In Search of the Perfect Investment

How disaster may befall your office building. This week I sent money to a real estate syndication that I’d invested in but was now in trouble with the bank that had lent it money.

Since the mid-2000s, virtually all commercial office buildings have lost half their value. There are two reasons: First, rents have fallen. Second, the valuation of profitability has dropped. Buyers are not willing to pay up for properties like they used to.

For some buildings, the drop in value is irrelevant — so long as the owners are making their monthly mortgage payments. For others, the bank often has covenants in its loan agreement  that stretch more widely than just receiving its specified monthly payment. Those covenants might include appraised valuation. It might include some measures of mortgage payments as a percent of rents. If something happens (like a general drop in office building valuation), the mortgage can be “in default,” though the bank is still receiving the money it’s due. A technical default can be caused by something as simple as a bank employing its own appraiser and securing a low valuation. Appraisers, like ratings agencies, will give you the answer you want based on who paid them. Nothing is “objective” in this world — except my children which are, objectively speaking, the most talented and most attractive in the entire world. A bank might go after a low valuation because it doesn’t want to hold the mortgage, or any mortgage.

A more serious problem happens when the mortgage becomes due. This is happening a lot now. Simply, many buildings were financed with short-term (often 5-year) mortgages. This was done for two reasons. First, the buyer figured he’d sell the building within the five years at a huge profit — as he’d done a zillion times before. And the new owner would arrange his own financing. Second, short-term financing was cheaper.

Once your mortgage has come due, you have to pay it off. You can use your own money, which you typically don’t have. Or you can go borrow money from some other bank. Sadly,these days  you’ll find it hard to borrow the money. But if you do get money, you won’t get as much as you did the first time. You (and your investors) will have to pony up money to pay for the shortfall. And that’s what happened to me several times in the past year or so.

Had all of us investors not ponied up, we’d lose all our investment. Had just some of us ponied up, the ones who didn’t would be placed at the bottom of the pile, and basically lose all their investment, since the ones who did pony up would receive a “preferred” (i.e. higher) return on their money.

Of course, all this depends on rents. In some places rents have not come back. In some places it’s simply impossible to find tenants — no matter what you want to charge. And in some places, you simply hand the bank the building (and its keys) and say, “It’s yours. You deal with the mess.”

Most banks are not organized to run a screwed up building. What do they know about prettying  elevators, painting lobbies, fixing potholes in the parking lot and negotiating with iffy tenants?

In my syndications, I’ve lost some buildings, I’ve financed others.

In the meantime, many commercial office building syndications have stopped paying dividends.

Suffice, it’s not like the 2000s. But then, what is?

The moral of this story is twofold:

1. Hockey stick valuation increases don’t last. They’re a sure sign of a boom about to bust.

2. Diversification remains the only sure-fire way to do good with investments you don’t control.

When crises happen, they happen fast.real fast. That’s the moral of today’s front page story in the New York Times. Happened to us in 2007, also. Lehman. Washington Mutual, etc. Critical to move fast when it happens. Every moment of delay will cost you money.This is a fascinating story:

As Iran’s Currency Keeps Tumbling, Anxiety Is Rising
By THOMAS ERDBRINK

TEHRAN — For months, since the imposition of harsh, American-led sanctions over Iran’s nuclear program, the country’s leaders have sworn they would never succumb to Western pressures, and they scoffed at the idea that the measures were having any serious impact. But after a week in which the Iranian currency, the rial, fell by a shocking 40 percent and protests began to rumble through the capital, no one is making light of the mounting costs of confrontation.

In the Iranian capital, all anyone can talk about is the rial, and how lives have been turned upside down in one terrible week. Every elevator ride, office visit or quick run to the supermarket brings new gossip about the currency’s drop and a swirl of speculation about who is to blame.

“Better buy now,” one rice seller advised Abbas Sharabi, a retired factory guard, who had decided to buy 900 pounds of Iran’s most basic staple in order to feed his extended family for a year.

“As I was gathering my money, the man received a phone call,” said Mr. Sharabi, smoking cigarette after cigarette on Thursday while waiting for a bus. “When he hung up he told me prices had just gone up by 10 percent. Of course I paid. God knows how much it will cost tomorrow.”

While only a few people actually need to exchange the rial for foreign currency, its value is one of the few clear indicators of the state of the economy, and its fall has sharply raised the prices of most staples.

In Tehran, many residents spend their days calling on money changers and visiting banks, deliberating whether to sell their rials now or wait for a miracle that would restore the rates to old levels, or for even a modest rally from the panic-driven lows of the last week.

