Dave Cain: Welcome to unsuitable on Rea Radio, the award-winning financial services and business advisory podcast that challenges your old school business practices in the traditional business suit culture. Our guests are industry professionals and experts who will challenge you to think beyond the suit and tie while offering you meaningful modern solutions to help enhance your company’s growth.
Dave: I’m your host, Dave Cain. Got a very special guest with us today. Our guest is Doug Houser who recently joined Rea & Associates as our new director of construction and real estate services. Many of you may have met Doug as he’s traveling throughout the state of Ohio meeting with referral sources and clients and talking about construction, consulting services, and real estate opportunities. Welcome back to unsuitable, Doug.
Doug Houser: Good to be here again, Dave.
Dave: Good. Kind of refresh. How long have you been with the firm?
Doug: Close to six months now.
Dave: Six months?
Doug: Yeah, time flies.
Dave: You are a partner with the firm-
Doug: I am.
Dave: … so you are well entrenched in a leadership position with Rea & Associates.
Doug: I’ve really enjoyed getting to know everybody from the team a lot more, and integrating myself with clients, and trying to help out where I can and build relationships. It’s a lot of fun.
Dave: The director of construction and real estate services, that is a really unique industry and growing industry, and we’re glad to have you aboard.
Doug: Absolutely. Good to be here.
Dave: Talk to me. As you’re traveling around the state of Ohio, what are you encountering within the industry?
Doug: Well, it’s interesting. Throughout our footprint, of course, we do see differences, surprisingly, between say northeast Ohio, west central Ohio, central Ohio, and southeast Ohio. I saw this occur 20 years ago when I got started dealing with construction and real-estate-related entities. There are quite a lot of regional differences even within the state, so it is surprising what you run into from that perspective, but the times are very good, certainly for construction-related entities right now.
Doug: There are certain sectors that have more concern that others about where we’re headed into ’19 and beyond. Some feel very positive that they’re still going to be very strong throughout ’19, some even beyond that. They’ve already got backlog. Certain sectors in the real estate segment, certainly, are looking very strong into ’19 and beyond, others maybe not so much. We just try to be cautious and make sure our clients understand the risks, and where they can be aggressive, and where they maybe need to take a breath, take a pause, and we want to help them get there.
Dave: What’s interesting about your bio and resume is that, of course, you’re a CPA and started, if I recall, with a Big Four. Might have been Big Eight back then.
Doug: Yeah. It was Big Eight back then.
Dave: Was it Big Eight?
Doug: It was, yeah.
Dave: Okay. How about that?
Dave: Big Eight, Big Four, 20-plus years in the banking industry-
Dave: … in private industry, and now with a CPA firm specializing in an area that you have great passion for.
Doug: I do. It’s funny because, when I started out of school in public accounting many moons ago, late ’80s, I was kind of the dumb one that raised my hand when they said, “Hey, who wants to do construction?” I said, “Hey, that sounds fun.” I didn’t know any better, and I was kind of the guy from the wrong side of the tracks a little bit, so I thought it sounded great. Got into it, enjoyed it, and here I am, I don’t know, 29 years later.
Dave: 29 still-
Doug: Still going.
Dave: Still churning.
Dave: Still playing.
Doug: I did that in a number of different ways through public accounting, as you said, and banking and financing, and then in the private sector, and now back in public accounting and looking forward to helping clients out.
Dave: What are some of the needs you’re seeing out there with the contractors? What are some areas of concern?
Doug: I think one of the things that we try to focus on is make sure that the relationship with the other advisors is strong. Particularly in construction, there can often be a great reliance on bonding and surety requirements. They underwrite that entity as well. They underwrite specific projects, so we need to make sure we’re providing them the tools so that they can get that bond and go ahead and perform on that project. We have to have a great understanding of the information that needs to be present so that they can make the best decisions.
