November 17, 2009

Burning Out The Bottom Of The Pot

This weekend I finished winterizing the homestead. In a flurry of activity, I turned off the irrigation and drained the pipes, hauled myself up onto the roof to clean out the chimney and service the swamp cooler, tucked some extra insulation into the chicken coop where a brood of seasonally-confused chicks is fledging. Then I harvested the last of my pumpkins and tomatoes, and left some little strychnine treats for the gophers who are trying to set up a new household under my artichokes. It all felt so tidy when I had finished that I couldn’t help congratulating myself. I may not be set to weather the financial storms of this coming winter, but at least I’m reasonably certain of getting through the next few months without starving or freezing to death.

I was enjoying a cozy fire and a glass of cabernet when I got a call from my buddy Arla. Several years ago Arla’s husband died and left her a nice life insurance policy and a stack of hospital bills. She jokes that his untimely demise was the most productive thing he’d done in his working life, because after probate she sold their large Bakersfield home at the top of the market, moved into a rented condo, and invested the proceeds in a small strip mall—which quickly filled with tenants. Anchored by a franchise take-out, the rents made her, if not a wealthy woman, at long-last a fairly comfortable one.

But now there’s trouble brewing. Despite her seven-figure down payment, the interest-only loan that financed the place is resetting in March and a balloon payment of nearly a million more is looming. Two of her five tenants have given notice as of December 31, and a third is a month behind on their lease. Knowing I was “somewhat bearish,” as she put it, on the whole real-estate-as-investment thing, she called to tell me that in spite of her 50% equity position in the property, (good,) the lender (first the defunct GMAC, now the soon-to-be-defunct Capmark,) has refused to either refinance or re-negotiate the loan (bad,) and is demanding payment in full when the note comes due after next quarter (very bad.)

Although she’s tried to short sell, no one else seems to want to touch her little empire because of the location, (Bakersfield, one of the underwater capitals of the world,) and the fact that its future occupancy is now in question. The gift shop and the salon will soon stand empty, and the clothing boutique is obviously on its last legs. The food joint is hanging on, but doesn’t have the cash flow to justify taking over the loan. Apparently a medical supply concern expressed interest in leasing one of the spots, but because of her uncertain financial status the partners decided to pass on the location.

She owns no other substantial property she can use to secure the loan, so it’s not looking cheery for her on that end either. Even the city council has turned their backs on her, and she’s thinking about withholding the first installation of her ’09-’10 property tax unless they grant her some relief –even temporarily.

Alva confessed to me that she’s seriously considering a walk-away. On a million dollar investment—her only hope for retiring with more than her survivor’s social security stipend to keep her going. So, what did I think?

Well, I think she’s not alone. According to Moody’s Investors Service, commercial real estate prices have fallen 41% in the last two years alone, and American banks are now on the hook for nearly 1.7T in US loans secured by these properties. It is estimated that in the next three years, $1.5T in loans are coming due, and if Arla’s story is any indication, a lot of these loans are going to default.

Which begs the question. Is a bailout likely for the lending banks holding commercial real estate as collateral?

Let’s ask our old friend, the Fed.

In a policy announcement released 10.30.09, the Fed got downright cagey, even coy.

Of particular interest is the following:

“…(we will)…support prudent and pragmatic credit and business decision making within the framework of financial accuracy, transparency, and timely loss recognition…(emphasis mine.)

“Timely loss recognition,” eh? That’s a good start. Then it goes on to say,

“…Financial institutions that implement prudent loan workout arrangements …will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications…”

“Prudent loan workout arrangements,” eh? “Will not be subject to criticism?” This is staggering stuff. It would appear that the Fedsters are both acknowledging that there is big trouble looming for banks with CRE holdings, and is telling them that they’ll “not be subject to criticism” (!) for write-downs; in essence handing them the legalese version of “you’re on your own, suckers.”

As Arla has discovered in her search for refinancing, there is no Fannie Mae or Freddie Mac equivalent for strip malls. And without a GSE conservatorship for commercial real estate, it would appear that the government largesse that residential loan-owners have come to rely upon will not be forthcoming for holders of CRE-backed loans.