“The fluctuations are so large that nobody knows whether it is better to wait or to change now,” said Ahmad, 65, as he shared a taxi to the west Tehran neighborhood of Sadeghiyeh. “I am so fed up,” said Ahmad, a garment seller, who like others here did not want to be identified by his full name for fear of retribution from the authorities. “I want to have a normal life, but from breakfast, to lunch to dinner, everybody only nervously talks of hard currency.”

Like many residents of the capital, Ahmad had tuned in to President Mahmoud Ahmadinejad’s news conference on Tuesday, hoping that he would offer some sort of solution.

Instead, Mr. Ahmadinejad attributed most of the rial’s weakness to currency speculators and the sanctions, saying that it is only natural that the currency should suffer when it is possible to sell oil only in small quantities and when it is hard to make international bank transfers. His opponents say he is trying to avoid blame for his own mismanagement of the economy. He even went so far as to threaten to quit.

“He has made a mess, and now he wants to leave us,” Ahmad said of the president. But a passenger in the taxi named Mostafa interrupted. “No,” he said, “most of our leaders are at fault, but they are trying to blame everything on Ahmadinejad.”

Just a day later, on Wednesday, clashes erupted when riot police officers on motorcycles dispersed sidewalk money changers near Tehran’s main bazaar. The government has accused them of deliberately manufacturing the currency crisis. At the bazaar, an important trade hub, shopkeepers closed their shutters, and hundreds of citizens joined them in a protest against the bad economy.

While life seemingly returned to normal on Thursday, the outburst of public anger exposed the deep feeling of hopelessness that has taken hold among many Iranians.

Experts are divided about whether the crisis has been caused more by Tehran’s longtime mismanagement of the country’s economy or by the American-led sanctions, which have been imposed over Iran’s refusal to halt a nuclear program that the West suspects is a cover for developing weapons. Whatever the cause, members of the once-vibrant middle class have turned into cynics, many of whom say they might be alive, but are not living.

For Maysam, the son of a man who was killed in the Iran-Iraq war, a decade of relative prosperity and technological innovations had enabled him to travel widely and had turned him into a prominent blogger and critic of the system that his father had died defending. Instead of hoping to die on a battlefield, he had planned to run his own Internet start-up company.

But those dreams have been shattered. “We can’t even think of the future, of tomorrow, the day after, or the next week,” Maysam said. Foreign trips are out of the question, as even the price of a cup of coffee in Dubai, United Arab Emirates, or Istanbul — favorite destinations for Iranians — has tripled when calculated in rials. Parents of the legions of Iranians studying abroad are calling their children back to Iran, as rents and college fees in countries like the Philippines and Malaysia have become unaffordable.

“I have told my son to come home,” said Shabaz, 60, who is part owner of a printing house, adding that he had spent his life encouraging his son and daughter to study abroad. “We are all losing. His future is gone; I won’t ever witness his graduation; and he won’t find a job.”

Among the country’s Afghan community, a mix of refugees and guest laborers, some were debating whether to leave Iran. Their currency, the afghani, had gained considerably against the rial, effectively slashing their already meager wages.

After risking his life to get to Iran from Afghanistan, Amin, 18, had thought he was lucky to find a job sweeping the floors of an expensive Tehran apartment building. Now, he said he felt as if he were working for free. “I can make more money working in Afghanistan,” he said shyly, turning his face away. “The people are good to me here, but I have to think of my family back home.”

Mitra, 47, had just returned from the dance class she teaches several times a week and was getting ready to head out for the dress shop that she runs with her husband. Her eyes welled with tears when she heard the rial’s latest rates.

“My only hope is to get my 23-year-old son out of this place,” she said. She had been trying to get him into Canada, where hundreds of thousands of Iranians live, but the Canadian Embassy closed last month. Now, she said, they would have to go to Ankara, Turkey, for his visa interview. “But if he manages to go, it will be worth every cent I have,” she said.

At Tehran’s currency market, traders quietly started buying and selling again after the raid on Wednesday, though few people were willing to part with dollars. While government officials announced that the rial would strengthen as soon as they had their own foreign currency exchange center up and running, many traders were skeptical.

“It all comes down to this,” said a trader named Akbar. “As long as sanctions continue, the rial will continue to lose value.”

Harry Newton who wonders why people ascribe such horriblenesses to both Obama and to Romney. Both seem to be intelligent, honest men trying their hardest. Picking a President, though,  is serious business. Obama has made many serious mistakes of late, but he hasn’t been helped by Congress. Romney did good in the “debate,” but told a bunch of  fibs. Click here. I’ll watch the next debate with interest — assuming I can stay awake.