Do you remember who gave it to you? If you were like me, it was a grandfather or maybe an uncle. He carved the little truck on his workbench at home. It was just like the many other ones he had made for the other grandkids or nieces and nephews, except that this one was made with you in mind. So, he built it with love and care, making sure that it would do what it was built to do. And he delighted just to see you push it around the living room after opening it.

My wish for 2012 is that we take our workbench back to work.

It’s been a long three-plus years since the financial world was turned on its ear in 2008. We’re fighting harder than ever, just to return home with less to show for it. It can be discouraging when we look at the bottom line. But didn’t too much emphasis on the bottom line lead our society into its current situation?

Margins may be thinner, but our clients, tenants, and customers are still the same. They are hard working men and women who deserve our best work and from whom we can expect the same. A bit of goodwill throughout the next year may go a long way toward our collective stabilization.

So, let’s ennoble our businesses in 2012. Here’s a toast to quality products and services delivered at fair prices, done for the joy of performing worthy work.

May you, our friends, be blessed this holiday season and all next year.

From all of us at Elyton Partners, Merry Christmas and Happy New Year.

– Jimmy Buffett

There was a time when there were only three “professions.” Then, a “professional” was a clergyman, physician, or lawyer. And there was good
reason why the designation was restricted: of all occupations, those were esteemed for their great moral responsibility to society. Accordingly, the three professions required rigorous education before entry, adherence to ethical codes upon admittance, and a pledge of service rather than pursuit of personal gain.

We can talk much about how far short of those ideals the learned professions fall today, but that’s not my point. My point is that with the proliferation of “professions,” there has been an alarming dilution of the hallmarks of professionalism: education, ethics, and service.

How does this pertain to real estate? Well, have we ever called ourselves “real estate professionals”? Why, then, do we all have not just one or two stories of unscrupulous tactics in real estate deals, but only one or two deals where one or more parties didn’t try to beat someone out of a
dollar? And why do we see so much squeezing of dimes out of projects, while the product itself barely serves its occupants?

Maybe better than “I’m a real estate professional” is “I’m a real estate steward.” That might put the industry focus back where it belongs:
on the people who use property. Viewed that way, real estate projects begin to take on a character of service as investors, developers, and the host of people who make any project happen seek first the good of the end-user.

Along those lines, “risk/reward” is platitudinous, too. “Responsibility/reward” might be a more appropriate correlation. We all know that real estate can be lucrative and that those who accurately calculate the risk are poised to reap such benefits. But “risk/reward” says nothing about why we do what we do. The real estate industry has great responsibility in that every project is an opportunity to shape the ways people relate to one another by defining space and creating environments. An ethical consideration of our whys provides a far better (in a moral sense) foundation for returns than a simplistic risk calculation.

I don’t know when or how the current economic turmoil will end. But whenever and however, a change in our collective attitudes will serve our tenants, clients, customers—and us—far better than the platitudes of our past.

Lies, lies, lies—yeah! (they’re gonna get you)
Lies, lies, lies—yeah! (they won’t forget you)
- “Lies,” Thompson Twins (1983)

Did you know that 64.6% of all statistics are skewed? Another 23.1% are made up on the spot. Apparently, only 7 in 12 people know that.

So what are we to glean from the statistics in the press?  You know, those GDP and labor stats that the government revises again and again? Or how about that stat of all statistics—the one on which our entire economy allegedly hangs—the Consumer Confidence Index? (Am I the only one disconcerted by the fact that our economy is driven by a qualitative evaluation which has been reduced to a quantitative metric??)

The complexity of today’s markets defies over-simplification, yet our 24-7 news outlets do just that by incessantly “developing” financial stories. The press makes it extremely difficult to glean meaningful insight into real estate.

“So what?” you say, “The press will be the press.” True, but the press is merely symptomatic of a systemic problem. For years, real estate has been plagued by numbers ungrounded in reality. Our industry, with its back-of-the-napkin pro-formas, unfettered optimism, lack of prudent underwriting, and mispricing of risk is a contributor to the ultimately meaningless statistics from which we try to divine the next good deal.

The solution? Prudence and temperance. Back-of-the-napkin numbers are sufficient only for whom they are written—a couple of buddies at the bar, taking a first cut to see if a deal should be pursued. Those napkins are not a sufficient foundation for underwriting (yet we continue to see them in loan workouts). So, too, the 800% return in two years, as evidenced by said napkin, should be questioned when the beers have worn off.