Doug: It’s funny, still to this day, how many financial statements I pick up, they don’t have either a proper jobs-in-progress schedule, or one that’s sloppy and not tied out to the balance sheet, or the other detailed information just isn’t there in terms of what would be valuable and what they’d like to see. There’s a lot of different things that go into it, but providing good quality information that allows the management team to make its best decisions on a real time basis as well as the other advisors, that’s what we need to do.
Dave: As a consultant to the industry, you had mentioned the schedules, the job costing and all of that and, again, as it’s being reported to third parties, you’re seeing some problems in that area. Can you help me if I’m a contractor in that business? Can you help my accounting department get that straightened around?
Doug: Absolutely. We’ve got a great resource internally here with our accounting services area. We’ve got folks that, in my view having been around the state and seeing a lot of different companies and a lot of different firms and entities, our accounting services folks have a better knowledge of dealing with construction companies and construction-related businesses in terms of taking care of that day-to-day stuff for clients better than anybody that I’ve seen out there. I mean that sincerely. We’ve got just some talented folks internally that can really take a lot of that burden off of the hands of the client because, after all, their expertise isn’t the accounting. It should be going out and performing on the project, so to the extent they can think about outsourcing that, making it a lot more efficient, whether we’re a part of that solution or the entire solution, I mean I just think that makes tremendous sense.
Dave: You hit on this earlier. I think that quality of information is maybe at a premium in the industry now than it’s ever been. Would you agree?
Doug: Yes. I would agree, absolutely.
Dave: If that quality is not there, what are the consequences? You mentioned bonding. You mentioned some taxation issues that may fall through the trap. What are some other consequences?
Doug: Yeah, certainly, you talk about taxation establishing nexus in different communities that we see now because contractors are among the easiest targets. A lot of them, you’ll see equipment or trucks performing in jobs in remote locations. All of a sudden, a county official or a state official in some other locale sees that, jots that name down and, all of a sudden, you’re getting notices, “Hey, what are you guys doing in this neck of the woods? And we’ve got potential tax liability,” so just being aware of those things, making sure that you’re got a partner like Rea that can help you navigate those waters, which can be difficult.
Doug: Beyond that stuff, we really see a lot of exposure in cyber risk, believe it or not, with contractors because they tend to get very trustworthy and in deep with other relationships with either subcontractors, joint ventures, other things like that, so there’s a lot of potential cyber risks. Separation of duties doesn’t always happen very easily with construction companies, we find, so you have a lot of potential for areas that can go sideways on you quickly.
Dave: Great. You mentioned a nexus, and we better not let our state and local tax team find out that we’re talking about nexus and taxation within various cities and everything. That has become an extremely difficult process for … and contractors are one that’s big.
Doug: Absolutely. They’re a prime target, and we rely heavily on our SALT team here, which they’re just wonderful, wonderful resources as good as any that I’ve seen. In fact, a couple of other firms that I was close to while I was in banking, I’ve started to maintain those relationships even now that I’m with, quote, unquote, a rival firm, and we’ve got consulting arrangements with other firms now because our SALT team is so strong. They realize, for their construction clients, they can’t fulfill that expertise and those capabilities, so we’re now doing that for them. I think that just points to the level of expertise we’ve got here.
Dave: Does the industry have a target on its back as far as this nexus and state and local taxation?
Doug: Absolutely. I would agree, certainly, because they’re performing so well. The money is very good right now. That’s one. Two, they’re very visible. Again, you see cranes, you see equipment, you see trucks, you see vehicles with names plastered on them, so it’s very easy to identify that they’re there physically, and it’s the low-hanging fruit.
Dave: As we look into 2019, what do you see?
Dave: Get your crystal ball out. Let’s go.
Doug: Yeah. Interestingly, I think, from the folks I’ve talked to, particularly on the real estate side, there is a great concern that we have hit a peak with regard to multi-family housing, not that there’s not a need for additional multi-family housing, but the scope and the financial return on the projects has hit a peak.
