Tuesday, November 10, 2009

Honoring our Veterans

Thank you for your service to our country. We join the rest of the nation on Veterans Day, November 11, in remembering the sacrifices of America's 25 million veterans and expressing our appreciation for your service. We thank you for our freedom.

Monday, November 2, 2009

12-step program for banks

Check out this link before you read my blog below http://www.msnbc.msn.com/id/29619236/ns/business-us_business/

Do you have a friend or family member that has had trouble with addiction? Have you heard about "12-Step" programs to get "clean" so to speak?

I have this friend, for the purposes of this article, I will call "Bank" and his problem/addiction if you will is credit. "Bank" has had a tough road for the past 6-7 years. First he was living it up on cheap credit, then he became a dealer and started to consume massive amounts of even cheaper credit. When he ran out of credit he did what any addict does and found other people help fund his problem. In "Bank's" case, it was clear, those funding his problem were not concerned about too much of a good thing. It was kind of funny to watch. "Bank" would go out, lend some money, get a huge fee and a nice buzz as well. "Bank" never failed to find money to lend, as long as there was a fee to be made. "Bank" thought the party was going to go on forever.

One day, "Bank" got a call from one of his suppliers of the cheap credit. After years of providing money without asking too many questions, the suppliers started to notice they were not being paid back. Eventually "Bank" started to notice even he was not getting paid back on the cheap credit he sold. This was not good, for if "Bank" could not use his cheap credit he would lose his fees, maybe even his job. Sniff. Instead of "Bank" realizing he has a problem, he wants to pretend one does not exist. "Bank" is so addicted to large fees and cheap credit he does whatever he can to put his problem off to another day far, far in the future.

What "Bank" needs is a 12-Step Program. There are three things to know about addiction; the treatment is not fast, the treatment is not easy and the cure begins with an admission that you have a problem and your life is unmanageable. American banks are in trouble. The banks lent more than a ton of money on projects, investments and pure speculation. The problem now is that the bank's problem is our problem. Since banks do not want to admit there is a problem, troubled loans stay on the books. The longer these loans stay on the books the less money there is to loan. A side effect of these troubled loans is that the assets remain on the books at inflated valuations.

Here is an example to illustrate the problem: There is a 4,000 sf office condominium where a bank lent almost $600,000 and the owner defaulted. The bank took about a year to foreclose by dragging their feet and today they are trying to sell the asset for $400,000. At first blush that sounds pretty good, only 66% of the original loan amount. The trouble is the condo is in such disrepair and there is so much competing newer space on the market that the value is probably closer to $80,000. The "funny" thing is the bank probably could have sold the asset for $200,000 when it first started the foreclosure. But due to the bank's own delay it is worth only about a third of that today... and tomorrow does not look any better. The longer the bank holds on to this property it will continue to decline into dis-repair and there will be even more space on the market tomorrow. The inaction by this bank and many other banks is hurting commercial property owners. Sure it would hurt the values of all commercial property if the banks had a huge liquidation sale but then the healing process could begin.

By pretending there is not a problem and not admitting first, there is a problem and second their books have become unmanageable, the cure, the rehabilitation cannot begin. The FDIC said a few months ago they wanted the banks to stop playing "Delay and Pray" with their loans and assets. What the banks need is for the FDIC to require all banks to acknowledge say 20% of their troubled loans each year for the next 5 years. Otherwise we risk going the way of Japan where banks made loans that became troubled loans and instead of facing the music they held the loans at face value and have continued to pretend for the last 20 years that values will eventually catch up with the loans and everything will be okay. By not admitting they had a problem Japan's banks have dragged down their economy for two decades with still no cure in sight. What we need is for banks to admit there is a problem, take action to make their books manageable and liquidate the assets so we can all get on with our lives.

Wednesday, August 19, 2009

Florida Development News has a new home on the web

I was talking with my assistant on Monday and she had some very good news for me. The new website (www.FloridaDevelopmentNews.com) we informally launched two weeks ago had 40 unique hits last week and the average time spent on the site was over 20 minutes per visitor. I have to say, I am aiming for much larger numbers in the future but for right now I am pleased as punch thank you very much.

We plan to formally launch the website next week and many more "unique visitors" I hope will find the site and value the content. The newsletter is not doing to shabby either with over 200 subscribers added in the last month. If you would like to subscribe, email editor@FloridaDevelopmentNews.com and put subscribe in the subject line.

I am working with a new group of authors/writers for our next publishing date on October 1st. I have to say the topics and depth of knowledge of the writers is truly outstanding and I think readers will be very pleased. As always, we are also on the hunt for new ideas both for the website and newsletter. Topic ideas from our readers are also valued and sought. The new site has every article published in the newsletter and links to development specific articles in papers around Florida and the New York Times. We also have an article originally published in an Urban Land Institute magazine on the future trends of the development industry. There is a link on the front page and I encourage you to check it out.

