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The Daily Transcript presents:

Banking & Finance Quarterly Report

Supplement to:


Thursday, January 24, 2008 / Vol. 123, No. 18

Roundtable roundup

Local experts discuss expectations for coming year

Daily Transcript staff report

In a series of roundtable discus- sions hosted by The Daily Transcript, local industry experts in construction, real estate, employ- ment, law and finance talked about the outlook for the coming year.

Construction Paul Tryon, CEO of the Building Industry Association of San Diego, sees 2008 as a yea r of transition for the residential industry, while Tom Brown, president of Sierra Pacific West Inc., forecasted the residential market will come back, in terms of returning to previous activity levels, by mid-2009.

Unlike residential, the commercial construction industry remains steady, according to David Susi, president of RSI Roofing. The gener- al consensus from those in the con- struction community, he said, is that the public construction sector will represent the strongest building seg- ment in the coming year.

price of steel and concrete will con- tinue to increase because of the international pressure for these materials, a demand that previously did not exist.

“We’ve failed to continue to devel- op our resources,” Tryon said, refer- ring to the lack of permitted aggre- gate facilities. “We don’t make investments in those locally and we’re increasingly relying on it being imported.”

Demand locally for steel and con- crete is likely to increase, as these are two of the main materials used in higher density projects.

Aggregate, which is already being imported from Mexico and other parts of Southern California, will also increase in costs.

On the whole, materials could rise as much as 5 percent to 8 percent, Brown said.

“The good news is insurance costs (workers compensation and liability) will be going down,” Susi said. “Insurance is our biggest bite.”