Doug: In fact, I had one expert tell me about a month ago, a veteran individual that’s been in the real estate business over 30 years, he said, “Doug, this is 2008 all over again.” He didn’t mean in terms of global financial crisis or the whole system melting down. He was particularly talking just about real estate. He said, “It’s overheated. It’s overvalued.” He said, “We will not fund any more multi-family projects in the region.” He said, “I just think the return is ridiculous right now. They can’t sustain these level of rents throughout the life of the project. Yes, it may look good for a couple of years, but through the life of the project, they can’t maintain this level of rents to sustain the viability of it.” Again, that’s just one person’s opinion, but I’ve heard that from several, so we’ll see. I do feel like there is a peak in that area.
Doug: By the same token, there’s a lot of areas still that have great potential, a lot of areas of redevelopment. There’s still a great need for additional commercial real estate investment in certain markets. With regard to construction, I would tell you that, if you’re in a specialized trade or a specialized niche that requires a significant barrier to entry to enter that segment, profits look real good, margins look real good. Activity should be real good, certainly, through next year.
Dave: Good. We had talked about, in a previous podcast, about finding the right bank for a contractor. Not all banks are into construction contractors and real estate. Talk to me a little bit about that, finding the right bank.
Doug: Well, again, it comes back to the understanding of the industry. We see things like banks will put in a standard lending relationship, “Hey, you’ve got to provide this borrowing base certificate,” without understanding, for example, that retainage might be lumped in with receivables, as it really should be. However, the retainage is a different type of receivable. The bank may not understand that. All of a sudden, somebody looks at it and says, “Oh, well, we’re not going to count this.”
Doug: I’ve also seen arrangements where they’ll back out costs in excess of billings and do other things like that because, again, they don’t understand the industry or the business. It’s just making sure that they understand the financial information that they are reading, they being the bank or the other third party, because for a construction company, those financial statements look very, very different than they do for a manufacturer or distributor.
Dave: I’m going to ask an obvious question maybe.
Dave: Is the industry making money?
Doug: Industry is making a ton of money right now. It you’re not, then it’s probably time to reevaluate your overall business acumen because, frankly, most in the industry are, quote, unquote, printing money right now, and if you’re not-
Dave: That’s good to hear.
Doug: … again, you got a problem.
Dave: That’s good to hear.
Dave: Keep it coming, and compared to years ago when we’re chasing contracts and gross revenue and the margins just weren’t there.
Dave: I’m glad to hear the bit of the turnaround.
Doug: The challenge is, and you hear this often, it’s finding people.
Doug: The good ones, they’ll take on the right projects at premium margins and not just say yes to everything. You’ve got to know what clients, in essence, to work with and what clients not to. It’s no different than any business, but the good ones are able to make that decision.
Dave: We talked a little bit about tax planning. I know we’re touching many different areas, but there’s some great tax planning ideas available.
Doug: There are.
Dave: We talked to them on a number of podcasts, but can you share a few of those with us? I know you’re not a tax guy and you’re not a state and local tax guy, but you’re talking about that stuff, so go for it, buddy.
Doug: Yeah, absolutely. I think the biggest thing is to sit down and really develop a long-term plan. What I see more than anything, particularly with construction companies, these folks are so immersed in their business they really have no ability to think, “How do I get out?” Construction companies traditionally are not very saleable because of the nature of the business, the people involved, so I would say, if I would touch on one area with regard to tax, it has to do with estate planning, and exit planning, and succession planning. That’s really, to me, the key area that you should sit down and think about. There’s a number of different strategies to pursue, whether it’s a mini leveraged recap, management buyout, perhaps an ESOP, other strategies like that that can help alleviate the tax burden down the road.
Dave: There’s no time but the present when life is really good to look at succession planning.