Monday, August 3, 2009

Florida Land Development Newsletter

I was driving to a meeting about two months ago and I was thinking about some of the issues that face the development community today. As I started to research Senate Bill 360 and new water quality rules being considered by FDEP I found very little in term of news I could use. Then I thought "I wish there was a source for the development community to turn when it wanted to know more about a certain issue". About 30 seconds later it hit me - I should call on my developer friends, bankers, consultants and planners to see if I could pull together a handful of articles that would be informative and useful. So I emailed and called a few friends with specific industry knowledge and asked them to write something.

The end result is the new Florida Land Development Newsletter. The purpose of the newsletter is to inform, not to sell anything or anyone. My original intent was to publish it about once per year or as issues presented themselves. We put out a press release informing the public of the newsletter and I was just about run over with requests to send out copies. I was equally surprised when several professionals asked if they could submit content on issues they were dealing with in their work. It was not to much after the emails started pouring in that I thought maybe we needed a website to support the newsletter and publish headlines from around the state on a regular basis.

The new website is www.FloridaDevelopmentNews.com and we are still working on the content and structure. Our goal is to have enough writers/contributors that we can publish at least one new 800 word article per week. Since a decent article may take a week or two to research and develop copy it will take a while before we can publish at that rate. Regardless, I keep an eye out for headlines around the state that impact development and we plan to keep those fresh every other day or so.

It has taken a lot of work to get from that idea on my way to a meeting to a tangible newsletter and website. If you would like to subscribe, have an idea or want to know more a topic, email me at editor@FloridaDevelopmentNews.com and I will see what we can do. If you would like to download a copy of this quarter's newsletter, just go to the website and there is a link in the center of the page.

Tuesday, June 30, 2009

Green Shoots in My Lawn

I have been reading a lot about green shoots in the economy lately. Just like Bigfoot, there are those that have "seen" it/them and there are others that insist it/they do not exist. I think this is one of those glass half empty, glass half full debates. The truth is it depends upon your point of view and context. My business is up 300% over last year (really). Is that a green shoot? What about the new restaurant that opened down the street from my office. Is that a green shoot?

In each case above it depends on how you look at the numbers. I had two project reviews "walk in the door" in April yet I had been working on getting that work since last year. So in that case, I would not call it a sign of the economy picking up. The new restaurant down the street (which has excellent mexican food by the way) is a good sign, however, there are three existing restaurants that have gone out of business since January 2009. I am honestly not trying to spin the numbers or convince you of something where I am "right" and you are "wrong".

Personally, I will see and believe in green shoots when I start to see new non-construction jobs opening up. Don't get me wrong, construction is a great field and traditionally pays very well. But, when the job is finished, so are you. Honestly, I am just as confused as anyone when it comes to our economy. I see the stock market up while on the same day unemployment reaches a 26 year high. I hear the credit crunch is behinds us yet I cannot refinance a land loan that I have. I see great sales in the Sunday paper but few consumers actually buying. The canary in the coal mine is JOBS. Anything else I see on the positive side is a result of the economic stimulus package or temporary construction work. The stimulus package is really fertilizer designed to give us a quick boost. When the "food" is gone we may find a very brown lawn.
We are in an economic winter here. It will be a while before the spring is here and green shoots appear in my economic lawn. Rest assured they (green shoots) will come and we will probably miss the first few signs of new real growth.

On the positive side, I am seeing a lot of assets re-priced and being liquidated in the market place. While it is painful to be the one selling your investments at steep discounts it does put money in to the hand of people that will generally spend it in the economy (versus saving it). The last thing I want to leave you with is many segments of our society are in flux and some say we need to adjust to the "new normal".

While I agree some thing's have changed forever (very easy credit to name one) life will go on. This is also an excellent opportunity for most of us that have spent much of the last 30 years taking advice from "experts" that really knew what was going on. The playing field has been leveled and you and I now have a chance to learn in real-time along with these former experts about what the new normal will look like. I know, not much to brag about but it is nice for the little guy to know just as much as the big boys for a change even if what we collectively know is "not much".

Monday, June 15, 2009

Repost: Gold Up, Dollar Down, Inflation out the Wazoo!

I was speaking with a friend recently and a blog that I wrote back in January of 2008 came up in conversation. I decided to re-post it since it is quite relevant to what is happening currently.

What the heck is the Fed Chair thinking? I know, I know, keep the country out of a recession. Yeah, right, like that is going to happen. The good news is my gold stock is way up. The bad news is so is my Canadian bacon.