The implications here are pretty clear. It the FED is unwilling to quantitatively ease commercial real estate exposure, as it has for residential mortgages, the economy is in for a bumpy ride. Those banks that have not used the ongoing rally to dump their commercial mortgage backed securities or CRE holdings might want to do so as quickly as possible and as quietly as possible if they intend to remain solvent.

No bailouts for commercial real estate implies no bailouts for commercial real estate builders either. The upside of this for the likes of us is that maybe at long last Washington will get the idea that housing prices are going to fall eventually—their best intentions to stave off the carnage notwithstanding. And those of us who have so patiently bided our time waiting for this to happen may now have some real hope of it occurring within our lifetimes.

It makes sense from a political standpoint, of course. While individual homemoaners can vote, (and there are millions of homes in foreclosure right now, with many more expected before the 2010 elections.) Builders (and their in-house lending arms) can only lobby and give money– and builders are running out of money these days. And they’re giving their unfinished projects back to the lenders. Who in turn give them back to the banks that the Fed says it isn’t going to bail out of their gone-bad portfolios. Who sell them to the hedge funds that…aHA!

So what happens to all the actual commercial property secured by these non-performing loans?

It would seem that vulture hedge funds are “snapping them up”—with a little help from the FED, as evidenced by the aforementioned policy announcement. Why not buy defaulted commercial property at pennies on the dollar when the government is not only encouraging you to do so, but de facto financing the whole operation by infusing investment banks with TARP funds to facilitate the deal?

Indeed such a seemingly far-fetched assumption would tend to be supported by recent announcements like this one, brought to our attention by Ben Jones:

“…SunCal Cos. bought 1,072 finished and partially finished residential lots spread across 11 Kimball Hill Homes’ communities throughout Las Vegas and Henderson for $20 million, or an average of $18,727 (emphasis mine,) per lot, from KHI Post Consummation Trust. It was an all-cash deal financed through D.E. Shaw Group….”

(D.E. Shaw Group, by the way, is the firm Larry Summers managed between his dismissal, er, resignation as president of Harvard and his appointment as Director of Obama’s National Economic Council.)

Taking it a step further, what happens when these closely-aligned-with-PPIP equity firms own a substantial portion of America’s commercial real estate a few years hence? Do they turn it over to the government to pay back the taxpayers who funded TARP? If Chris Dodd’s 1000-page giveaway to hedge funds like D. E. Shaw is enacted, it’s not likely. Check out this excerpt from page 438 of this Senate discussion draft. (Warning: PDF)

‘‘(ii) EXEMPTION.—The Financial In
stitutions Regulatory Administration by
 rule or order, as FIRA deems necessary or
appropriate in the public interest, may conditionally or unconditionally exempt a swap dealer or major swap participant (emphasis mine,) for which FIRA is the primary financial regu
latory agency from the requirements of
 this subsection and the rules issued under
 this subsection with regard to any swap in
 which 1 of the counterparties is—”

So, all those CRE-backed CDO’s and credit swaps are going to be exempted from regulation and oversight in the “public interest?” How very convenient.

Is Professor Bear’s “Megabank, Inc.” destined to become commercial American real estate’s Fannie Mae and Freddie Mac? That’s a lot of unoccupied commercial property to landlord and manage; they can’t just let it sit around gathering termites and amassing delinquent property tax bills. At some point, someone is going to have to collateralize it, or sell it or lease it, and not incidentally, make someone—presumably someone aligned with Megabank, Inc.,—a whole lot of money. My bet it isn’t going to be Arla.

In the coming weeks it will be interesting to watch the turf war between Sheila Bair’s FDIC and the more populist Elizabeth Warren’s Congressional Oversight Committee as they battle it out for consolidation and regulatory reform of America’s financial services industry. Whether we end up with a post-Soviet style giveaway to favored cronies, or a marginally more equitable and democratic redistribution of these properties remains to be seen, but unless Congress declares a jubilee, or passes a 0% interest, 99-year repayment plan for small business owners seeking to refinance their interest-only loans, the whole economic stew may soon be burning out the bottom of the pot. And guess who gets to scrub up the mess?

by ahansen

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Comment by Ben Jones
2009-11-17 07:51:29

Byline’s at the bottom.