Doug: Absolutely, for sure, and it’s something that we are dealing with and we hear every day because so many companies just struggle, particularly in construction, to get through the crisis and survive. They have an amazing ability to survive. Well, now that times are good, they’re so busy just trying to get the work done they haven’t given the forethought to, “What’s my plan two, three, four, five years down the road?” We’re trying to help people deal with that now because you do need to plan. You got to get evaluation. You’ve got to sit down and think about all your constituents internally to your company, your family, your community, all those things, and how do you feel about all those different groups, and how do you want to maintain your legacy going forward?
Dave: Do you help our contractor clients? Do you try to hook them up with their bonding group, their surety company?
Doug: Absolutely. In fact, we’re going to do a joint presentation after the first of the year with a major surety provider here in Ohio. I think, again, the fact that we take the time to sit down with those surety agents and those underwriters to understand what their needs are with regard to our clients helps our clients be more well-rounded and understand that, hey, we’re all there as a part of the team to help them do better, and don’t treat this like it’s a separate silo.
Dave: What’s your expense report look like at the end of the month? What’s your mileage? You’re going to load-
Doug: A lot of mileage.
Dave: … a lot of mileage.
Doug: A lot of mileage.
Dave: Yeah. Those boots are getting old, man.
Dave: You’re moving all around the state.
Doug: It’s all good. I enjoy it.
Dave: If I’m a contractor and I want to talk to you, how do I get a hold of you?
Doug: You can reach me on my cell.
Dave: You’re moving.
Doug: Cell is always the best, which is 614-314-5937. Email also, firstname.lastname@example.org.
Dave: You’re the first one on this podcast of about 170 episodes that ever has given their cell phone number.
Doug: It’s there. That’s no secret.
Dave: Give it to us one more time slow.
Dave: You got it, so that’s great. As we wind down the podcast, can you give us … I’m a contractor. What three things? What’s my action plan for 2019? What are my New Year’s resolution? Give me three things.
Doug: First and foremost, I would say let’s make sure the quality of your financial information is what you need and what your other advisors need. Let’s make sure there’s a good matching of the information that is put together. Secondly, I would say let’s sit down and develop a three to five-year plan, whatever that looks like. Whether you still intend to be in the business and you want to grow it or you’re in more of a maintenance mode and it’s a lifestyle business, let’s talk about those goals so we can help you achieve them. Thirdly, around that, then I’d say let’s sit down and develop a strategy with regard to tax and other consultative services that help you get to that plan. That’s really the key.
Dave: The number one is quality of information, data. You’d also mentioned, earlier on, security issues, data breaches. Are you running across any of that?
Doug: I would say, more than an actual breach, we really see, with construction and real estate, a lack of separation of duties and fraud that occurs that way, trusted employees that you think, wow, they’ve been here for 20 years, but procedures just aren’t followed, and there’s a life event that causes some challenge and-
Dave: It’s a red flag isn’t it?
Doug: … before you know it, money’s gone.
Dave: That was a red flag 50 years ago, and it’s still a red flag.
Dave: Can you help me fix it?
Doug: Yeah. Certainly, there’s technology available that can help with that. The other thing I would say is I would suggest examining and outsourcing of a portion of your accounting services, whether in entirety or, again, just a piece where perhaps we’re taking a look at that information on a monthly basis and making sure that all the proper reconciliations are done, and you can feel good about what you’re doing.
Dave: Kind of an internal control checklist.
Dave: Let’s go back and get that done, protect our assets.
Dave: Our guest today has been Doug Houser with Rea & Associates, director of construction and real estate services. Thanks again for joining us, Doug. Great stuff.
Doug: Great to be here.
Dave: Appreciate it.
Dave: Listeners, if you enjoyed today’s episode, let us know. Like it, comment on it or share it, and don’t forget to check out videos of our podcast on YouTube. If you want to learn more about this topic or talk one on one with Doug Houser, email us at contact.us, which is also us, @reacpa.com. Until next time, I’m Dave Cain encouraging you to loosen up your tie and think outside the box.
Disclaimer: The views expressed on unsuitable on Rea Radio are our own and do not necessarily reflect the views of Rea & Associates. The podcast is for informational and educational purposes only and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.