Tuesday, July 16, 2019

Another Taxi Medallion Workout Success Story

Crains New York reported on July 11, 2019 that an auction of 16 medallions at an East Elmhurst, Queens, hotel came to an early end, with just three sales and a top price of $138,000.

Regrettably, this article demonstrates that taxi medallions continue to drop in price.  

As many readers of this blog know, Jim Shenwick has developed a niche practice representing “underwater’ taxi medallion owners.

The strategies used by Jim Shenwick in taxi medallion workouts are as follows:

First, he does asset protection planning under New York State law to make sure that if the negotiations are not successful, or the taxi medallion owner needs to file bankruptcy, as few assets or property of the medallion owner would be available to creditors or the bankruptcy trustee.

Second, he commences aggressive negotiations with the bank (that holds the medallion loan), seeking that they “take back” the underwater medallion. This is known as a “walkaway”, or a “surrender”, of the medallion and it is a form of “out of court” workout. There are tax implications regarding the take back of a medallion by a bank under Section 108 of the Internal Revenue code, and those issues have been discussed in prior blog posts by Jim Shenwick.

Third, if the out-of-court negotiations do not work, in appropriate cases Jim advises the medallion owner to file for Chapter 7 bankruptcy (also discussed in prior blog posts).

Fourth, if neither of the options described above work, Jim then seeks a modification of the medallion loan with the bank.

Recently, Jim Shenwick concluded a successful negotiation regarding a medallion loan modification and the facts and strategy are discussed below.

The facts: An individual owned one taxi medallion subject to a loan on the medallion in the amount of $650,000. The individual also owned a house in Nassau County with a fair market value of approximately $600,000 and the house was not subject to a mortgage. The medallion was being leased out by a management company and the cash flow from the lease was not covering the monthly loan payment to the bank (a common problem). For several months, the client had been using money from their savings and checking account (out of pocket) to make up the difference. However, based on the property that the client owned and their age, they would be unable to make those payments indefinitely and they were nervous and stressed about their situation.

The Strategy: Jim Shenwick was retained to begin negotiations with the bank. Based on the value of the house and the amount of equity in the house, the bank indicated that they would not accept a surrender of the medallion. He then agreed to a modification of the medallion loan so that after the modification, the cash flow generated from the leasing of the medallion would equal the monthly medallion loan payments- the loan would be cash flow neutral.

While the result was not as ideal as a surrender of the medallion, under the circumstances at that  time, it was the best solution for the client. The modification eliminated the need for litigation and a bankruptcy filing by the client. In the case of bankruptcy, based on the equity in the house, the client would have lost their house.

In a loan modification there are four variables: 1) The amount of the loan 2) The interest rate on the loan 3) The term of the loan 4) The amortization schedule for the loan. 
Once these four variables are determined, a loan amortization table can be used to determine the monthly loan payments.

Let's now discuss those factors and how they applied to the medallion loan modification.  First, Jim asked the bank to write the loan down to the value of the medallion and the they refused (the amount of the loan for purposes of the loan modification was $650,000). Second, the bank agreed to an interest rate of 3.75% for the modification. Third, the bank agreed to a two-year term for the loan. The client requested a three to five-year loan repayment term, but the bank refused. Fourth, the bank advised that the loan be interest only to lower the monthly payments- which the client agreed to.

Based on the above factors, the parties agreed to modify the loan. After the modification, the cash flow generated from leasing out the medallion equaled the monthly loan payments and the medallion owner/ borrower no longer had to “go into their pocket” to cover the monthly payments.

While the solution was not perfect, under the facts and circumstances of this case it was the best result for the client. Effectively, we have “kicked the can” down the road for two years with the hope that medallions will increase in value during that period of time. If medallions do not increase in value, the client can either do another loan modification, seek a surrender of the loan, or file for bankruptcy.

Anyone who is interested in discussing an underwater taxi medallion loan modification or similar strategy is advised to contact Jim Shenwick