Comment by Jingle Male
2009-11-17 14:48:49

A Hansen,

If Alva would like a second opinion and some advice from a professional with 30 years in the commercial real estate business, please have her e-mail me at paladin@paladinreports dot com. I am not very busy these days and am willing to invest a few hours to provide an analysis and strategic direction which will benefit her situation.

I know the lender very, very well and am willing to help out your friend.

Sincerely, Paladin

Have Gun, Will Travel
Wire Paladin, San Francisco

Comment by ahansen
2009-11-17 15:12:12

Paladin! You’re alive! Many of us were afraid Mozillo had sent a hit squad after you….

Thank you very much for your kind offer, I’ll forward your contact info to her.

Comment by Jingle Male
2009-11-17 15:30:47

You make me laugh <;-o}.

I have been lying low for a while just minding my own business, getting married, traveling a bit and buying a couple of houses which Mozilo’s old firm is selling. Life is strangly good, but with a very unsettling undercurrent. Sort of like your Alva and Bakersfield must be feeling….

I keep wanting to write the story about my cloak and dagger travails with the mortgage fraudsters, sub-prime lenders, the FBI, the IRS, C-BASS, and the scammers like Fortress Investment Group! However, the final chapters are still being written. Mozilo and his Countrywide cronies may get the final hit, but only time will tell! None of the investigations I triggered in early 2007 have closed!

I will post it here when they do!


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Comment by Arizona Slim
2009-11-17 15:32:16

Paladin, I went to your website. Are you still accepting fraud reports via the site?

Comment by Jingle Male
2009-11-17 16:00:45

AZ Slim,

The web site is still up, but I was overwhelmed with over 400 submissions in the first year. I worked thru quite a few that looked promising, but was overwhelmed to say the least. Unless there is a lot of information included with the submission, it is just too laborious for me to develop it into a proper submission to the FBI or the IRS. If you have something with full name rank and serial number, I can get it into the right hands at the proper agencies.


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Comment by aNYCdj
2009-11-17 16:37:34


Great job, now why is Moz still here waiting to be caught?

I figured with his $150 mill costa rica or on an island in the pacific, that should have been a no brainer.

Comment by crush
2009-11-17 22:05:52

Oh, I lost another loan to DITECH!

Comment by aNYCdj
2009-11-17 08:28:07

Great post Ahansen, my idea is we need to do this to credit cards too…maybe 0% for 3 years and all monthly payments to pay down the principle, and it lowers your credit limit then at 50% paydown you can apply for a credit increase.

$5000 cc x $100 month after 25 months the balance is $2500 and you can apply for increased credit at a reasonable interest rate say under 9%.
but unless Congress declares a jubilee, or passes a 0% interest, 99-year repayment plan for small business owners seeking to refinance their interest-only loans

Comment by NYCityBoy
2009-11-17 09:50:00

DJ, should we do that for credit cards just because you are carrying a balance? It seems everybody wants their own self-interest served. Why does anybody deserve preferential treatment? It shouldn’t be up to the government to pick all the winners and losers. That is what got us into this f—ing mess in the first place.

Comment by aNYCdj
2009-11-17 10:14:13

Its not the balance i worry about its the fact that $$ittbank still can jack up interest rates for no reason until the new law takes effect….and they still can increase the rates after the it takes effect if the Fed raises rates and you have a variable rate cc. Thank you Bernakeee

I used to pay down all my cards with all the holiday parties and NYE i used to do. And had money left over to put in my IRA.. so it was never a problem before 3years ago….

Comment by Blue Skye
2009-11-17 12:01:51

Ironic to put income that you weren’t reporting into an IRA. Cash back on every deposit, priceless.

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Comment by BKlawyer
2009-11-17 11:37:54

No -Congress needs to unwind the bankruptcy laws to prior 2005 changes so more people can qualify. They need to raise the Chapter 13 debt limits ($336k unsecured, 1,010,000 secured debt) so people who made (agreed not-so-bright) decisions to purchase multiple properties or incurred massive debt to build businesses can still operate.

