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8:30 AM Friday, April 8, 2005: Economics is called the dismal science. An economist is someone who didn't have the personality to become an accountant. God invented economists to make weather forecasters and astrologers look good. Economists are incredibly good, I'm told, at predicting the past. Several people have also said, ""If you laid every economist end to end, it would not be a bad thing." There are also three types of economists: Those who can count, and those who can't. For those of you who don't know (or care), my first degree was in Economics.

All this is by way of introduction to how wrong economists are. Be wary when you hear what they predict. According to them,

1. The rise in oil should have put our economy into recession. It hasn't.
2. The dollar's drop should have cut our imports. It hasn't.
3. By now, Greenspan's short-term rate hiking should have lifted long-term mortgage rates. He hasn't. This week long-term mortgage rates dropped to below 6%.
4. The housing boom should be bust, or busting. It hasn't and isn't.
5. Inflation should be skyrocketing. That may be the only thing the economists are getting close on. And that portends further short-term interest rates rises by Mr. Greenspan. Inflation is now the factor which could trigger items 1-4, and ultimately a recession. This weekend see for yourself. Go shopping. Check out prices at your local supermarket. Try to remember what they were three months ago. I've written about higher prices at my local Whole Foods. A reader, Merryfield L. Peters, writes,

"We don't have a Whole Foods Store in our area, but I hope that will change. On Monday I went to our local Sam's Club and was shocked by some hefty price increases. Paper plates were up about 25% A 2-lb package of pecan halves increased in price from $8.95 to over $11. This was repeated over and over as I went through the Club. Add that to the increased gasoline price and a shopping trip isn't much fun anymore.

P.S. The Sam's Club (a Wal-Mart company) in our area is rarely busy while Costco is always crowded. While I was at Sam's I overheard two employees talking about current employees being either laid off and/or reduced to part time status."

Business Week predicts the real estate boom will end shortly. But go tell that to the market, where prices continue to escalate. Try this: Last Friday a company called Tishman Speyer bought Manhattan’s MetLife Building for $1.72 billion -- more than $660 per square foot. That now stands as the loftiest price ever paid for a single Manhattan skyscraper. Lost in all the hoopla is the downright puny cap rate, estimated at slightly less than 4% by one Manhattan real estate source with close knowledge of the deal. Such a low cap rate could make squeezing profits from the former Pan Am Building a serious challenge.

A sub-4% cap rate is considered extremely low for a healthy, leased-up property in Manhattan. It also represents a huge premium over the 7.1% average cap rate that Real Capital Analytics estimates for similar trophy properties that sold in the first quarter, according to National Real Estate Investor Magazine -- see chart below.

“They [Tishman Speyer] must really believe that they can boost rents in the building — and fast — in order to pay that price,” says Dan Fasulo, an associate at Manhattan-based Real Capital Analytics.

Easier said than done. Average asking rents in midtown Manhattan were $47.13 per sq. ft. at the close of the first quarter, according to Cushman & Wakefield. A midtown Manhattan leasing broker says that average asking rents in the MetLife Building are around $55 per sq. ft. CoStar Group data shows the building to be 100% occupied, with 5.2% of the space subleased. Lease expirations in the building are staggered over the next 14 years.

The rich valuation of the Tishman Speyer deal does have a certain sense of deja vu. New York real estate execs were stunned in 1980 when the ailing Pan American World Airways sold its headquarters to MetLife for an unheard of $400 million, or $177 per sq. ft. That yielded just 3.4%. What’s more, the building’s cash-on-cash return (meaning cash flow after debt service divided by equity investment) was only 2.4%. But in last week’s sale, MetLife scored a $1.32 billion profit on its investment — and that averages out to $52.8 million worth of appreciation per year since 1980, or about a 13% annual return.

Trophy office cap rates by quarter:
Q1 2002: 9.2%
Q1 2003: 8.5%
Q1 2004: 7.6%
Q1 2005: 7.1%
Source: Real Capital Analytics

My real estate syndications are doing fine: I am in five properties with one careful syndicator. On four of them, I'm getting a cash dividend of between 8% and 9%. The fifth one's dividend is on hold as we're using it to spruce up the building in anticipation of a sale. We paid $82 million in 2003. We're about to sell it for between $100 million and $110 million -- giving us syndicators an IRR on sale of between 20% to 30%.

The deal today is to buy buildings, fix the management, improve the building, up the rents and sell it. We had originally projected a sale price of $95 million in 2008. We were early.

Personally, I see more opportunities in real estate than in the stock market. But as I"ve written before. You got to be careful and you have to follow my friend Francis Greenburger's philosophy "Buy it right. It's the only chance you'll get." To that aphorism, you should add, "If you've done everything you can to improve it, sell it. No one went broke taking a profit, nor being in cash."

A Home Built for a Billionaire
You've heard of spec homes? How about a spec home designed to sell to a billionaire? This is for real.
Updown Court, as it's called, is 25 miles outside London. It's 103 rooms, 60,000 square feet, 11 acres, 22 bedrooms, a two-lane bowling lane, a squash court, a 50-seat theater, stables for five horses, a tennis court and a price tag of $134 million.