Just think: in an ideal world, there would be no recourse financing at all. A real estate deal conceived with tempered optimism, capitalized with sufficient equity, and priced by the lender with an appropriate premium for the risk involved should stand on its own merits. If it doesn’t, there’s a strong argument that it shouldn’t be done.

Twain was right:  “There are three kinds of lies: lies, damned lies, and statistics.” But let’s be honest with ourselves: until we add “real estate numbers” to that list, we’re not admitting our problem. What real estate needs is a changed attitude, including transparency from all parties, vetted numbers, and prudent underwriting.

- Jimmy Buffet, “Changes in Latitudes, Changes in Attitudes”

The Great Recession has passed, and we’re now two years into “recovery.” So, what have we learned over the past four years? Have any of our attitudes changed? We can test ourselves by examining our platitudes.

Take, for example, real estate’s favorite platitude: “Location, location, location!” Really?! Tell that to the residents of Detroit. Or think about Manhattan: it was once a rocky, hilly island with a marshy perimeter inhabited by the Lenape people. If it weren’t for enterprising developers—those with vision like Gouverneur Morris, John Rutherfurd, and Simeon De Witt—Manhattan would not be the valuable real estate that it is today.

The problem with “location, location, location” is that it doesn’t begin to encompass the complexity of real estate in our time, much less the
responsibility of those who work in the industry. A better mantra, one that aspires to an actual ideal, might be “Ownership, partnership,
stewardship.”

• Ownership.
  Real estate is not a day-trade or even a three-year hold. It’s a 40 year asset class for a reason, and it comes with long-term responsibility.
• Partnership.
  That responsibility extends to and is required of all stakeholders—landlords, tenants, tenants’ employees and customers, property managers, real estate agents, architects, builders, and even bankers. (Bankers, I know you recoil at this, but get a grip. It’s a truth that you’ve been avoiding because lawyers are perched on your shoulder. You’d help yourselves if you regained a sense of commonality of
  purpose with your borrowers.)
• Stewardship.
  The ultimate purpose of ownership and partnership is stewarding an asset for future benefit. Real estate professionals don’t simply play in the dirt; they create communities—communities that continue to need shaping as they grow and develop over time.

So, let’s examine our platitudes and realign our attitudes. Remember that real estate is not an end itself. It has value only to the extent that it serves people. Real estate is, in essence, a people business.

So is this the beginning of a real estate recovery?

Depends on who you are. Consider this: TARP allowed the Treasury to bail out hundreds of banks around the county, ostensibly to keep banks and, therefore, credit markets from collapsing. On top of this, the Fed dropped interest rates to essentially zero. Complete collapse may have been averted, but credit stopped flowing as banks focused on resuscitating their balance sheets. Despite these measures to prop up banks, however, hundreds have been taken over by the FDIC. Many of these failed banks in FDIC receivership, in turn, have been purchased by larger banks (the only ones qualified to submit bids) pursuant to stop-loss agreements by the FDIC. The losses covered by these agreements are not based on the price paid by the purchaser for the credit; they’re based on the credit’s outstanding balance. That means that the purchasing bank profits no matter what the real estate collateral brings.

So, large banks have grown even larger while having profits guaranteed by the FDIC. Despite the guaranteed profit, these same banks are pursuing “every available remedy” against their borrowers, including personal guaranties. Every recovered dollar is not merely mitigation of loss, but pure profit on a bad loan!

I realize that not every credit at every large bank has a stop-loss covered by the FDIC, but there are enough out there to affect the market. As long as some credits are covered by stop-loss agreements which assure that timing doesn’t matter, the holder of those credits will delay, waiting for maximum profit. The bank can also drag its feet on other credits, knowing that losses on those can be offset by guaranteed profits. Banks that do not benefit from stop-loss agreements must aggressively manage their balance sheet and aggressively pursue borrowers just to keep up. Otherwise, they’ll fail. And when they do, the spiral deepens.

Instead of spreading the pain of recovery, the federal government has effectively concentrated it on smaller banks and, ultimately, borrowers. Shifting all these losses downward will continue to disproportionately ruin all but the largest real estate investors, just as it is ruining all but the largest financial institutions.

So who benefits from this nascent “recovery”? Right now, it looks like only the biggest banks and real estate investors. The average real estate investor may be fighting for a while yet to get out of the woods and return to doing what he does best—putting land to productive use.

