Bridge Loans and New Jersey Pharmacy Acquisitions

By Brad MacLiver
Authorship and profile at Google


With the changes in the NJ pharmacy industry independent drug store owners, small and regional pharmacy chains, and pharmacy equity investment groups are acquiring New Jersey pharmacies to obtain a larger competitive footprint in a geographic area. During the acquisition phase of the business expansion there may be opportunities that require action, which is faster than the traditional funding process.

Bridge Loans are a short-term financing option and are used while waiting for permanent financing, or the next stage of financing to be obtained. Bridge loans provide funding to "bridge" the gap between a company’s current needs and their long term financing requirements.  The bridge loan is generally "taken out," or paid back, with traditional financing.

One characteristic that a bridge loan has is that they can close quickly, which in turn allows a company to capitalize on a timely acquisition or another business opportunity. This sort of quick access to cash alsos businesses the chance to avoid temporoary problems like penalties or bankruptcy. If there are  longer term issues that need to be dealt with, this form of “transitional financing” can provide the company with time until longer term financing can be secured.

Another characteristic that bridge loans have is that the process will usually require less documentation than conventional financing. Bridge loan lenders typically don't have the same government regulations to follow, so they tend to have more flexibility with their lending criteria and documentation they require. However, less documentation doesn't mean they will fail to perform due diligence to have a comfort level with the transaction before they fund.

Examples of using Bridge Loans in NJ Pharmacy Transactions:

1. An independent New Jersey pharmacy owner learns of health issues and decides to quickly sell the family owned pharmacy to an employee or local competitor. Traditional financing for the NJ pharmacy buyer may require a time line that is not acceptable when considering the circumstances. Bridge loans can be used to quickly accomplish the transaction in these scenarios.

2. In order to expand their business, a small pharmacy chain needs $1 million. They have 3 new equity investors who will be investing in the firm over the next 6 months, but at different intervals. However, the business has opportunities which require action sooner than 6 months. The quick closing bridge loan allows the pharmacy chain in New Jersey access to the needed funds so they can complete their expansion and increase profits. Money from the 3 new equity investors will pay off the bridge loan.

3. A New Jersey pharmacy owner in a leased location has an opportunity to quickly acquire a commercial property that would be a great pharmacy location, but the property is in disrepair. A bridge loan provides the needed funds to acquire and rehab of the property and once that is complete conventional long term financing can be obtained.

4. A pharmacy group developing new NJ pharmacy locations can receive bridge loan funding to get through the permitting process of a project when conventional financing isn’t available at this early stage due to there is still too much risk. A bridge loan allows the project to move into the construction phase and then qualify for other forms of financing.

5. When a pharmacy in New Jersey is owned by two or more partners and one of the partners is ready to exit the business, a bridge loan can help ensure the cash flow and uninterrupted operation of the business during the partner buyout.

6. Real estate, or equipment bought at auction may have a narrow window for closing the deal and timing of traditional financing would keep the buyer from proceeding with the opportunity. Benefits of a bridge loan will permit the pharmacy owner to quickly respond to the opportunity.

When there are business opportunities, buying NJ pharmacies, selling pharmacies, quick deadlines, an old loan maturing before a new loan can be put in place, funding needs during the permit, planning, or evaluating stages, etc., bridge loans can be an essential financial tool.

Tips regarding pharmacy bridge loans in New Jersey:

1. Bridge loans are quick to obtain, but quick to expire.

2. A bridge loan is similar to a hard money loan and the terms are often used interchangeably in conversations. Both are short-term, higher interest rate, non-standard loans, but in some circles hard money refers to the lending source and a bridge loan refers to the duration of the loan.

3. Because bridge loans usually come with higher interest rates than traditional financing a larger down payment, meaning a lower Loan to Value (LTV) and a lower level of risk and provides an opportunity for lower interest rates.

4. With the shorter time period of bridge loans borrowers will need to be aware that fees for valuations, legal, dues diligence, etc., will be amortized over a shorter period than traditional financing transactions.

