Investing in Non Performing Loans (NPNs)

[clearfund]

Allan – I think the SF is a good example of why anyone who buys that type of asset now has a higher chance of succeeding that did those that bought at historical record high values (and record low yields).

I would rather look at that type of bldg where the tenants have blown out, underwrite the new rent/downtime/ti/lc at levels meaningfully below ‘current’ market rents.

To your balance sheet focus, I am sure we’d all be happier with the identical asset as a significantly lower cost basis for all of the obvious reasons.

Is now the right time to buy that bldg given the others that may tumble behind it given the high level of over-leveraged, highly optimistic underwritten bldgs that you correctly state? I Don’t purport to know when to call a bottom. However, what I do know is the case for long term fundamentals (read: 10+ years of projected ownership). If you can achieve a low basis and capture a strong all cash yield (at some point in the next several years) in a top shelf SF bldg I think we’d sleep well at night and ultimately cash in at some point in the future.

12% offering: To be clear, I make no offer (or hint at one) of a 12%+ investment. My prior statement re: 12% was that I use that number as minimum all cash yield I would require upon achieving stabilization on the property when preparing the underwriting models. I feel that we can buy cash flow today for approaching 10%, however, I would expect any leased deal to go ‘backwards’ on income for a while due to rent reductions, etc to maintain tenants (lower rent is better than a vacancy). thus 12% is just a personal min yield requirement used in crafting my value/offer to submit to the lender to acquire the note.

Lastly re: “conservative assumptions” I do agree with you that the phrase can/has been used as ‘cover’ and BS many times over. However, it is just as likely that someone who uses that phrase is actually using conservative assumptions. Thus, to disparage someone due to a very subjective term is not appropriate without previously drilling down into their definition/idea of ‘conservative assumptions’.

The market has told me that my assumptions are hyper conservative due to the response I receive from lenders to my offers. My offers come with an explanation of how I derived my offer value (rents, vacancy factor, expenses, discount rate, etc) and they never have an issue with any of those items, just my price (which is a derived from the agreed upon assumptions).

As a further example of someone using the term “conservative basis” you might want to read the 3rd paragraph on page 2 of this link:
http://www.ticonline.com/buffett.partner.letters/1959.02.11.pdf

“…it has an intrinsic value of $125/share computed on a conservative basis…”
Warren Buffett, 1959 Partnership Letter

Not attempting to compare myself to ‘the man’ but it is possible, and probable, for someone to accurately, and ethically, underwrite deals in a conservative manner.

Moral of the story, not every property is worth buying, not every deal is truly a deal, but there are deals to be had if you are diligent and look hard. Don’t try to flip but rather underwrite for the long run, be as conservative as you can (even though my conservative assumption may not be your conservative assumption), and do your personal due diligence.

Happy New Year

ps: I was commercial real estate/REIT analyst for a top 2 wall street investment bank for many years so I too have seen the good/bad/ugly/losers/winners in Billions of real estate deals.

[Allan from Fallbrook]

Clearfund: Thanks for the thoughtful and cogent response. I don’t see anything in there that I would disagree with. As far as “conservative” and “conservatism”, there is a huge gulf between between how an accountant perceives those terms and a financier. As an accountant, the principle of conservatism is actually a guiding principle and one that I would hew to closely. Given your background on Wall Street, I would imagine you have seen it all as far as deals go, and have probably also seen the lingo and terminology canted, slanted and twisted to seal the deal.

While I understand your point regarding timing in the SF market, I would also opine that the days of Heller and Thelen-type implosions are far from over. I’d also say that quite a few investors get caught on the downslope (“knife catching”) as the upswing when it comes to pricing and values.

Of course, I’d also be willing to admit that I’m extremely cautious as an investor, hence my love of corporate bonds, and coming from the insurance and surety business, I’ve seen my share of bullshit deals, too. I was actually working as a CFO in Orange County during 1994 when Citron blew up Orange County with his derivative dealings and had entertained a sales presentation from an investment bank which shall remain nameless about the benefits of investing in derivatives. I didn’t, thank God, and largely because I had no idea what the guy was talking about, but still. Cautionary tales abound.

