The beauty of the United States’ system of free enterprise is that it allows anybody with a good idea the opportunity to act upon that idea without the interference of government. This is a very simple concept in theory but as it has been demonstrated over the years not as easy to implement. Unfortunately, not everybody with an idea has pure intentions and in order to protect US citizens from these individuals the government has found it necessary to create a set of laws, rules and regulations. This governmental interference has resulted slowly over the last two hundred plus years and while justifiable to some is objectionable to others. Those in favor of governmental interference argue that it is necessary to protect our citizenry from crooked people and those opposed to governmental interference argue that it stifles creativity and makes it more expensive to bring new ideas to fruition.
Both arguments are valid and while I do believe that the government has a responsibility to protect the uneducated, poor and elderly within our society, government is overstepping when they put limits on the individuals in society that are well educated and well-funded, the sophisticated investor. These individuals are capable of making investment decision without the interference of the government and without these individuals the bulk of new ideas would never make it beyond the entrepreneur’s kitchen table.
I’m writing about the free enterprise system, while the economy continues to slowly recover and there are no clear indications when we will regain full employment, because I believe that governmental interference in the free enterprise system is one of the main reasons that the United States economy has been languishing. As a real estate developer I deal almost daily with governmental interference as I try to obtain zoning, permits and funding for a project. A real estate project is nothing more than an idea without the proper zoning of the land parcel for an intended use, a developer can’t even begin to break ground on a project without a group of investors providing equity for the project and an investment group won’t realize a profit without leveraging their equity with a loan. Each step of the development process is governed by rules and regulations that were put in place by politicians with good intentions but end up costing the developer time and money by hampering the projects progress.
I could write at considerable lengths about the delays that zoning codes cause a developer or how regulations hamper a developer’s ability to raise equity but will instead focus the remainder of this blog on how governmental control over the financial industry has made it almost impossible for a developer to get a loan for their project. The only way that a developer can construct the large real estate projects that you see today is to provide a portion of the equity for the down payment themselves and obtain the remainder from outside investors. The outside investors would like to receive a fairly large return on their investment to offset their risk and the only way to make that happen is through borrowing money to leverage the equity provided by the investors. The more money that is borrowed and the less that is needed in equity will result in a higher return on that equity to the investors.
Leverage has not been possible the last few years because of government’s involvement in the financial industry banks. Scared of the consequences, the banks have pretty much just stopped lending. Not directly, mind you, they just put so many obstacles in the way that it is almost impossible to get a loan approved. The time required to process a loan for approval has gone from a couple months to more than six months. These delays have caused many a development project to falter. Equity requirements have gone from twenty percent to forty percent making some projects unprofitable. Additionally, the banks value of a property’s worth is so conservative that it would make a right wing radical look liberal. The low values also results in higher levels of equity be contributed. All of this is the direct results of governmental interference. I believe that the economy will continue its slow pace towards recovery until government allows free enterprise to be truly free on governmental interference.
CEO, Employing Broker
Katchen Company, founded in 1962, is an integrated real estate company with its corporate headquarters in Lakewood, Colorado. The company offers real estate development, redevelopment, property management, brokerage, consulting services, construction oversight and maintenance services to individual and institutional real estate investors throughout the greater Denver metropolitan area in Denver with satellite offices in Chicago, Las Vegas and Miami market areas.