Understand the types of deals that require a bridge loan may be considered speculative in nature, or have higher risk factors. Due to this many banks do not offer bridge loans. Banks must meet government regulations and need to justify their lending practices. Riskier bridge loans do not usually fall within the lending parameters of many banks. Therefore a majority of the bridge loans will come from private investment firms.  It is best to consult a company that has access to a number of funding sources who provide bridge loans.

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New Jersey Pharmacy Transactions and Capital Gains Tax

By Brad MacLiver
Authorship and profile at Google

Almost everything you own and use for personal, or business, purposes in New Jersey is a capital asset. When pharmacy owners sell a capital asset, the difference between the amounts you sell it for and the amount you paid for it (the basis), is a capital gain, or a capital loss.

One strategy, but not the only one, that is currently available to assist the capital gains tax burden is the Charitable Remainder Trust (CRT). CRT’s are legally described as Split Interest Trusts. The term is used because of the blend of philanthropic motivations and personal financial aspects. CRT’s can decrease tax liabilities, increase a business owner financial wealth, and at the same time provide a vehicle for charitable giving.

CRT's are created when someone first donates an asset into this special type of Trust.  These assets can be several things such as cash, stocks, real estate, etc.  The lifetime of the CRT is predetermined, or it will expire on the event of the donor's (the pharmacy owner in New Jersey) death.  The pharmacy owner or any family member can receive income from this Trust's assets.  If the donor dies, the assets will go to a designated charity.  Also, part of the Trust's income can be used to purchase life insurance for the donor, and the proceeds will go to a designated heir(s) who will receive the money without estate tax liability.

CRT's are a tool for tax-planning that professional financial planners are using to maximize their clients' financial position, while at the same time they increase charitable donations.

Third party appraisals, or pharmacy business valuations, must be completed to determine the asset or business value. For the charitable deduction, the donated value will be limited to the cost basis of the asset and not the current fair market value. CRT’s, as a concept, are very simple to understand. However, strict and complex tax rules govern how and when a CRT can be set up.

As a tool for the reduction of capital gain taxes, CRT's are often utilized when a highly appreciated asset or a New Jersey business is being sold.  Following the IRS codes, assets are required to be transferred into the CRT before there are any obligations to sell the asset.  Because CRT's are irrevocable trusts, these assets can't ever be taken back out of the CRT once they are donated.  As the owner of an asset whose sole purpose is to reduce capital gain taxes on the sale of an asset, take heed that after the transfer of the asset into the CRT, if the sale of the asset does not happen for whatever reason, the asset can never be returned.  Strict, complex, and specific procedures must be followed in order to take advantage of the CRT benefits. Only someone who has advanced knowledge in these matters should be retained to guide the donor through the process of setting up a CRT.

To qualify as a CRT in New Jersey the trust must meet all the requirements set forth in the Internal Revenue Code 664, and must, from its creation, in every respect meet the definition of, and function exclusively as a CRT. The requirements cannot be met unless each transfer to the trust qualifies in itself as a charitable deduction under the Internal Revenue Codes.

There are issues that may affect the status of the assets ability to be donated to a CRT. Non-qualifying assets may reverse the benefits of the CRT causing the CRT to lose its tax-exempt status.

When the CRT ends at its designated time period, or with the death of the donor, the remaining assets in the Trust will pass to the charitable organization. The designated charity can be any legally formed tax-exempt organization including a family foundation.

As tax rates increase more business owners will use tools such as the CRT to legally put more money in their pocket instead of the governments. Business owners selling a large asset, or their company in New Jersey, typically use the money to invest in other assets whether it is new equipment or real estate, business or personal.

Over the years there have been unscrupulous individuals who have tried using CRTs and similar financial tools in illegal scams. With the increase in capital gains taxes there are expectations more scams will be floating around out there. Be knowledgeable about the possibilities, but be confident you are working with experts in your industry.  Use a company that has extensive experience in pharmacy and drug store acquisitions. Knowledgeable pharmacy consulting firms who have the knowledge and expertise to structure the transaction appropriately, for tax considerations, can save a New Jersey pharmacy owner large sums of money when a pharmacy is sold.

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