[Allan from Fallbrook]

Clearfund: Thanks for the thoughtful and cogent response. I don’t see anything in there that I would disagree with. As far as “conservative” and “conservatism”, there is a huge gulf between between how an accountant perceives those terms and a financier. As an accountant, the principle of conservatism is actually a guiding principle and one that I would hew to closely. Given your background on Wall Street, I would imagine you have seen it all as far as deals go, and have probably also seen the lingo and terminology canted, slanted and twisted to seal the deal.

While I understand your point regarding timing in the SF market, I would also opine that the days of Heller and Thelen-type implosions are far from over. I’d also say that quite a few investors get caught on the downslope (“knife catching”) as the upswing when it comes to pricing and values.

Of course, I’d also be willing to admit that I’m extremely cautious as an investor, hence my love of corporate bonds, and coming from the insurance and surety business, I’ve seen my share of bullshit deals, too. I was actually working as a CFO in Orange County during 1994 when Citron blew up Orange County with his derivative dealings and had entertained a sales presentation from an investment bank which shall remain nameless about the benefits of investing in derivatives. I didn’t, thank God, and largely because I had no idea what the guy was talking about, but still. Cautionary tales abound.

[Allan from Fallbrook]

Clearfund: Thanks for the thoughtful and cogent response. I don’t see anything in there that I would disagree with. As far as “conservative” and “conservatism”, there is a huge gulf between between how an accountant perceives those terms and a financier. As an accountant, the principle of conservatism is actually a guiding principle and one that I would hew to closely. Given your background on Wall Street, I would imagine you have seen it all as far as deals go, and have probably also seen the lingo and terminology canted, slanted and twisted to seal the deal.

While I understand your point regarding timing in the SF market, I would also opine that the days of Heller and Thelen-type implosions are far from over. I’d also say that quite a few investors get caught on the downslope (“knife catching”) as the upswing when it comes to pricing and values.

Of course, I’d also be willing to admit that I’m extremely cautious as an investor, hence my love of corporate bonds, and coming from the insurance and surety business, I’ve seen my share of bullshit deals, too. I was actually working as a CFO in Orange County during 1994 when Citron blew up Orange County with his derivative dealings and had entertained a sales presentation from an investment bank which shall remain nameless about the benefits of investing in derivatives. I didn’t, thank God, and largely because I had no idea what the guy was talking about, but still. Cautionary tales abound.

[Allan from Fallbrook]

Clearfund: Thanks for the thoughtful and cogent response. I don’t see anything in there that I would disagree with. As far as “conservative” and “conservatism”, there is a huge gulf between between how an accountant perceives those terms and a financier. As an accountant, the principle of conservatism is actually a guiding principle and one that I would hew to closely. Given your background on Wall Street, I would imagine you have seen it all as far as deals go, and have probably also seen the lingo and terminology canted, slanted and twisted to seal the deal.

While I understand your point regarding timing in the SF market, I would also opine that the days of Heller and Thelen-type implosions are far from over. I’d also say that quite a few investors get caught on the downslope (“knife catching”) as the upswing when it comes to pricing and values.

Of course, I’d also be willing to admit that I’m extremely cautious as an investor, hence my love of corporate bonds, and coming from the insurance and surety business, I’ve seen my share of bullshit deals, too. I was actually working as a CFO in Orange County during 1994 when Citron blew up Orange County with his derivative dealings and had entertained a sales presentation from an investment bank which shall remain nameless about the benefits of investing in derivatives. I didn’t, thank God, and largely because I had no idea what the guy was talking about, but still. Cautionary tales abound.

[Allan from Fallbrook]

Clearfund: Thanks for the thoughtful and cogent response. I don’t see anything in there that I would disagree with. As far as “conservative” and “conservatism”, there is a huge gulf between between how an accountant perceives those terms and a financier. As an accountant, the principle of conservatism is actually a guiding principle and one that I would hew to closely. Given your background on Wall Street, I would imagine you have seen it all as far as deals go, and have probably also seen the lingo and terminology canted, slanted and twisted to seal the deal.

While I understand your point regarding timing in the SF market, I would also opine that the days of Heller and Thelen-type implosions are far from over. I’d also say that quite a few investors get caught on the downslope (“knife catching”) as the upswing when it comes to pricing and values.

