as it would be a disadvantage for businesses in the state.
It’s easy to think of the massive, well-capitalized Fortune 1000 firms in the state that can roll with this, but there’s another element to it.
Many small businesses sign triple net leases and by the nature of those leases, tax obligations flow back to the tenant. So you’d see monthly lease payments increase by a significant amount in those instances. In short, a split-roll property tax would increase operating costs with negative consequences.
This is an important policy that the business community is going to be watching and certainly making capital budgeting decisions around if it ever gets legs through the legislature.
What about any specific industries to watch this coming year?
In California, we’ve seen nice comebacks the last few years in health care, hospitality and professional services.
Certainly technology companies continue to thrive, as do any providers making or moving a tangible product.
Themes or common traits emerge with the most successful firms. One of the most common themes is that the owners and managers care deeply for their businesses.
Oftentimes a large percentage of personal net worth is tied into these businesses, and if that’s not the case, as an executive, the day-to-day business needs are very time-consuming, thereby important.
Lenders and depository institutions like to serve in as much of an advisory role as is possible and this begins by understanding the ultimate objectives of the company and its management team and creating value within that context.
What are some examples of creating value from a banking perspective?
The most highly pursued answer is oftentimes credit, and in situations where it is applied appropriately, strong value can be created.
For example, if there is a way to generate a loan facility accretive to the objectives of the company, or a structure to create additional free cash flows or other specific deal points personal to ownership, a bank aims to do that.
But a loan is not always the priority. Oftentimes there are solutions determined with foreign exchange experts on international commerce that still get overlooked by the folks down the street. Other times, it’s an introduction to another expert that can help solve a problem, or prevent one from occurring in the first place.
The focus is always on improving business value that even an objective third party would see, and in doing so, a business realizes the maximum benefits of business ownership. ●
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