Comment by Wickedheart
2009-11-17 12:08:25

I only have a couple of cards. Funny I keep getting notices of changes in the terms on my cards. Amex is no longer charging a fee for over limit and no penalty interest rate.

Interest now accrues from the date of purchase unless you pay in full or haven’t carried a balance for the previous 2 months. Here’s where it got interesting, they are reserving the right to deny any request for authorization for a charge , even if the account is in good standing and won’t put you over your credit limit.

On one hand it really ticks me off on the other hand maybe they want to put a stop to the old run up your cards before you declare bankruptcy.

Comment by DinOR
2009-11-17 12:17:09


Given your vocation, I can well see why you want the limits/applicabilty greatly raised. But considering most of the bad debt we’re discussing arose from a “business” involved in flipping/slapping up homes, I’m none to eager to do ‘anything’ of a generous nature.

BK laws were originally intended to allow normal people to take ‘normal’ levels of risk. Not to cushion the fall for insane people to take INSANE levels of risk!

Besides, just pick up the paper, why right here in Portland, OR most of the major builders have already picked themselves up by their own bootstraps ( after stiffing banks, suppliers and employees! ) and are ‘moving forward’. Well, why do “I” care?

Sorry my friend, I say screw ‘em. Many of the multi-flippers were gaming the cap gains exemption ANYWAY and should have been structured as LLC’s etc. But they didn’t want to do ‘that’! Now they want f-u-r-t-h-e-r leniency? Please tell me you’re kidding.

Comment by ahansen
2009-11-17 12:29:57

“…incurred massive debt to build businesses can still operate.”

To do it all over again?
You are definitely in the right racket, BK. You’re probably the only growth industry that even has a chance in this economy. Well played, Sir!

Comment by DinOR
2009-11-17 12:46:44


My thoughts were similar in that my understanding of BK laws is that they’re designed for normal people to take normal risks ( not insane people taking ‘insane’ risks! )

How would this be anything we’d want to encourage more of? Just curious?

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Comment by ahansen
2009-11-17 14:46:57

I suspect because it’s widely believed among policy-makers that it’s the entreprenurial risk-takers who drive our nation’s economy. Encouraging them to keep plowing money into the system with new businesses is one sure-fire way of collecting new fees, taxes, start-up costs, outlays for equipment and furninshings, payrolls, etc. Innovation and job creation are Good Things in our society.

Alas, the collective gamble blew up in the policy-makers faces this time because they didn’t bother to keep tabs on who was taking a legitimate business-creating risk, and who was gaming the system via those risks’ derivative financial instruments.

Bankruptcy certainly beats putting millions of otherwise productive people into prisons where they cost society money to maintain and can’t pay taxes, but the process, like any public system, can be serially abused. That’s where gatekeepers like BK come in.

Comment by DinOR
2009-11-17 16:07:24


Well, long before derivatives like CDS’s came into play, this occured more or less at street level. We should also consider the individuals and businesses that form her tenants as well.

But before we invoke mental images of debtor’s prisons, I don’t believe what the founding fathers had in mind when they crafted BK law was what we see before us today? Posters here have noted that this is a right and proper safety valve to prevent people from accruing ‘too’ much debt.

I just don’t happen to think it applies nearly as well when you had legions of people that equity-skimmed their primary res. to put 10 grand on 20 homes? Definitely skirting the issue when you want to profit like a ‘business’ but be protected under ‘personal bankruptcy’ laws, hmm?

Comment by pismoclam
2009-11-17 18:46:04

Why should the ‘taxpayers’ pick up the slack for some losers who have made wrong business (personal) decisions. Oh, I remember, the Mesiah will set you free (with my money). There is no free lunch unless you are a member of Acorn, the SEIU, or Democrat party. This Obama depression will not be over until the underwater housing and property gets foreclosaed and flushed out and values go back to the mean. 52% of the population gets a government check. ‘Bring on the bread, grain and circuses (NFL)’, we’re toast.