This mosaic found on the floor of the study in the master suite is one of the house's most extravagant design details. Made of 24-carat gold, it cost $475,000 to create.

It also has five swimming pools, an eight-limousine garage and a walk-in safe and windowless "panic suite," fitted with a mini-kitchen and steel door.

The target owner, according to developer Leslie Allen-Vercoe, is a super-rich international buyer looking for a second, third, or fourth home in London. "The house has been designed for a specific market, which is the billionaire market, as opposed to the millionaire market," he told Business Week. The Rolls Royce is not included.

The scandals never cease: When we sold our company in 1997, we told the truth. We actually embellished all the bad things, and made a sales point out of the bad things. "We couldn't expand internationally. That is bad. But you can. That is good."

But we didn't lie or cheat or mess around faking up documents. As a result, I can still sleep at night. Several years ago, I wrote here that it would be a minimum of five years for all corporate scandals to emerge. And there would be plenty of them. Today another one. From the New York Times:

"Documents for a transaction that is at the center of a wide-ranging insurance investigation were doctored two months after the deal was struck, executives with direct knowledge of the transaction said this week.

The 2000 deal, between American International Group and General Re, a unit of Berkshire Hathaway, served to spruce up A.I.G.'s financial reports, ultimately bolstering its stock price. Regulators, and now the companies, say the way that the deal was accounted for was improper. Why the documents were altered by midlevel General Re employees is not entirely clear, but one regulator said it was done in a way that allowed A.I.G. to account for the transaction in a favorable way.

Signs that the paperwork had been altered drew the attention of lawyers for the Berkshire unit this year, when they were examining possibly questionable insurance transactions at General Re. The lawyers brought the transactions to the attention of law enforcement authorities, prompting a fresh round of subpoenas at A.I.G. in February that led to the downfall of Maurice R. Greenberg, who had been A.I.G.'s chief executive for nearly four decades." is just great. The Internet is the best place for buying lightbulbs of all sorts. I like for four reasons:
1. They have pictures of all their bulbs. It's easy to find what you need.
2. They sell brand-name (expensive) bulbs and "value-brand" (cheap) bulbs. Other than a huge savings in price, I've never found any performance difference.
3. They remember what you bought. This saves you figuring out the dumb names of what you need.

4. They're easy to deal with. Their site works well.
I bought some bulbs from them yesterday for $2.38 a piece. I checked locally. One hardware company was selling the identical bulb for $7.57. Another was selling it for $4.99.

The moral of this story is simple: Check the price on the Internet, first.

The world's prettiest watch: I want to own this watch. But it's $10,000, discounted on the Internet, no less. I can't find a $20 fake, yet. And I'm not paying $10,000 for a watch that keeps worse time than my $20 Timex.

The Irish gas station
Tiger Woods drives his new Mercedes into an Irish gas station.

An attendant greets him in typical Irish manner,

unaware who the golf pro is... "Top o' the mornin to ya".

As Tiger gets out of the car, two tees fall out of his pocket.

"So what are those things, laddie?" asks the attendant.

"They're called tees," replies Tiger.

"And what would ya be usin 'em for, now?" inquires the Irishman.

"Well, they're for resting my balls on when I drive," replies Tiger.

"Aw, Jaysus, Mary an' Joseph!" exclaims the Irish attendant, "Those fellas at Mercedes think of everything."

Tax season is upon us
The Internal Revenue Service sent an auditor to a synagogue.

As the auditor reviews all the paperwork, he turns to the Rabbi and says, "I noticed that you buy a lot of candles."

"Yes, we do," responded the Rabbi.

"Well, Rabbi, what do you do with the candle drippings?" He asked.

"A good question," noted the rabbi. "We actually save them up and when we have enough, we send them back to the candle maker and every now and then, they send us a free box of candles."

"Oh," replied the auditor somewhat disappointed that his unusual question actually had a practical answer. "Rabbi, what about all these matzo purchases? What do you do with all the crumbs from the matzo?"

"Ah, yes," replied the rabbi calmly. "We actually collect up all the crumbs from the matzo and when we have enough, we send them in a box back to the manufacturer; and every now and then they send us a box of matzo balls."

"Oh," replied the auditor, thinking hard how he could fluster the rabbi.

"Well, Rabbi," he continued, "what do you do with all the foreskins from the circumcisions?"

"Yes, here too, we do not waste." The rabbi answered. What we do is save up all the foreskins, and when we have enough we actually send them to the Internal Revenue Service."

"Internal Revenue?" questioned the auditor in disbelief. "Ah, yes," replied the Rabbi, "Internal Revenue. And about once a year, they send us a little prick like you."

Thought to ponder for the weekend
If a man opens his mouth to say something, and there is no woman present to hear him, is he still wrong?

Harry Newton

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. That money will help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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