Investing partners are falling out amidst the turmoil in real estate. Lawyers are urging bankers to disavow all notions of partnership with their borrowers. Even family partnerships are being tested by the current financial strain.

And Elyton Solutions is now Elyton Partners.

Seems contradictory, doesn’t it? In an economic climate where everyone fears the worst, where each is trying to position himself to protect his assets and defend his legal rights, Elyton Partners is hoisting the banner of collegial association.

So—why?

Simply put, it’s who we are. The spirit of partnership is the foundation on which we build client relationships. We sit on the same side of the table and focus on the issues. Our interests are aligned. Together with our clients we craft innovative strategies for complex real estate challenges.

We still find solutions, but we’ve changed our name to underscore that our focus is on our relationships with real estate investors. Nothing is impossible when we work together.

Solutions. Partners. Elyton.

If you’d like to find out more, give us a call at 205.533.9261.

(Some of us hold law degrees, so, of course, here’s our disclaimer: Elyton Partners, LLC is a limited liability company organized pursuant to the laws of the State of Alabama.)

“But I made a good profit!” So did the investment bankers at Goldman Sachs who pushed “[bad] deals.” There’s such a lack of accountability in society today that anyone can get away with just about anything. Regrettably, you can see such lack writ large on our American landscape. Over the past 70 years, our beautiful country has been all but covered up with ill-conceived, poorly-executed real estate developments built on a single premise: “the numbers work.”

I’m not saying that the world will all be alright if everyone hugs a tree. But you can do well while doing good. In fact, with an appropriately elongated timeline and an increase in a project’s internal velocity of money, you can generate far greater returns than you can with the cookie-cutter approach that most use. It takes a little more thought, but fortunately, there’s woefully little of that out there, so you’ll be miles ahead of the competition.

Just let patient capital be your touchstone.

The foundational principle of patient capital is a long time horizon. There is not going to be much quick, easy money in real estate for a while to come (when there is, again, watch out), so the real estate world needs to get used to the idea. A long time horizon shapes everything else about the investment. For example:

• Reasonable debt. The pinch of interest payments can hurt enough on a three year deal. Imagine the bite taken out of your apple over a longer term. Do you really want the bank to profit-share with you? Debt per se is not bad, but it does constrain what you can do with your development. You’re answering to a stakeholder whose interests are not aligned with your ultimate success. A proper debt load—even a healthy debt aversion—will return the profits to him who actually works to earn them.
• Less capital. Since you’re not spending someone else’s money (i.e., the bank’s), you have to manage your capital wisely. A quarter mile of asphalt is the minimum order? How about 100’ of brick pavers instead? Sure, the pavers are more expensive per square foot, but 100’ of pavers costs much less than a quarter mile of asphalt. And it’s more durable, requiring less maintenance (again, less cost) over the long term. Caveat: think “inexpensive,” not “cheap.” Vigilantly guard your capital!
• Reinvestment. Since you’re starting with less capital and keeping it invested for longer, you will have to rely on reinvestment to complete successive phases. Sold a house fronted by those pavers? Lay 100’ more, build four more houses, and do the same thing again. Work your capital hard. IRR may look slim on the front end, but by increasing the velocity of your capital, you’ll multiply returns every time it turns over.
• Quality. In order for real estate developments to make it in the long term, they must have good form and substance. For examples, look at old European developments as well as pre-WWI American ones. In them, parcels do not stand alone. They all “talk” to each other in a harmonious way and each says something of value. When form and substance are both present, in micro and macro, projects remain useful hundreds of years later. Do you really think your strip center has lasting power? A relentless pursuit of quality and usefulness will assure that your project will succeed.

Patient capital makes good sense. It also makes “cents” because when you deliver actual value in this day and age, people will pay a premium on account of its short supply.

This just scratches the surface of the idea of patient capital and thoughtful development in the new economy. If you’d like to discuss them further, give us a call at 205-533-9261.

Real estate lawyers advise their clients to set up special purpose entities (LLCs, partnerships, and the like) for each property. This is good advice for legal liability and asset protection purposes. The unintended consequence, however, of drilling into investors’ heads that each property and project stands alone is that the investor—and often the lawyer himself—thinks of each project as a stand-alone. But that view denies reality.

Projects are highly interrelated. You know this from experience. When a storefront across the street from your center goes dark, your property is affected. Likewise, when the bank forecloses on a property, the value of all similar properties in the area suffer.