Comment by SteveH
2009-11-17 21:23:51

The Obama depression? Where have you been for the last eight years? Obama’s been president for what, 10 months? And he caused all this? Get real. How short your memories are, and how maleable. Pop quiz: Who was the last president to have a balanced budget? Bush? Nope. Guess again. What a crock you Repuges are dealing. How about some personal responsibility (that you are so fond of mentioning)?

Comment by combotechie
2009-11-17 22:20:48

“Who was the last president to have a balanced budget.”

The question should be: Who was president when CONGRESS presented a balanced budget.

But, I get your point; I hope you get mine.

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Comment by GrizzlyBear
2009-11-17 22:32:11

Ignore his partisan BS. He’s been spewing it here, all over Marketwatch, and god knows where else. He blames Obama for every problem in his life, and in this country. Funny how he wasn’t upset about “his money” when it was lining the pockets of Blackwater, Haliburton, and every other corrupt business owned by corrupt corporate fat cats, politicians, and the well-connected. Pismoclam might just be Dick Cheney.

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Comment by WT Economist
2009-11-17 08:31:17

I’m writing a report on the Boston office market now, and as I look over the data I’ve become convinced that the economy, in a real sense, has been in recession since 2000. The response to its onset merely created an unreal asset price and consumption bubble.

And the response to the collapse of that asset price and consumption bubble, instead of turning around the real economy, is another one.

As companies shed workers and don’t invest in plant and equipment, and existing companies disappear and are not replaced by new ones, our productive capacity goes down. Low interest rates are creating a stock bubble, not lending for investment. Cash for clunkers and home buying subsidies are pumping up imports and the federal debt, not jobs.

Comment by ahansen
2009-11-17 12:33:28

At some point, could you link to your report and maybe discuss it further here? I’d really be interested to see what you’ve come up with. Thanks.

Comment by shelby
2009-11-17 08:47:30

Why would anyone in their right mind tie up ALL their money in RE?

And in the arm-pit of California (Bakersfield) no less!

Anyone that’s lived in Cali for more than 20 years knows it’s one of the most cyclical RE Markets in the Country!!

Comment by NYCityBoy
2009-11-17 09:58:58

This is another case of all the eggs in one basket.

Frau Hansen’s story was good and illustrates a lot of things currently taking place. First, sadly her friend deserves to lose. That is what capitalism is all about. She chose to take a big risk and that risk is not panning out. The first person to pay the price from her decision should be her. Unfortunately, at her age she will never be able to get that money back and will probably have many miserable moments in her Golden Years.

The fact we are asking if CRE should be bailed out shows just how pervasive the government’s (Fed) folly has been. When you are selectively bailing out you make some happy and some really unhappy. You create a contorted system that no longer has anything to do with fairness. Capitalism is supposed to be harsh but fair. This is not capitalism.

We can conclude that the big boys have nothing to fear from CRE. The little people will not be so lucky. Bernanke will see to it that JPM and Goldman come out of this just fine, stronger than ever. People like Allena’s friend will not. This is the current state of America and something is surely rotten in the state of America.

Comment by polly
2009-11-17 11:36:42

Why was she clever enough to see that she should sell her house at the top of the market and rent a condo and then couldn’t see that a RE readjustment was going to hurt strip mall income as well?

Ahansen? Any ideas on how she got half so right and half so wrong? Or was it just confidence that the 50% downpayment would protect her from just about anything?

Comment by ahansen
2009-11-17 11:50:26

I think it was a sentimental decision, Polly. Just pure luck.
Her husband dropped dead one afternoon in 2005 (?) and rather than wander around in a 4 bd 2 ba house with all those memories she put it on the market shortly thereafter. It sold almost immediately, because it was adjacent to a tract of land that was about to be zoned R1.

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Comment by polly
2009-11-17 13:13:05

Hmm…interesting. So there was no special insight into the market (I guess that is why she is coming to you a few years later), but just an emotional reaction to not wanting to be alone in a house where she had previously been part of a couple.