This country is in so much trouble from the Cheap Credit Party that the only real solution is to turn on the printing presses and print our way out of "real" debt. I knew the hang-over (from that credit party) was going to hurt but man! Now to add insult to injury my savings is worth a lot less this year than it was in just 2005.Thanks Federal Reserve Geniuses. I appreciate being penalized for actually (shock and awe) having a savings account instead of being 10 bazillion in debt.

Don't get me wrong I have a mortgage just like everyone else but I did not go out and buy 10 Miami condos on margin to rack up my debt. The only silver lining is our real estate is now comparatively cheap to foreign investors and tourists.Inflation is now getting ready to leave the earth's orbit ala 1970's style. I can't wait to order my first $100 cup of coffee. Okay, enough complaining and feeling sorry for my country, now on to what are we going to do from here.

The only way I know how to preserve buying power (wealth) is to own hard assets such as gold, real estate or some other object that does not deteriorate over time. Gold is sky high because the dollar is in the toilet not because it has "gone up in value". The price of gold has gone up, not the value. If you don't believe me check out the price of gold in Euros. Sure it is higher now than a few years ago in terms of euros but in dollars, it has tripled!I think the best investment is real estate! With that said, I don't think everyone should go out and buy a house or office building but referring back to a blog entry this summer "When it Pays to Buy, Buy" there is a time and place to buy real estate.

I have a personal example to share with you. I just love the beach. I have always wanted a place at the beach where my family can spend holidays and lazy weekends. Here in SW Florida, there are some tremendous deals on beachfront condos. Many of these condos demand high rental rates from December through April. If you find the right deal the rent from this period of time may cover you entire ownership costs. So while inflation is rampant and your banker is only paying you 2.5% for your money why not invest in something that pays for itself and you enjoy.

Another example is rental property. While we are in this huge housing slump it is a good time to hunt for bargains where the rent will cover your carry costs. Office space is another option however, one must be particularly careful when considering office and industrial property as the economy is slowing down and many small business will go under and potentially a lot of vacant space may emerge driving down rental rates.My favorite asset type is either bulk lots from builders or complete developments where the developer is in hot water for one reason or another. The key to these deals though is CASH! The reason why investors and companies are in trouble is DEBT! Don't get me wrong, debt is a wonderful tool but it is analogues to a sledge hammer; hit the right spot and mountains will move, hit the wrong spot and you lose your left foot. If investors and companies did not have debt on their books they could afford to hold their assets forever without fear of bankruptcy. Of course the way to make money is to turn your assets over and over making profits along the way. Obviously no sales equal no profits. So if you are long on cash and short on investment real estate, take another look around you for opportunity.

I was just offered bulk lots by one developer for 33% of the development costs. I was sharing this with a friend of mine yesterday and he asked how I know that particular deal is worth going after. My answer was simply, when you can buy something for less, or in this case a lot less, than what it costs to build you will be way ahead of your future competition. I can turn around and sell these bulk lots to another investor a year to two from now for 50% of the cost to build and still make a 50% profit on my investment. Not too shabby when you consider the alternative is a 2% or 3% money market rate.I am always taking questions so feel free to email me dave@keystonellc.net.

A Video on Government Spending


I am working on an article about Water Quality permitting in Florida as well as update on SB360, which I hope to publish here soon. Until then enjoy the link above.

Saturday, May 30, 2009

Panel Discussion

Today I am in Davie participating on a panel for a Land Use Permitting and Entitlement Course at the Huizenga School of Business and Entrepreneurship at Nova Southeastern.

The class consists of MBA students that are getting a specialization in Real Estate. The focus of this class is the entitlement and permitting process, as well as a better understanding of the roles and relationships between permitting agencies, consultants, the public, and implementing law.

Tuesday, May 26, 2009

An expert for every market

I spend most of my days working on real estate deals in one form or another. Sometimes it is a loan being sold to investors, sometimes it is the liquidation of a developer's inventory and on a rare occasion it is a good old fashioned traditional real estate transaction. I want to share one of my secret weapons with you; his name is Mike Timmerman.

Mike and I have known each other for over 10 years and he consistently delivers recommendations based on hard data versus other "experts" that go with the current trend. If you are a regular reader then you know I like Mike and have written about his great talent for making sense of all those real estate numbers. Mike and I have not had a chance to work together much over the last few years but we did have an opportunity last week and that is what I want to tell you about today.

I have a client that needed to know precisely what the market decline rate has been since 2005 for a specific market. I had my own ideas and my client had his own ideas about the market for this type of product. Mike quickly dove into the data and delivered an analysis that, after extensive review, was right on the money. I will say Mike did not give us the answer we were looking for but his insight and mountains of data backing his conclusions were absolutely spot on.