Investors, too, are interrelated. Jack, Jim, and Johnnie are buddies. They co-invest on multiple projects. If one property loses a tenant, they may even fund that property’s deficit with the cash flow from one of their other projects. It’s robbing Peter to pay Paul. (Be sure to consult with your legal and accounting advisors before attempting a transaction like this—documentation is key!)

When the bank comes calling on one or more notes, though, Jack, Jim, and Johnnie usually retreat to their respective corners. The deep pocket then tries to protect his reserves. This puts him in direct conflict with the other two who are simply trying to preserve the shirts on their backs.

Inevitably, everyone—investors, legal counsel, and the bank—are looking at the property as a stand-alone. That is exactly opposite of what they should be doing. A comprehensive approach that involves multiple projects and their investors, and sometimes multiple banks, is much better. Real estate is a dynamic industry that defies reductionist thinking. Therefore, by approaching the situation with a view that the parties still have more common interest than disparate and that there is strength in numbers, maximum value can be realized from the project.

If you’d like to learn more, give us a call.

Probably because they’ve gotten away with having no specialized tools for the past ten years.  When the market was so hot that property turned a profit regardless of hidden conditions (and even despite obvious ones) in the property itself, or in its numbers, or in the configuration of stakeholders, what did it matter if you used an appropriate tool—or any tool at all—to fix them? 

Now, though, the margin for error is thin.  Far from covering up latent defects in property, information, or structure, the market is exposing them.  Finally, investors are pulling out their rusty toolboxes to fix the obvious problems, but they’re finding only hammers.  Seized by panic, they start swinging because they don’t know what else to do.

While the real estate industry was wheeling and dealing, the financial, legal, and relational structures supporting it became increasingly complex.  Unbeknownst to most investors, their once-simple projects became knit together in a convoluted web of partners, tenants, lenders, vendors, governments, and other real estate investors.  Then, the economic bottom dropped out.  Blindly swinging a hammer at this point may deal a blow that causes the whole house to collapse.

If you are in this situation, don’t panic.  Realize that you are not the only investor in this predicament.  We see it everyday.  Some have greater problems, some have lesser, but all have problems with one or more aspects of their real estate.  Those that think they don’t are deceiving themselves.

Addressing the issues skillfully requires a full toolbox.  It also takes the expertise to use each tool.  And it takes self-awareness to realize when you don’t have the tool or the expertise necessary. 

If you need a handyman, call us.  Elyton Solutions serves real estate investors in a way that you probably have not seen before.  We’d love to tell you about the results we’ve been able to help our clients achieve.

Punxsutawney Phil saw his shadow yesterday morning, so it looks like we’ll have six more weeks of winter.  And if you believe the pundits’ predictions for 2010, looks like we’ll have an extended winter in commercial real estate, too.

Do you feel like Phil Connors (Bill Murray’s character in the movie Goundhog Day), like you’re waking up only to relive the same day over and over again?  Are you mired in limbo, just drifting from day to day, hoping that tomorrow will bring the deal that will jump-start your business?  Have you tried everything—slashing staff, forebearing loans, making concessions, cutting advertising—but nothing has changed? 

Maybe it’s time to do like Phil.  In the movie, egotistic misanthrope Phil Connors finally gets over himself and begins to care for other people.  Hopefully, you don’t have as much personality work to do as Phil, but the principle applies to the real estate business: do things right.

What does that mean?  First, get your business in order from the ground up.  If you’re like most real estate investors, your investments are an amalgam of disparate properties and disjointed entities; find the synergy among them and develop a comprehensive strategic plan to maximize value.  Next, develop a business continuity plan to assure that when you die, you don’t leave a mess for your heirs and business partners to clean up.  Finally, tweak your information systems to deliver more timely, more accurate, and more understandable information.  When you do things right, you’ll make more money from your real estate in less time with less risk.

Take heart: spring is coming.  Despite Punxsutawney Phil’s prediction, it arrives on the vernal equinox every year.  So whether he sees his shadow, and we have six more weeks of winter, or he doesn’t, and we have only six weeks until spring . . . it’s the same difference.  In real estate, too, spring is coming.  Be ready when it arrives.

CLOSE UP – THE CLOCK: The digital clock-radio changes from 5:59 to 6:00.  The radio comes on, playing the chorus of “I Got You, Babe.”  Phil opens his eyes as Rita reaches over him to shut off the alarm. . . .