contrarian investing question - Posted by Bob Smith

Posted by Merez(IA) on February 03, 2006 at 22:21:05:

Hello Ray,

Sorry to hijack the topic, but I so rarely see the topic of master leases mentioned (I forget at the moment if they were mentioned in Dealmaker’s Guide, it’s been a while since I’ve gone back and paged through it).

As experience is one of the best teachers, I was wondering if you would be so kind as to share some of your experiences with them: the pitfalls, the benefits and many even a few details of actual transactions. Even if you have mentioned in the past that descriptions of some of your transactions would bore some people, I find them very interesting.

Thanks in advance.

contrarian investing question - Posted by Bob Smith

Posted by Bob Smith on January 31, 2006 at 13:53:47:

“Buy when there’s blood in the streets”, or so the usual wisdom goes. That suggests that I should be buying in sectors that have high current vacancy rates and/or unstable rents. The question then becomes “why should I believe that I am so much better than all those other presumably professional owners and have low vacancy and stable rents when I buy property in that sector?” What say you?

Re: contrarian investing question - Posted by ray@lcorn

Posted by ray@lcorn on February 02, 2006 at 10:37:07:


In my mind “blood in the streets” indicates the time when assets can be purchased far below current valuations or replacement costs, whether through foreclosures or other distressed sale conditions. Significant valuation discounts lower the carrying costs for the new owner. That allows acceptable returns, or the option of repositioning or redevelopment, that the previous owner didn’t have. It’s not that you do it better, but with a lower cost structure, and perhaps a new market position.

But buying in a sector or market just because it is down is foolish unless you also understand why it’s that way and that something is going to change.

When I see a property offered “below replacement cost”, my first question is “if given the chance to replace it, would I?” Quite frankly, many of those properties are functionally obsolete and are worth no more than the dirt value, and market conditions are usually the controlling factor.

The market may be in a total state of decline, or just oversupplied with the property type. Successful contrarian investing requires a keen knowledge of market dynamics, the ability to spot changing conditions, and the capacity to capture (or create) the opportunity.


try west side of Austin - Posted by Jimmy

Posted by Jimmy on February 01, 2006 at 09:08:09:

I am unqualified to comment on commercial properties, other than 1-8 unit residential stuff in certain part of East Texas. but if you are looking for some really nice, relatively new SEE-THROUGH office buildings, try looking along Highway 360 on the west side of Austin. tech-wreck still lingers. if and when this large volume of empty space fills up with suits and 100K salaries, the local residential market will spike upward.

Bring it ON !!!

Re: try west side of Austin - Posted by Bob Smith

Posted by Bob Smith on February 01, 2006 at 17:03:12:

Ok. So assuming these nice office buildings are actually for sale at an attractive price, how could I avoid making their problems (vacancy) my problems? Same goes for residential there; I sure don’t want to wait 300 days to resell.

W Side of Austin - Posted by John Merchant

Posted by John Merchant on February 01, 2006 at 11:41:31:

Good thinking.

As when does ANY state capital stop growing?

Answer: Never. That’s just reality.

“Gummint” spending never slows down…the economy otherwise might be down or slow, but not with the Big G. .

When I was a kid (back in Civil War days), one could have bought most of Austin for a pittance, but that’s ancient history and today, I can’t think of a better place for long or short term REI.

Embrace the Problem. - Posted by Jimmy

Posted by Jimmy on February 02, 2006 at 07:59:27:

commercial office buildings ain’t my gig. It takes big money to get into this business, and I’m just a little guy. whomever grabs these empties will need to have a deep enough ewar chest to endure the 2-3-4 years it will take to fill 'em up. but the rewards should be considerable. reminds me of Houston in the mid-80’s. \

I buy empty residential properties al the time. In fact, I prefer them to be empty and in deteriorating condition. That’s where I create value. I suspect, but do not know, that the same could work in office buildings. The ones in question here are newer, presumably in very good shape, yet empty.

Re: W Side of Austin - Posted by Jimmy

Posted by Jimmy on February 01, 2006 at 12:26:47:

no arguments from me.

this part of Austin built up in a hurry in the last 90’s, when Austin was one of the “Little Silicon Valleys.” a ton of growth and construction in office buildings, and then KABOOM.

State government is unlikely to absorb much of the excess capacity, because they have plenty of room downtown. The area of which I write is on the luxurious west side (Westlake Hills, Barton Creek, Rob Roy and other high end areas). It will take an influx of business to absorb this space, hopefully with great diversity this time.

This residential real estate in this particular area has been a terrible over the past 3 years (unless you were buying!!!). Days on the market is in excess of 300. I bought a house last May which was on the market for 420 days. properties which sold for 750 in 2003 fetch 550-600 now. they ran up quickly as the dot commers bought with abandon, and the fell back sharply when the dot commers diappeared. [contrast this with the real Silicon Valley, wich was hit harder than anywhere, but where residential real estate kept on moving up. go figure].

This area is still a buyer’s market. and the best school district in the state of Texas. In a couple of years, these empty office buildings out here will fill up, and we will see some excellent upward pressure on the residential side.

Re: Embrace the Problem. - Posted by ray@lcorn

Posted by ray@lcorn on February 02, 2006 at 11:39:59:

I agree. Your strategy of buying an ugly house in a good market works for commercial properties too. However, “ugly” may be somewhat differently defined. In this case it means it’s empty… and carrying an empty building is no fun.

But assuming the market has the fundamental prerequisites for future growth?such as the point John made below about Austin being a state capital?then the challenge is to devise a strategy that allows you to survive the lean years and still be alive when things get better.

That may mean buying the buildings so cheap you can afford to carry them. That’s what deep-pocket investors like Sam Zell did in the early nineties. (But he went too far the other way in San Francisco, buying at the top of the market in 2001, just before the dot com crash… but that’s another story.) Zell almost single-handedly created the REIT industry by buying scores of distressed assets so cheaply that he could afford to wait for the market to come back.

But that’s not a viable strategy for me… I’ve got to get a return from every dollar I invest or I will soon be out of dollars.

So when I spot a market poised for growth (and I’m not saying west Austin is… this is just the example we’re working with) I start thinking about ways to acquire or control property in a way that doesn’t bankrupt me in the process.

Possible strategies can include straight options, pre-paid leases, master lease with an option to purchase, exchange of other assets, or perhaps a sale with an owner-financed cash flow mortgage.

The key is to control the property without having to pay for it until the property can generate its own funds.


Re: W Side of Austin - Posted by Bob Smith

Posted by Bob Smith on February 01, 2006 at 16:59:25:

The real Silicon Valley is subject to a vile combination of geographic impediments (bay and foothills), smart-growth mandates, and environmentalist wackos. Any new development takes many years, and the “impact fees” top $100k/unit. It’s hardly surprising that residential real estate there keeps going up: supply is so constrained that it always lags demand.

Re: Master Lease til market grows - Posted by James CA

Posted by James CA on March 22, 2006 at 18:46:13:

I like master lease idea to control til market picks up. Can one easily structure a deal so that you won’t pay or pay a little monthly until say 1-2 years when business pick up?

Can you explain a little about staigth options, and pre-paid leases?

I am interested in Texas maybe small commercial property or 4plex.