In 2003, my brother Neil, Karbank Real Estate Company’s General Counsel, and I met with some of Lehman Brothers real estate executives at the Lehman Park Avenue office in New York. A friend of ours, a Kansas City native, worked at Lehman and suggested that we meet with his real estate colleagues at the firm to see if we might do business with them.
Those executives were in their early 30s and collectively seemed to have had less experience in the real estate business than Neil or I had individually. They described Lehman’s real estate investments funds, geared to institutional investors and high net-worth individuals. Their investment strategy was to acquire office, retail and industrial properties ranging from a minimum of $10,000,000 to portfolios of properties in the billions of dollars, hold the properties for 5-7 years, then sell them for a profit. They typically financed those deals with CMBS (Collateralized Mortgage-Backed Securities) loans. They also said that Lehman could provide debt financing for 3rd party acquisitions, usually in the form of 2-5 year “mezzanine” loans with interest rates in the teens.
It was clear that they knew all the real estate and financing lingo. They were slick. They were quick to answer questions on numbers, returns on investment and amortization, but unfocused and bored when asked about the nuts and bolts of real estate: ceiling heights, loading, parking, local market knowledge, vacancies, roofs, etc.
After their presentation, seemingly as an afterthought, they asked us about our company and portfolio. We told them that our company specializes in brokerage and development of industrial and commercial property and that our approach to acquisitions and development projects is very simple: we make long term investments, build high quality buildings, avoid excessive leverage and require projects to be positive cash flow from day one.
As we spoke, their body language changed, as if we were country bumpkins, wearing straw hats, who had just fallen off a turnip truck. They began to fidget and look at their watches.
After the meeting finished, as we got into the elevator Neil and I looked at one another and started laughing. Either we were hayseeds who didn’t understand the complex, sophisticated deals those folks were hyping, or we could recognize fee-generating horseshit real estate deals and impractical financing that didn’t serve the interests of investors and clients. It didn’t take us long to figure out which was correct. The truth was, they knew a lot about packaging and buying and selling “deals”, but not very much about owning and operating real estate.
The real estate landscape throughout the country is littered with struggling or bankrupt real estate projects put together by Wall Street folks. They spent other people’s money overpaying for existing projects or developing projects that failed because they were poorly conceived, poorly managed or stupidly financed. They had no monopoly on losing money in real estate. Many people are expert at it, including big-name developers who regularly crash and burn in down cycles. The downfall of the Wall Street real estate folks is that they believed that success in investment banking and financial engineering translated easily into real estate success. They were expert in generating fees, but inexpert in investing for the long-term. Moreover, they believed that brain power equals judgment. It doesn’t. It’s nice to have the former, but it’s necessary to have the latter.
Steven Karbank
Comments
Post has no comments.