I wonder if all the assets being snatched up at pennies on the dollar will end up being all that valueable down the road. Oh, I’m sure that they will be valuable eventually, but hedge funds are not really known for their patience. Good luck to anyone who is still around who helped engineer PPIP if the hedgies do end up making a killing on this stuff. My guess is that we will hit a “straw that broke the camel’s back” situation rather than a “oh, another make the rich people richer using my money - shrug” moment. Anger, not ennui. Not sure how long it will take or what form it will take, but it will happen.

Comment by mtnbikegirl
2009-11-17 18:41:22

What sucks is that there are much smaller investors (say 1-5 million) that are willing to step into the market and buy but can’t get out of the starting gate.

Comment by NYCityBoy
2009-11-17 11:50:54

It sounded like the first event was akin to the blind squirrel finding a nut.

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Comment by ahansen
2009-11-17 12:07:49

Which turned out to be a castor bean.

Comment by ahansen
2009-11-17 14:49:31

Agree 100%, NYC.
Just for the record, though, I’m not a “Frau.” I’m a crank.

Comment by Bill in Los Angeles
2009-11-17 11:01:30

Because they are Trump wannabes and they listened to Robert Kiyosaki pump up the idea of being a landlord (which was after Kiyosaki cashed out most of his rentals and got into silver and gold)!

Same situation with stocks after age 50. At age 26 I would be 90% into stock mutual funds and 10% in T-bills. But 55% equities is fine for me nowadays.

Comment by NYCityBoy
2009-11-17 11:53:10

How dare you badmouth Robert Kiyosaki. He is so wise. He knows about being rich. Ha ha.

We had a consultant come in a few weeks ago. He reminded me of Robert Kiyosaki. There was definitely some resemblance. I gave him a shot to the nuts, just on principle.

Comment by AQIUS
2009-11-17 13:21:21

” I gave him a shot to the nuts, just on principle.”

had to read that twice . . . and laughed twice as hard!

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Comment by Ol'Bubba
2009-11-17 17:57:07


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Comment by SMF
2009-11-17 13:18:53

As far as I am concerned, those that invested in CRE committed the same mistake as those who ‘invested’ in housing.

My in-laws almost got suckered into purchasing an old building (that would need heavy repair soon) for $1 million+. The rents collected were $9000/month.

How would that pencil out financially?

The woman should have made a realistic ROI calculation prior to purchasing the building.

Comment by az_lender
2009-11-17 22:39:13

In the case at hand it sounds as though her pencil just assumed full occupancy forever, and no decline in likely rents.

Comment by cobaltblue
2009-11-17 09:11:28

Hi Ahansen,

This was an absolutely first rate treatment of the subject, IMHO!

I’ve always enjoyed your writing style.

Just out of curiosity, are Decoy and Arky still at your place? You might have mentioned something but I missed it if you did. I have thought often about the difference they may have made. I really appreciate the articles you’ve written and thank Ben also for providing you the opportunity on his blog.

Comment by DinOR
2009-11-17 09:55:19

“first rate treatment”


And it pains me to see this. Unlike legions of Casey Serin’s, this was a person that put a fair amount of forethought into executing her plan. All throughout the build up, pin prick and subsequent debacle, I’ve maintained that investors like this ’should’ have fared better?

But w/ skittish ( read freaked out ) lenders exercising their right to an acceleration clause, I can’t write a happy ending here if we wanted. Sad.

Comment by Prime_Is_Contained
2009-11-17 11:41:17

“All throughout the build up, pin prick and subsequent debacle, I’ve maintained that investors like this ’should’ have fared better?”

Why “should” she have fared better, DinOR? She ignored all the basics of investing!

First, she did not diversify.

Second, she did not understand the space she was investing in. This CRE bubble could be spotted a mile away if you looked at the fundamentals.

Third, her investment was not age/time-horizon/risk-tolerance appropriate.

Fourth, she doesn’t appear to have a grasp of the risk/reward shift of leverage, which bears heavily on point (3).

She deserves to lose big-time: she invested 100% in a single asset class, in a single location/neighborhood(!), with fairly high leverage (2X? 3X? the story doesn’t say, but if it were no leveraged, she would not have a mortgage on it).