Today it seems as though everyone with a computer is an "expert" analyst and nobody thinks twice about manipulating the data to reach a preconceived conclusion. Fortunately, Mike never got that memo and he works like he has for the last 30 years - letting the data reach the conclusion. That is not to say Mike does not have instinct. In late 2005 Mike presented his analysis at an Urban Land Institute program in Naples where he announced the party was over. Now if he had just looked at sales or permits issued he would not have come to his gloomy conclusion. Mike took it a step further and looked at affordability and a survey of where people closing real estate contracts lived. He found the market had priced most real buyers out of the market place the previous years appreciation rates had reached unsustainable heights. He also found most buyers were from up north, namely Ohio and Michigan. In hind sight Mike called as he saw it and he was correct.

If you have a need for hardcore data analysis and someone to make sense of market you are in, I suggest you contact Mike at mtimmerman@fishkind.com, oh yeah, tell him Dave sent you.

Just in case you are wondering, Mike did not ask me or pay me to write this blog. I cannot help that I am a cheerleader for those I respect and admire.

Wednesday, May 20, 2009

Unconventional Wisdom

I had lunch with an investor friend of mine on May 18 and we had a very interesting discussion about the economy in general, real estate prices/values and the stock market. First let me say if a man is measured by his friends then I am the richest guy in the world. Not only are my friends smart but they are generous with their time and allow me to probe their thoughts on what is happening but also why it is happening (in their opinion).

My friend sees the general economy as sluggish and thinks it will continue to be flat for some time. He sees much trouble ahead for the commercial real estate market. It may be because there is too much space and not enough tenants or consumers may not be spending enough to keep the tenants in place. Regardless, he sees cap rates heading back to the historic mean of 10%. In english that means retail/strip centers may fall as much as 40% in value from 2006 prices. Compounding the situation is many centers are not stable as in they are not 90% full and most are losing tenants such as Circuit City, Linens & Things and other bygone companies.
On top of that, rents are still falling in centers across America to entice tenants to move from one center to another. Plain and simple, the commercial market IS ugly and will get worse. I have to say I agree with my friend. With that said, I also have friends in areas that are not overbuilt and their centers are staying full and rents are stable but these are in less populated areas.

As for the stock market, I keep reading about how much cash is sitting on the sidelines ready to invest in anything that makes sense. I was talking to my friend about a graph someone sent me that showed money market deposits as a ratio of the S&P and it showed a monster amount of available cash. My friend pointed out how the graph misrepresented the actual amount of available cash because the S&P index is down by almost 50% since a year ago. Therefore there is not twice as much cash as a year ago as the graph indicated, it is more of a reflection of how the S&P is down. My friend really likes SRS (Super Short Real Estate Index) and I will tell you I am also a fan of SRS and I own it as part of my own holdings. All of my investor friends believe the stock market is over bought and we are in a secular Bear Market that just happens to be in a rally.

Back to real estate in general. One thing my friend has been saying for some time now is do not buy (for investment purposes) anything for a year or so. He believes the prices will be the same if not lower a year from now and the chance of further decline is just not worth the risk of marginal returns (rents) and carry costs such as taxes and insurance. In general I agree with him but there are always exceptions and one should keep their eyes peeled for those exceptions (i.e. some distressed bank own property for example). It also depends on why you are buying too. If you are buying to use for your own purposes, then there is no risk of lost expected rental income and you will pay taxes and insurance wherever you live or run your business.

In closing I hope everyone has a great Memorial Day weekend. Stay safe.

Monday, May 11, 2009

Racing for Charity

This past weekend I participated in the " 33rd Annual Great Dock Canoe Race" at Crayton Cove in Naples, Florida. I have been attending this event since 1990 and this year was my first time competing!

The Annual Great Dock Canoe Race is arguably Naples' most popular event. Contestants and spectators travel from throughout the country to race and watch, and thousands of people, from young children to grandparents, celebrate the Race on land, dock and bay. The Theme for the event changes each year, and the costumes and headgear of the participants and spectators are as much a part of the day as the paddling.

My partner in the race, Kent Skrivan of Garlick, Stetler & Skrivan is a very strong rower and is generally responsible for our 5th place finish in the VIP race with a respectable time of 4:26.

At the races, over $7,000 was raised for CHS Healthcare a private, not-for-profit “safety net” health care provider with 12 health care facilities located throughout Collier County which includes the Ronald McDonald Care Mobile. They offer basic primary and preventative medical and dental health care services. In calendar year 2008, they provided services to over 46,700 patients (over 31,000 of which were children) for a total of nearly 186,000 patient visits! You can visit their website at http://www.collier.org/

In the pictures, I am the one in the front wearing an orange Gator hat.

Monday, May 4, 2009

Getting a loan

I know the media is pretty good about reporting how bad the economy is doing and "no one" is lending.

I have worked on over 17MM in loans this month and find the banks willing to lend...just not at the same crazy standards they were using in 2005 (got a pulse - great you are approved!). I am seeing LTV's in 60-75% range with the key being what exactly is the value today. This is where my company helps by assisting lenders review specific assets for a specific loan. In many cases it is not pretty. The fact is there is not much a bank or anyone can do when the borrower owes or wants to borrow 10MM for a 2MM asset - which is all too common these days. That is how I see things from where I sit.

If you have a question about lending, asset valuation or development in general, drop me an email dave@keystonellc.net

Friday, May 1, 2009

Finally...someone gets it!!

I was reading the paper last Sunday (as I do most Sundays) when I saw an ad by a local developer touting their project as a great place to live. Now this type of ad is generally not too shocking since every developer says the same thing about their respective projects.

What caught my eye was the marketing blatantly touted the fact the community did not have a Community Development District (CDD), a tool large developers use to finance the development of their property through bonds where the residents of that community pay the bonds back. It is a slick deal for developers. They pass the development costs on to the end user while at the same time charging as much as every other development for their land (yes CDD's are real - I am not making it up).

As I was saying, a local development known as the Vineyards has something few developments in this area can say NO DEBT. That means when you buy a new or existing house in their project you do not have to pay additional CDD fees to live there. What a novel concept!

There are many developments in Florida and elsewhere in the country where the residents are saddled with $10-20 thousand (or more!) in debt the day they close on their house. In my less than humble opinion, the CDD tool is over used and does not save the consumer any money. Too many MBA's and CPA's with little regard for future buyers appetite to pay more fees long after closing were driving the development bus.

So Kudos goes to the Vineyards and the "in hind sight" brightest developers in the land. They have an attractive community with all of the amenities one could ask for with ZERO add-on fees for the buyers. As their ad says "This Developer Gets It!". I agree.

Wednesday, April 8, 2009

RLSA program will actually mean less development

My Guest Editorial debut in the Naples Daily News. Enjoy.


Much has been said and written about Collier County’s Rural Land Stewardship Area (RLSA) program since its inception and then adoption in 2002. There are at least three sides to this issue; the owners of the rural land, the environmental community and the residents of Collier County.

From the landowners perspective the issue is pretty simple; they own the land, they pay taxes on the land and their land has inherent development rights of one home for every five acres they own. The environmental community also has a straightforward point of view, protect endangered species, their habitats and sensitive wetland ecosystems. The residents of Collier County have probably the most nebulous job and that is to decide what is best for our current and future residents for many generations to come.

The RLSA overlay is about 200,000 acres surrounding Immokalee. The landowners have the right to convert their land to 5 acre lots similar to what exists today as Golden Gate Estates. If this form of development was to occur it would mean about 40,000 homes could be built in the rural area. If you look at a typical 5-acre lot with a home in Golden Gate Estates you will notice one acre or more of the lot has been cleared and developed from its natural state. When the local street network necessary to serve these hypothetical 5-acre lots is contemplated, another 9,000 acres would need to be developed. Without the RLSA program, Collier County could have had 49,000 acres of development in the rural area. That is assuming a maximum of one acre would be cleared per lot.

The rural area is rich in ecological diversity and contiguousness. In other words, the RLSA has large connected areas of uplands, wetlands and serves as habitats for many species including endangered species such as the Florida Panther and the Florida Black Bear. Both the panther and bear populations reportedly need large open areas to forage, mate and raise their young. In some areas, the wetland ecosystems are used as habitat by these two species but they also need considerable upland area to survive. The point here is even if you did not allow development in the wetland areas of the RLSA there still would not be enough area for the panther and black bear.

Collier County needs to decide how to balance resident’s future needs, the landowner’s ability to use their land and the needs of the environment in the RLSA. The RLSA 5-Year Review Committee has spent the last eighteen months studying the existing RLSA program and taking testimony from experts of almost every field. One of the committee’s recommendations is a maximum development area of 45,000 acres thereby perpetually preserving over 150,000 acres of rural land. This 150,000 acres will be preserved in its present condition or in a restored condition if there has been significant disturbance. Some believe a 45,000 acre maximum development footprint is too much development especially in a rural area. Some also believe there will be too many people living on those 45,000 acres especially since before only one home was allowed on a 5-acre lot and the RLSA program is forecast to have about 2.5 homes per acre. However, today 43,000 acres of the 200,000 are anticipated to be developed as part of the existing RLSA program. While this existing condition is less than the proposed 45,000 acre cap, it leaves 47,000 acres of land available for development at one home per five acres.