Of course, I’d also be willing to admit that I’m extremely cautious as an investor, hence my love of corporate bonds, and coming from the insurance and surety business, I’ve seen my share of bullshit deals, too. I was actually working as a CFO in Orange County during 1994 when Citron blew up Orange County with his derivative dealings and had entertained a sales presentation from an investment bank which shall remain nameless about the benefits of investing in derivatives. I didn’t, thank God, and largely because I had no idea what the guy was talking about, but still. Cautionary tales abound.

[Allan from Fallbrook]

Dupe

[Allan from Fallbrook]

Dupe

[Allan from Fallbrook]

Dupe

[Allan from Fallbrook]

Dupe

[Allan from Fallbrook]

Dupe

[clearfund]

A conservative accountant who loves bonds, and insurance??? Shocking!!!

I do find my finance side tempered by my business partner/CFO who was a former international tax partner at Andersen in New York, London, and Tokyo. He was so disgusted with the business after the Enron debacle (which he was no where near) that he retired until he unretired to partake in this evolving down real estate market.

I agree that there is more downside than upside today. However, one cannot rebuild a portfolio on the day everything seems rosy again.

I am of the philosophy that we get as work towards the bottom (at least as we can see) cautiously begin wading in (this is where we are now), pick up steam as the knife falls farther and likely wind down once the upside is realized by all.

A few before the bottom
A few at the bottom
A few after the bottom

We’ll see how the ‘speculation’ works out….

As Thomas Barrack of Colony Capital (multi $B RE Advisor) said of investing in this real estate market last fall “..up till now, everybody’s been wrong…”

[clearfund]

A conservative accountant who loves bonds, and insurance??? Shocking!!!

I do find my finance side tempered by my business partner/CFO who was a former international tax partner at Andersen in New York, London, and Tokyo. He was so disgusted with the business after the Enron debacle (which he was no where near) that he retired until he unretired to partake in this evolving down real estate market.

I agree that there is more downside than upside today. However, one cannot rebuild a portfolio on the day everything seems rosy again.

I am of the philosophy that we get as work towards the bottom (at least as we can see) cautiously begin wading in (this is where we are now), pick up steam as the knife falls farther and likely wind down once the upside is realized by all.

A few before the bottom
A few at the bottom
A few after the bottom

We’ll see how the ‘speculation’ works out….

As Thomas Barrack of Colony Capital (multi $B RE Advisor) said of investing in this real estate market last fall “..up till now, everybody’s been wrong…”

[clearfund]

A conservative accountant who loves bonds, and insurance??? Shocking!!!

I do find my finance side tempered by my business partner/CFO who was a former international tax partner at Andersen in New York, London, and Tokyo. He was so disgusted with the business after the Enron debacle (which he was no where near) that he retired until he unretired to partake in this evolving down real estate market.

I agree that there is more downside than upside today. However, one cannot rebuild a portfolio on the day everything seems rosy again.

I am of the philosophy that we get as work towards the bottom (at least as we can see) cautiously begin wading in (this is where we are now), pick up steam as the knife falls farther and likely wind down once the upside is realized by all.

A few before the bottom
A few at the bottom
A few after the bottom

We’ll see how the ‘speculation’ works out….

As Thomas Barrack of Colony Capital (multi $B RE Advisor) said of investing in this real estate market last fall “..up till now, everybody’s been wrong…”

[clearfund]

A conservative accountant who loves bonds, and insurance??? Shocking!!!

I do find my finance side tempered by my business partner/CFO who was a former international tax partner at Andersen in New York, London, and Tokyo. He was so disgusted with the business after the Enron debacle (which he was no where near) that he retired until he unretired to partake in this evolving down real estate market.

I agree that there is more downside than upside today. However, one cannot rebuild a portfolio on the day everything seems rosy again.

I am of the philosophy that we get as work towards the bottom (at least as we can see) cautiously begin wading in (this is where we are now), pick up steam as the knife falls farther and likely wind down once the upside is realized by all.

A few before the bottom
A few at the bottom
A few after the bottom

We’ll see how the ‘speculation’ works out….

As Thomas Barrack of Colony Capital (multi $B RE Advisor) said of investing in this real estate market last fall “..up till now, everybody’s been wrong…”

[Author]

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