What the F*ck is This?

Real estate's 5 waypoints to big dough

“The real estate industry has created far more bankruptcies than billionaires”

- Francis Greenburger, Time Equities

A friend of mine used to work for one of the New York real estate titans, a long-time public company CEO known for being a bit gruff. A lot gruff. He barked from behind his desk while underlings like my pal came and went carrying out orders. The boss wanted all sorts of information, all the time, most of it difficult to come by. When he wanted information, he wanted it on paper. And he wanted it now.

The recurring theme was that he would demand some bit of arcane detail - the weighted average credit rating of their entire tenant base as compared to their top three competitors, for example - and then shoo someone off to get it. Immediately.

What made him a legend was not his rule over the Manhattan skyline, but his ability to - no matter how clear his threats if the data wasn’t immediately fetched - whenever handed any piece of paper, without even glancing at it, drop it on the floor and ask “WHAT THE F*CK IS THIS?”

Francis Greenburger, another New York legend that converted over 10,000 New York apartments to condos had an affinity for bowties and Uniqlo puffy vests. Less offensive than the paper-dropper, but a unique “thing” nonetheless.

A California-based national retail developer, otherwise always dressed and behaving like a dandy, flosses his teeth during in-person negotiations. Most off-putting is his tendency to then lick off the resulting detritus.

A prolific and talented Atlanta developer often conducts meetings with one foot propped on his conference room table. And above the foot, placed for all attendees to see, is an ankle holster and pistol.

Every successful real estateur is an oddity. They’re all suitably weird. But, despite their differences, the ones that have made the big dough all took the same trip. Different landscapes and roads, but they all shared these 5 waypoints:

1. Extreme leverage: Either through borrowed money that allowed them to amplify a small investment and/or by partnering with others and receiving a disproportionate share of the proceeds, big time real estateurs used levers that multiplied their stake.

   Building a Walgreens for $4 million and selling it for $5 million is great. But the developer that borrowed 80% and had investors for 90% of the equity and then got 50% of the proceeds, made 7x their investment.

2. Scale: Making money in real estate requires big piles of money. Making tens of millions - at least on a reasonably recurring basis - requires deploying hundreds of millions. Making hundreds of millions requires billions.

   As Mr. Greenburger observed, there’s plenty of examples where real estateurs have turned billions into thousands, but in real estate it takes billions to make billions.

3. Cooperative markets: Swimming upstream is tough. The folks that hit it big found a niche (through skill or luck) that came in to favor. Some groups made staggering amounts of money on class B malls in the early 2000s. Others lost staggering amounts of money on class B malls in the early 2020s. Rural self storage traded for years at 10% cap rates, then the gods of fortune smiled and cap rates dropped to 5%.

   Imagine buying office space on Sand Hill Road when it rented for $20 per square foot per year, then still owning it when it rents for $10 per square foot per month.

4. Loss avoidance: Loss of a grubstake sets back even the savviest of operators - sometimes it can be a decade or more. The winners have tiptoed past the land mines and held on to capital for #5. All of them have scar tissue but they survived. None were taken out of the game.

   Harry Macklowe used $50 million of his own cash to buy $7 billion worth of office buildings six months before Lehman Brothers failed. But as a testament to being hard-to-kill, kept enough under the sofa cushions to sell $920 million of art work in his divorce proceedings last year.

5. Reinvested proceeds: The big hits come when capital events compound - when the proceeds from one big sale get put into another big deal and then make their way out again, even bigger.

   Many of the large real estate private equity fund managers had meager beginnings but kept rolling a forward a small starting grubstake. CIM Group began with a couple of Israeli immigrants and a bad idea about opening a carpet store, then later buying a small building in Santa Monica, and now is a $30 billion asset manager. Compound your personal capital at 30% for a few decades and next thing you know you’re talking real money.

If you have any doubts about these 5 waypoints, just print this out and hand it to any successful real estateur. Odds are they’ll say “WHAT THE F*CK IS THIS?”