Before the RLSA program existed, a future theoretical build-out of Collier County’s rural area would have resulted in 49,000 acres of developed land. Keep in mind that does not include any development for government type services such as EMS, fire, government administration, schools and administration, hospitals/emergency care and necessary commercial services to serve the residents of the rural area, collectively called Public Benefit Uses. The RLSA as it exists today requires all development participating in the program to provide for most of the above services within their development area. The proposed 45,000 acre development cap proposed by the 5-Year Review Committee is inclusive of Public Benefit uses.

Without taking sides on what is right and what is wrong with the proposed cap let’s take a look at the build-out numbers over the next 50 years. If the RLSA program did not exist there could be about 49,000 acres of sprawling development with little or no preserved agricultural uses or protected habitat areas. With the existing RLSA program there will still be over 40,000 acres of development but this development will be concentrated in distinct towns and villages. The quality of the development within the RLSA will be vastly superior to tens of thousands of scattered five acre lots. The word “superior” in this context means well a thought-out mix of uses with dense populations capable of supporting Public Benefit Uses while minimizing sprawl. What is even more important than what is developed is what will never be developed.
Over 150,000 acres of land contiguous to millions of acres of preserved land will never be developed.
Before you make up your mind about the RLSA program including its benefits and shortcomings, take a hard look at what could have been, what is now and what could be changed for the better. We could have seen 49,000 acres of sprawling development in five acre tracts over a 200,000 acre area with no RLSA program. With no changes to the existing RLSA program there will be about 43,000 acres of development with another 47,000 acres left out of the program and subject to development with one home per five acres. If the RLSA 5-Year Review Committee recommended changes are implemented 45,000 acres may be developed and 150,000 acres will be perpetually preserved as existing agricultural uses, restored habitat areas and native forests.

Friday, April 3, 2009

What Businesses can learn from Penn and Teller

Dave and Penn

I recently went to a Penn and teller show in Las Vegas. I was amazed after the show, as both Penn and Teller were very gracious and personally greeted every person that wanted an autograph, a picture of even just a handshake. Their show was unlike any comedy or magic show I have ever seen.

First of all, they broke the #1 rule of magic by telling you and showing you how they do about half of the tricks in their act. You might think that would take all of the fun out of the performance, but it only added to the mystery. I just watched them show me how to make a cigarette disappear and reappear as well as “read minds” but because of their master showmanship, I still couldn’t believe what I was seeing!

So, on to my point of writing this blog...What I learned from the Penn & Teller show is the following:

1. If you are a master of something, you can give up some of your “secrets” and have no fear of competition (I am talking skills here)

2. If you provide a public benefit (say…exposing psychics) people will appreciate what you do and be loyal to you (think Google)

3. If you do not have integrity, you don’t have squat! (Peanut Corp. of America)

4. Be humble and thank those that have and continue to help you in your business.

5. Be available to those you work for and those that work for you (i.e-shareholders and staff).

6. It is OK to be different if you are true to your core beliefs (Southwest Airlines, Apple and Google)

7. Reading minds and the future are easy if you are paying close attention to the subject (see #1)

Pretty good for just a “magic” show. Look around at all the trouble our economy and companies are in. Note: I did not say ALL companies. It is the troubled companies that I wish to focus on. Until this economic meltdown reared its ugly head, most consumers and investors believed that those in charge of corporations were doing an okay job. As it turns out, most executives were at best, just showing up for work and at worst, criminally negligent (i.e AIG, Lemon, Meril, Peanut Corp. of America, Countrywide, Circuit City, Wachovia- remember their tag-line “Uncommon Wisdom”?)

Examples of well run companies are Southwest Airlines, whose management had their eye on the ball and read the future by locking in fuel prices at half of the price of most every other airline. Another example is Toyota who also miraculously read the future (30 years ago) and provided well engineered, fuel efficient cars that folks wanted to buy.

In 2000 my wife and I purchased a Corolla for $11,000 and it got 38 miles to the gallon. Chrysler had a similar car called the Neon which cost a few thousand dollars more and got 22 miles to the gallon. Can you guess which company is going into bankruptcy?

Let’s also look at Apple-a company that not only constantly invents products that people desire, but they are constantly improving on existing ones. I am talking about the I-phone and I-Pod; both are wildly popular and have much competition, yet they dominate sales in both areas. The years ago Apple was selling for $12 per share with $10 per share socked away for a rainy day. Regretfully I did not buy the stock but I should have seen the 2000% increase coming.

Here is the point I am trying to get across to you; good business practices do not rely upon "magic", however, just like magic it takes practice and a desire to do something well to become a master of something. Funny, I thought I was going to a Penn and Teller show, I had no idea I was going to learn so much about business. I highly recomned you check out their show at the RIO next time you are in Las Vegas.

