One Piece at a Time

Hoarding as a development strategy

I got it one piece at a time and it didn't cost me a dime

I met a guy 25 years ago and forgot about him until seeing him last week. Everyone looks better rich, and he’s no exception. Maybe it suits him so well because his current state of financial affairs is such a departure from our last interaction.

The last time I saw him he was a second-tier retail real estate broker, the kind of guy that never came up in conversation. He represented second-tier retailers in their search for second-tier locations. Two of his clients were a regional tire shop and a barbecue franchise that were, as I recall, indistinguishable from each other. Somehow, though, he had also created a relationship with a growing big box retailer, and through them, his fortunes would change.

Even though it wasn’t anything formal, it was hard to believe he had any type of relationship with this retailer. Those choice assignments are reserved for brokers from big corporate shops, who win them with boardroom presentations and rounds of golf. This guy, by comparison, was the type you could imagine hanging around the door to the parking lot, flicking out a cigarette and running up beside the head of real estate on the way to his car.

But somehow he’d worked his way into creating some contacts within the retailer’s organization, and he learned their processes and requirements - enough to get out and in front of the market and find the twenty acre sites they needed.

He was a relentless “dirt dog” and once he sniffed out a workable location, he’d guide it through the retailer’s internal mousetraps and broker a transaction with the landowner. His trick was setting up the deal so that the retailer would pay a price that made sense for them and, when he could, he’d have the landowner compensate him with an acre or two of land - plus some cash - as a commission.

The retailer knew what he was doing but didn’t care because they were getting the sites they needed at a palatable cost. For him, the land sleight of hand plus a cash commission from the seller gave him the equity required to build small 10,000-ish square foot strip centers.

Part one of his real estate development caper was getting land without paying for it. Part two was building buildings without paying (much) for them.

For years leading up to his first project he began to accumulate building components. He bought them, and sometimes just took them, from disinterested owners. He got to know demolition contractors and lenders and with their help, stockpiled assorted construction materials - rooftop HVAC units, steel doors, storefront systems, electrical panels, wall packs, exit signs, fluorescent lights, and even bar joists.

Instead of hiring a plausible general contractor, he managed the work himself. And it showed. His buildings looked like misfit toys, sitting off to the side and out by the road in front of a fresh clean big box store - but they were sturdy. He built masonry exterior walls and concrete parking lots for maximum lifespan. Ugly, yes. Bulletproof, also yes.

He ended up building ten of these little Frankenstein shopping centers over a few years and financed them each with twenty-year self-amortizing loans. After that his brokerage business petered out, and while everyone else didn’t think of him, he sat on his ass, Charlie Munger-style.

Amortization became his employee, working hard for the next two decades to extinguish his debt. All the while the exurban areas where he built became suburban areas and now his goofy little properties have a bit of charm.

I’d guess he now averages $25 per square foot in rent, net of expenses, across somewhere around 100,000 square feet of space. He’s sitting fat now but his business plan always reminded me of this tune from the Man in Black: