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Seeing Past the Smoke — Commerce in Detroit Post Bankruptcy

Smoke in urban city
Detroit is beyond broke — it is bankrupt.

Last Thursday, Detroit filed for bankruptcy. This announcement garnered national attention because it is the largest city to declare bankruptcy.

While local officials decide how to proceed in the coming weeks and months, many businesses face uncertainty about how the city’s financial problems will drift down and impact them.

Not the First, Not the Last

Edward J. Grebeck, global debt market strategist and CEO of Tempus Advisors, told loans.org that Detroit is not the largest city that has faced these financial issues.

In the mid-1970s, New York City was close to declaring bankruptcy, but due to the number of large banks headquartered there, the city was able to avoid the financial mishap.

Detroit is not as lucky.

The main backbone of the city was automobile manufacturers which have since depleted and eliminated the location’s funding and economic growth.

“Unfortunately Detroit doesn’t have the bank backing like New York did,” Grebeck said. The bankruptcy is “totally unprecedented” due to the city’s size.

Although declaring bankruptcy is not a positive factor for a city, sometimes it is the only option.

“It at least puts the issue out in front,” Grebeck said. “It doesn’t mean that those issues will be resolved but it’s better than hiding them under the carpet.”

Heavy Words

The word bankruptcy is a heavy word in our financially-centered economy. Although bankruptcies can give consumers and businesses a new outlook, announcing bankruptcy is usually met with negative responses.

But two local business owners, Vladimir Gendelman and Dwight Zahringer, are not afraid of the upcoming proceeding. Instead of viewing the bankruptcy negatively, they instead see it as a financial restructuring — a second chance.

Zahringer, founder of TruReview, a business located in a Detroit suburb, said that he is not concerned about the bankruptcy filing because it signifies a point of closure that allows the city to “reset and move forward.”

Zahringer said the events that have led to the bankruptcy, over 20 years of issues which have intensified in the past five to 10 years and were fueled by corruption and a lack of organization, forced the city to hit rock bottom.

He said it is similar to waiting on an elderly, ailing family member in a retirement home to pass and end their suffering. Once that death or bankruptcy occurs, the city can move on.

Zahringer expects that security within the city limits will improve greatly as the police force is strengthened and laws are reinforced. Right now, despite the city’s improvements, a powerful stigmatism is still present that keeps suburbanites away from downtown.

“Once a neighborhood or a borough has been labeled unsafe, it is hard to lift that,” he said.

Another local business owner, Gendelman, founder and CEO of Company Folders, said that skepticism might harm businesses in the coming months, but on a long-term scale it should die down.

“Detroit will gain a lot of respect and credibility and, in retrospect, this bankruptcy will probably be the best thing that ever happened,” he said.

Gendelman has no concerns over the bankruptcy and only feels it will help the city continue to improve.

“If you take the government aside, everything else in Detroit is phenomenal,” he said, mentioning several cultural elements located downtown inclusive exclusive restaurants and new construction plans. “The bankruptcy only affects the debt that Detroit itself has. The debt was created by many years of poorly ran government.”

Perceived Risks vs. Real Risks

A more hidden impact of the bankruptcy is how it will affect business loans and available funding. When borrowers default on their loans and try to have them erased in a bankruptcy, lenders are less likely to lend to them in the future.

David Duffus, Partner of accounting firm ParenteBeard, worries about the availability of credit in the city.

“Will the city of Detroit have access to credit? Will it be able to issue bonds and at what cost?” he questioned.

Grebeck also wonders what credit will be accessible for the actual city itself and its businesses. He said the city could improve financially but only if they are allowed in the capital markets after the bankruptcy. If investors are given a sense of certainty that their money will be repaid, they might be open to lending to Detroit.

“Bankruptcy itself would not shut Detroit out of the capital markets,” he said. “They could access the capital markets if they correctly restructured.”

Scott Sporte, chief lending officer for NCB Capital Impact, a community development financial institution (CDFI), agrees that little change will likely occur.

Although Sporte believes that businesses will not improve or decline due to the bankruptcy, he does think the city needs to overcome negative connotations in order to improve their funding capabilities. Lenders and major banking institutions viewed the city as toxic even before the announcement.

Sporte said lenders needs to distinguish between real risk and perceived risk.

“Detroit is a perceived risk,” he said. “It is no more risky to lend to inner city areas as suburban areas.”

Fewer Residents, More Obligations

Sporte doesn’t believe that this financial declaration will impact local businesses mainly because the city already operates like it is in bankruptcy.

Residents have migrated out of the city steadily, making the economy weaker and less financially stable. According to the U.S. Census, the 2012 estimate for the city was 701,475 residents. This is more than a 25 percent decline in the last decade. In fact, Detroit hasn’t seen a population this low since before 1920.

Duffus said one of the many issues facing Detroit is the outcome of their taxes. He questioned if the property and sales taxes which fund the municipality will increase in the future.

“There is a mismatch between the revenue that is coming in and the expenditure going out,” he said. “Taxes have an economic impact on everything that is affected.”

In addition, fewer residents and less disposable income hurt the consumer economy. Duffus said the remaining residents are now forced to “support legacy costs.”

But Zahringer is not concerned. In the end, the city will prosper.

“People always like a comeback story,” he said.

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