Tuesday, March 10, 2009

New Idea for New Economic Model

I talk with other investors on a daily basis. Investors love profit but hate risk. A common question I am hearing a lot these days is "are we at the bottom or is there more downside?" My honest answer is I really do not know... I will tell you there are many stocks, bonds and real estate deals that are being sold for far less than their replacement cost. One example is a pipeline stock that I personally own that is being traded for $2.65 yet has a book value of $16 and a replacement cost of about $30 per share. I have gone out on a limb and purchased more of this company because I believe it will recover and I see little downside risk at this price.
Another example is homes are being sold for $30-$50 thousand about 30 minutes north of where I live. These homes cost at least $100 thousand to build even with today's reduced raw material costs. Could both still go down in price? You bet (no pun intended).

I was talking with an investment group out of Texas a while ago and they wanted to know about downside risk. The investor's actual question was "do you think there is more than a 20% downside?". The vanilla answer is I do not know. However, I personally think prices will not dip much lower. Then I had an idea. What if two investment groups got together where one group provided 80% of the purchase money and another group provided remaining 20%. The group that put up the 20% would take the first hit in any realized loss of value. In exchange for this risk, the 20% group would receive 60% of the any profit realized. The group that put up 80% of the money now has a hedge against losing money and yet they still have the opportunity to make a very good return on their investment.

If you are confused, let me give you an example to explain my idea. Say we have an office building that appears to have an asking price half of the replacement cost. So the asking price is $1,000,000 and my two imaginary investment groups put up their 80/20 ratio of funds. Assume our investment time horizon is 5 years. At the end of 5 years the two groups agree to put the building on the market for $2,000,000 (its replacement cost). The group that put up $800 thousand would get 40% of the $1 million profit and the group that put up $200 thousand would get 60% of the profit. The group that wanted a partner to absorb 20% of the risk still has a 50% profit ($400k/$800k) or an average of 10% profit per year. The group that essentially acted as the risk absorber was able to make a 300% profit ($600k/$200k). This idea provides risk mitigation, at a price, to those that want to invest but are worried about losing more money. The risk taker is only at risk for the initial investment and has the potential to earn handsome returns.

I know financial engineering got the world into this mess BUT how are suppose to get out of this mess without financial engineering? Just because a bridge collapses does that mean we should never engineer and build another bridge? We must analyze why the first bridge (or economic model) failed and then avoid the same mistake. The financial meltdown last fall was the result of bets in the market by insurance companies and Wall Street institutions that risked more money than they had. That was a big mistake. My idea is does not call for such outlandish risk taking. My idea rewards those that have an appetite for risk and eases the mind of wary investors that are concerned the market has not reached bottom. If you would like to be a risk mitigator (i.e. the investor that puts up the first 20% at risk), please give me a call and I can point you to investments where 80% of the money is waiting for someone to take some of the risk.

Tuesday, March 3, 2009

Seeing is believing

I know it has been too long since I updated this blog. I write my best stuff (you can argue just how good the writing is) when I am inspired.

Yesterday I was helping a friend find a home in the $200,000 range and I was surprised by two things; first there are a lot of homes that used to sell for $300-400 thousand that are now listing in the $200,000 range and two, homes are selling like hotcakes in the low $200's. Since I do not buy homes myself on a regular basis I was caught off guard a bit by all of the activity that I witnessed. Granted, I live in Naples, Florida where it is now tourist season and there are lots of retirees with money to spend this time of year. I guess what really surprised me was the pace of the sales. I called a few brokers about their listings and before I could get more than an address out they interrupted me (politely) with "that one sold a day or two ago and we have a back-up contract". We are all the sum of our experience.
I like to use my family and friends as a benchmark for what is realistic. In other words, if my family and friends can afford something, then I think most people can. This yard stick of sorts has served me well in the past.. I was in a new development a couple of years ago and the project manager was telling me about all of the great amenities they had to offer. I asked what the HOA dues were and he told me "only $350 per month".. I not only balked but I must have looked disgusted as he followed with "you have to remember this is relative to other communities". What he was trying to say is "hey our dues are cheap!".
All I could think of was my parents who are not poor, but would never live in a place where after the home was paid-off they would still have such a large monthly payment FOREVER. Let's just say that place is not doing so hot these days.
Okay, back to our regularly scheduled blog. So in the process of showing my friend some homes we stumbled onto a NEW subdivision. I put emphasis on "new" because I have not seen a new project in years. Even here in Naples where the people with real money live. So I stopped into the sales trailer and was stunned to see a bunch of people (I am talking about a mob here) waiting to speak with a sales person. As I observed the festival atmosphere I could not help but wonder what had caused all of the excitement. Then it hit me - the asking prices for new homes ranged from $190,000 to $299,000 - these are prices my folks would pay. Hmm. Very Interesting.
My point is I think many builders, developers and flippers forgot about my parents and the MILLIONS just like them. When this foreclosure nightmare is over I can see what segment of the market is going recover first - the one that people can actually afford. I know my recent experience is local and does not reflect the rest of America or the world. But it is a ray of hope. It is one positive sign after many less than positive signs (Cliff Drop Off Ahead).

