Don't pay a premium for an uncooked steak.

Let me ask a question. Would you pay more for a corvette that was ready to drive or one that you had to assemble? How about a dinner that you had to prepare or one that was already prepared? Simple right? You’d pay more for the assembled corvette and the prepared dinner. This principal applies in real estate investing as well though we regularly encounter sellers who believe that the buyer should pay for the value that they (the buyer) will add. For example, the buyer bringing in a tenant or selling out unsold condominium units. The value to be created should not be paid to the seller, period. We recently looked at an office building that was for sale. The building was (and is) vacant. One hundred percent vacant! The asking price is equal to the value as leased (and leased at market rents from two years ago and capped at rates from two years ago). Now, we’ll make an offer on the building but we will have to explain that their assumption of the lease rate is too high, their cap rate is too low, AND the building is vacant. Any value based on income is only any assumption since the current income is zero and the building currently throws off negative cash flow after expenses. The real value will need to be added by the buyer who will take the time, energy, and expense to find and put a tenant in place. Then the buyer could sell the building to an investor who is more risk adverse (and would not have purchased a vacant building) at the market cap rate for a leased building. It would seem that this is common sense but I am growing weary of explaining and arguing this to sellers but nevertheless we will continue to explain and fight on behalf of our investors…just takes patience.

Is the time right?

Is it a good time to invest in real estate? Good question. Is it a good time to invest in equities? How about in GE, Wells Fargo, the S&P 500? I don’t like pat answers to these questions and I don’t like seeing, for example, a real estate broker in Florida telling me it’s a great time to buy a home in Florida or a broker in the mountains telling me what a value residential lots in the mountains have become. If I could answer these questions with certainty then I’d probably be in Florida fishing. The truth is we don’t know, timing the market, any market, is nearly impossible. It’s really simple, when you need to invest you need to invest and there are many options each with its own risk profile. Is now a horrible time to invest in real estate? For some real estate asset classes it is a bad time yet for other property types it’s a fine time to invest. If, if you are able to achieve the desired risk and return objectives, which are unique to each investor. This takes careful analysis and consideration.


We recently looked at a failed townhome development. The project is in a dicey neighborhood. One-third of the units are complete, one-third are partially completed, and one-third have not been started. Is it a good time to acquire this asset? For the passive investor I would say definitely not. For the developer-investor who can deliver the balance of the units cost effectively and if he can buy the busted development at the right price then it may be an excellent time. The key lies in the risk-return relationship. The cost must be right in order to price the units at a level that they can be readily sold into a distressed market. Our current economic environment is no different than the boom environment we experienced in 2004, 2005, and 2006. Was it a good time to invest in real estate then? Most thought it was an excellent time. My point is this, whether its boom or bust if you have funds that need to be invested, invest them but spend the time to understand and analyze the risk-return relationship and work hard to mitigate the risk.

Curb The Enthusiasm

Enthusiasm. It’s a wonderful thing until it’s gone. It seems to be a rare commodity in our world these days. We are firm believers in the importance of enthusiasm but it must be tempered not unbridled. We have a coffee shop and deli nearby that closed in October. We weren’t surprised, they just didn’t get it. We often talked about what we would do to make the place more successful. These conversations typically occurred after experiencing a less than tasty sandwich, or the failure of a cheap coffee cup, or after getting a curt reply from the owner who was less than customer centric. When we heard of the closing our enthusiasm peaked as we brainstormed how to repackage and reposition the shop. Then we remembered, we don’t know anything about operating a deli or coffee house. So we call a friend who happens to be a very successful serial restaurantuer. Who knows where this will lead but the important point is to temper enthusiasm with knowledge and unbiased advice. This is what we do for our investors and developers. Had our industry tempered its enthusiasm a little more over the last 10 years maybe we wouldn’t be feeling the pain we are today, maybe.

The New World Order

So I met someone recently who says they have a line on funding from non-traditional sources, these sources apparently are not especially interested in being repaid. In a world turned upside down the allure of a new way of doing things is very attractive. Unfortunately I remain hopelessly traditional, believing that people who have money and want to deploy it want it to come back to them at some point in the future preferably with a return attached. But, hey I am intrigued by the concept of a new form of equity and debt, especially in a form that doesn't need to be repaid--it would make the underwriting a lot easier.

The Lost Bankers

These are tough days to be a banker, I talk with a lot of them and in general they are a glummy bunch. Having spent 15+ years as a commercial real estate banker I can tell you that the fun in banking is doing deals...their not doing many deals right now. While I would agree that as an industry we got a little strung out on the risk curve the current stance seems to be a bit of an overreaction. While it is true that much of the overreaction is driven by concentration issues, capital, and other portfolio points there is a significant dose of fear--fear of making a decision (right or wrong). And really who knows any more, maybe commercial real estate will implode this year and there will cease to be retail stores, no one will live in apartments, no one will stay in hotels, and people will stop going to work in offices. Its a crazy unpredictable world.

Get Going

We remain active in this market, looking for new opportunities, seeking and finding placement sources, advising buyers, and guiding developers. We believe you can crawl under the table and hide or get out and get to it. Keep the faith.