According to Brown, San Diego recently received $451 million for Caltrans work, Sandag has $200 million in current projects that will take place and the city of San Diego has a significant amount of work on the board in the infrastructure sec- tor. Real estate There was no clear consensus among local experts on the residen- tial real estate market. Rick Hoffman, president of Coldwell Brokerage Banker San Residential Diego/Inland Photo: J. Kat Woronowicz Jay Jeffcoat, a commercial litigator with DLA Piper (right), and Michael Maslak, president and CEO of North Island Credit Union, spoke on legal and financial issues in one of a series of roundtable discussions hosted by The Daily Transcript. Empire, said consumer confidence continues to be an issue, but neither expects a crash nor a big boom in the residential markets for at least the next year. “There’s more work than contrac- tors can handle (in this sector),” Brown said. Because of this current and future workload and decline in residential activity, a lot of contractors who for years have practiced in the private building sector are now migrating to the public market. ber of skills. that were unaffordable to most. But with a current surplus of con- dos, the prices have come down significantly. just don’t see the housing market recovering in 2008,” Murphy said. “It’s going to get pretty ugly.” Preparing the next generation for a flexible career outlook has been a challenge to educators and an adjustment to employers. Michael Murphy of Murphy Development said for at least the next year homeowners will be in the unenviable position of being unable to refinance their homes and/or will be waiting for adjustable rate mortgages reset to unaffordable levels. Charles Black, a downtown developer and consultant, agreed the homebuilding industry in par- ticular could take quite a while to rebound, but also pointed to an upside: The explosion in condo construction downtown saw a surge in development and prices Hoffman doesn’t pretend there won’t be plenty of problems. He said he is just beginning to see a shakeout among real estate agents, and that significant consolidations among offices and real estate companies are also coming. “I think you still need to have some of those basic fundamentals of what is loyalty, what is a good worker, what does it mean to put in the time and effort to be successful,” said Dennis Snyder, executive director of the Escondido Charter High School. “And I think we can’t forget those things in public education.” Material costs also remain a con- cern of contractors, primarily, the price of fuel, steel, concrete and aggregate. “Now there’s no refinancing and no sale because they overpaid ... I Ray Carpenter, president of R.E. Staite Engineering Inc., said the The good news, according to Hoffman, is that those who have to held onto their homes are generally seeing a substantial return, regard- less of what has happened in the intervening time. For example, depending on the location, home val- ues may well have tripled between 1991 and 2005. Incentive stock options and the tax advantage you might be missing Businesses are looking for people who can be the “jack-of-all-trades,” according to Dennis Guseman, dean of the College of Business Administration at the California State University, San Marcos. the strike price and the stock price ($30) is taxed as ordinary income. However, when the ISO is exercised, the $30 spread is subject to AMT if you hold the stock through 2008. By TIM CALLAN as the credits have been carried over for at least three years, they allowed you to move some of the surplus to help offset regular income taxes owed. However, it is unknown whether this benefit will be available in the future; one of the reasons it is safest to exercise early in the calen- Callan Capital “We train students to be flexible, to be able to accept change, to be able to work in different types of environ- ments,” Guseman said. “Basically I am preparing students for jobs today that don’t exist (and) to address problems we’re not aware of.” As the New Year begins, we inevitably start filing taxes. And often we start to think of the many tax advantages missed over the last 12 months. Each year, countless executives and other holders of incentive stock options are guilty of bypassing the small steps when exer- cising ISOs that can provide signifi- cant tax advantages; especially when compared with the tax incurred on the alternative, nonqualified stock options (NQs). Employment As baby boomers retire, leaving with them are the loyalties to long- time employers and the defined parameters of job portfolios. This leaves the door open to the millenni- al generation, with vague career paths and resumes reflecting a num- Now, after you exercise the ISO, you hold the stock until Jan. 2, 2009 and sell it when Amylin is trading at $100. The difference between your strike price and the price of the stock when it is sold ($90) is taxed as long- term capital gains. If the stock is sold before Jan. 2, 2009 it is considered a “disqualifying disposition.” That means the lower of the two gains at the time of exercise or sale is taxed as ordinary income. The potential to earn long-term capital gains on the spread is a significant advantage for an ISO versus a NQ. See Incentive on 2 See Roundtable on 5 Prime time: The new boom in refinancing Before exploring the various strategies relating to executive options, it is important to address the differences between NQs and ISOs. borrowers with so-called conforming loans — those eligible for purchase by Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), the two government-spon- sored entities that rule the mortgage market. In partic- ular, borrowers with high credit scores or a large amount of equity already in their home, or some com- bination of both, stand to benefit, says Dale Westhoff, who heads Bear Stearns’ mortgage research. In the past, when rates have dived below 6 percent, “you’d normally see subprime and Alt-A and jumbo borrow- ers” in the market, Westhoff says. “But they’re really not going to be participants in this refi wave.” By JEFF D. OPDYKE The Wall Street Journal Another mortgage-refinancing boom is under way. But this time around, many homeowners will be watching from the sidelines. A Nonqualified Stock Option is taxed upon exercise of the option. The amount of taxes owed is calcu- lated on the difference between the strike price and the market value of the stock and taxed at ordinary income rates. Following the current theme, it is easy to identify the two major advan- tages in exercising an ISO early in the calendar year. For the first time since 2005, mortgage rates have slipped well below 6 percent, ending last week at about 5.87 percent, according to mortgage tracker HSH Associates. Some lenders are offering even lower deals. At these levels, about 37 percent of homeowners could refinance their mortgages and save money on their monthly payment, estimates investment bank Bear Stearns Cos. (NYSE: BSC). As rates drop further — and some expect that to happen if the economy contin- ues to weaken — increasing numbers of consumers will find refinancing their existing mortgage worthwhile. In this example, you exercise 100 ISOs late in the year, October 2008, when Amylin is trading at $50. Your strike price is still $10. If you hold the stock through Dec. 31, 2008, the $40 spread is subject to AMT due in April 2009. In June 2009, the sector crashes and the stock falls, trading at $15. You decide to sell the stock in October 2009 at $15. You will only be taxed between the strike price and stock price ($5) at long-term capital gains, while the AMT you already paid in April will now serve as a credit against AMT for future years. An Incentive Stock Option is taxed when the stock is sold (except when the Alternative Minimum Tax applies), instead of being taxed at the exercise, like an NQ. The tax advan- tage is incurred when the stock is held for one year from exercise and two years from grant date. At this stage, the holder qualifies for long- term capital gains on the difference between the strike price and the market value of the stock when it is sold. At this stage, it is helpful to see the difference between the two in an example. Fiona Furlong of South Glastonbury, Conn., is one borrower who has been able to refinance her home. She originally sought to refinance her conventional mortgage in December 2005, but missed the last of the sub-6 percent rates by a few weeks. She told her mort- gage broker to keep her in mind if rates ever slipped below 6 percent again. But here’s the catch, and it’s a big one: Many home- owners won’t benefit, either because their mortgage is too big or their credit score is too low. In other cases, falling home prices will make it tough for them to refi- nance. “When he called recently, I had sort of forgotten about this,” Furlong says. “I was surprised to hear rates have dropped so significantly.” She locked in a rate of 5.75 percent, reducing her current rate from above 6 percent, a move that will shrink her monthly payment by about $100. “My house just got reappraised and I’ll be paying more in taxes, so that savings will help,” she says. As the subprime-lending crisis continues to roil the housing and financial markets, rates for so-called jumbo mortgages — those above $417,000 — are now uncharacteristically priced so far above conventional mortgages that refinancing generally makes no sense for homeowners who hold them. At the same time, conventional borrowers who have lower credit scores — or relatively little equity in their houses — are find- ing that they generally don’t qualify for the best rates, often negating any expected benefits to the pocket- book. It is worthy to note that during the recent tech bust, technology execu- tives that exercised ISOs late in 2000 paid more AMT than their stock was worth in 2001. It became a problem for so many executives that Congress recently offered relief. It passed the AMT Credit Fairness and Relief Act of 2007 to help individu- als with large AMT credits. As long Assume you’re an executive at Amylin Pharmaceuticals (Nasdaq: AMLN) with 100 NQs and 100 ISOs. Your strike price is $10 and the stock is currently trading at $40. You exer- cise both on Jan. 2, 2008. When the NQ is exercised, the spread between Furlong’s broker, Michael Menatian, president of Sanborn Mortgage Corp., in West Hartford, Conn., says his refinancing business is “surging” these days among those who qualify. “It’s going nuts, because The result: The big winners will be conventional See Prime time on 8

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