Friday, February 6, 2009

ULI Winter Institute 2009

On January 29, 2008 the Urban Land Institute hosted the 2009 Winter Institute and Pathfinder Awards in Naples, Florida. As the Vice-Chair of the Southwest Florida District Council part of my duties are to produce the Winter Institute program. This year's Winter Institute was the best one I have attended in the last 12 years. We were fortunate enough to have speakers such as the Chief Economist for SunTrust Bank Mr. Greg Miller, Ron Glass founder of workout firm GlassRatner, Florida CFO Ms. Alex Sink and former mayor of Pittsburg Mr. Tom Murphy. I spoke with many that attended the program and the unanimous consensus is the content was timely, informative and useful. Below are a few pictures from the event.

A link to the presentations as well as information on upcoming events can be found at: http://swflorida.uli.org/News/Event%20Presentations.aspx

Florida CFO Alex Sink and Ron Glass of GlassRatner Capital Group

Tom Murphy, former Mayor of Pittsburgh and Dave
Dave and Florida CFO Alex Sink

Ron Glass of GlassRatner and Dave

SunTrust Economist Greg Miller gives a 2009 prediction

Dave with previous Pathfinder Award winners and 2009 winner Nancy Payton of the Florida Wildlife Federation

Attendee's at the standing room only event

SunTrust Economist Greg Miller with Dave and a WI guest

Commissioner Jim Coletta, Dave Farmer and Collier County Planning Commissioner Dave Wolfley

Tuesday, January 27, 2009

This blog's for you

As usual I have been reading a lot about the real estate market and the stock market. I have accepted that I am a hard-core investor at heart. Part of the reason it has been a while since I have updated the blog is that every other writer seems to be writing about the same issues I would have written about. I generally sit down to write the blog when I am inspired by something. It is hard to be inspired when everything you read (books, newspapers, internet) you just shake your head up and down in agreement. It seems as though all has been said. Is there anything fresh to say? In the end, I write for you.

Locally here in SW Florida, privately owned land may be approaching a bottom. Bank owned land in many cases is still priced too high. On the housing side we have just the opposite occurring as privately owned homes are overpriced and banks are almost giving houses away. It has been reported the 825B Obama economic rescue package will focus a lot of money on infrastructure. I have even heard that Florida may get as much as 40B for infrastructure spending! I certainly think it is a better use of taxpayer money to build infrastructure than to bail out every company that has hit hard times (AIG, Citi, GM et al).

The new infrastructure plan, when fully implemented will (temporarily) create many jobs for those hit hardest by this recession - real working people. Don't get me wrong, I would love to make 40 million a year for mismanaging a company. Let's just say I am too worried by the newly unemployed CEO's that have helped to run the economy into the ground. I am very concerned about the good folks that need jobs to feed their families and make their house payments. Heck, I would hire them if I just had a project to put them on.

Alas, it is going to take more than you or I to turn the corner on this economic situation we find ourselves in. I believe we are planting the seeds today that will be our crop of success in the future. Just like any crop it will be a while before we are ready to harvest the fruit of our labor as a nation. Very few crops are able to be observed growing. From day to day, the field looks the same. As time marches on we will start to see changes that are positive. Sometimes a change is not something happening, rather it is the absence of something.

Take the nightly news. Last night it was reported that more than 30,000 layoffs were announced by a slew of companies. At some point companies will stop laying off workers; yet that will not make the news. The next notch of improvement will be companies of all sizes hiring new or laid off workers and that too will probably not make it into the news. Remember the saying; "believe nothing that you hear and only half of what you see" The saying can be applied today as well.

We hear all sorts of bad news and that makes us feel bad. But when you look around where you live, most of us are not in immediate danger of losing a job or house. One more comment on last night's news. It was reported the sale price of homes compared to a year ago was down some 15% in price. Okay, that is not exactly good news. What I think was under reported is the volume of home sales was actually up. I am sure a good reason for the volume up/price down was foreclosure selling. At least we know the buyers today actually have money to buy them (this is inferred since I do not know of many banks lending right now). Part of the problem we have right now is an enormous glut of existing homes for sale and the sooner we can get those homes sold and off of the market the better. This economy will improve. It will just take time before we see the seeds in our field sprout and even then you are going to have to look hard to see the new growth.