Comment by DinOR
2009-11-17 14:03:02


I think everyone’s gotten me a bit wrong here? I’ll never argue your points ( as they’re the very same ones I t-r-y to make every day to people )

My point was that in LIEU of being able to talk this nice lady out of RE investment -altogether- in the mania that led upTO this debacle, this would have been the better choice over say buying multiple “upscale” homes ( that somehow mystically were going to be “rented out” ) based on a commission-based UHS’s “projections”?

In ‘my’ estimation her most glaring error was her time horizon, as you’ve noted! But let me ask you this, had she invested in virtually any other public/non- public REIT ( w/ all their “professional management” ) and coast-to-coast diversification, would she have fared any ‘better’?

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Comment by NYCityBoy
2009-11-17 14:28:40

She was in a position to play prevent defense. There was no reason for her to throw a hail Mary.

Comment by DinOR
2009-11-17 14:47:12


No offense but that is a vast over generalization. Of course even at her time of purchase, I’m sure the majority of posters ‘here’ would have concluded that equity markets were grossly overvalued at the time as well?

The point ‘is’ that huge swaths of REIT’s are no longer paying out ANY dividends at ALL! So here ret. would have been frozen up in in “broadly diversified holdings” of which ( ain’t none of ‘em paying out JACK! ) Oh and they’ve closed the Redemption Window as well!

So good luck getting your money out. I just think there’s been way too much armchair QB’ing on this one. Again I have plenty of friends with all kinds of experience on this and they’re pulling their hair out too.

Comment by NYCityBoy
2009-11-17 16:28:06

At the time she, ahem, “invested” every bank in the country was giving out 5 year 5% CDs. She could have dumped at least half into that. I hate to disagree but this was a hail Mary pass. She just wouldn’t admit it and I’m sure like so many others wouldn’t listen to anybody that was pointing that out.

She broke all the rules. Sometimes it works. Sometimes it doesn’t. In this case, it didn’t. Her pass sailed into the 3rd row.

Comment by DinOR
2009-11-18 08:29:19


Not to further… buttress my claim, but we are looking at all of her designs in retrospect. While we’re at it, a 5% return would have only equated to $25k a year in TAXable income ( and good luck living off that! )

Of course, ‘now’ a 5% CD ‘looks’ like a Godsend, but the truth is ( as evidenced ) that wouldn’t have lasted for long nor provided any kind of long term solution? In addition, many of the smaller banks that were offering Brokered CD’s are uh… no longer in business and have simply returned depositor’s principal, and nothing more.

I think lastly, this gal wanted to have something to ‘do’ in retirement and stay active after her husband’s passing. I just don’t think there’s any right or wrong moves here, just ‘her’ personal choices, and you still haven’t begun to address the smoking hole that is commercial REIT’s that ’should’ have provided her “diversification”. This was a great Case Study and it’s a shame in our “Lust for da’ Bus” we never gave it the gravity it deserved.

Comment by az_lender
2009-11-17 22:50:25

re diversification. Half of the reason why I do not own a house is that over half of my money is in home mortgages. Very very very lucky home mortgages with a default rate of zero since 2003, but home mortgages all the same. I’d have to be nuts not to have large positions in cash, cash equivalents, some mix of bonds, etc. And am not owing anything to anybody. I agree that Arla made an inappropriately large and inappropriately leveraged bet, and, in NYCB’s words, the first person to pay the price should be Arla. If Paladin can help her negotiate some forbearance, well, that’s fine; but if not, no Arlatarpa.

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Comment by michael
2009-11-17 12:45:01

“…was a person that put a fair amount of forethought into executing her plan”

if i had a million bucks…i could not fathom putting all of it in a strip mall.

just cannot fathom it.

Comment by DinOR
2009-11-17 13:28:10


We have to be consistent. All throughout the run-up one of the core issues BB’s brought to the forefront was an absolute “lack of skin in the game” on the part of res. RE infestors.

Now we have a gal who’s LTV was 50%, and… we’re going to jump down her throat for ‘that’! It’s possible ( given her equity position ) that the lender didn’t even bother to look any further? Which wouldn’t surprise me given the attitudes at the time.

Still, if she can find a way to get through this time, she’ll fare a lot better than Casey Serin, who last I heard could be looking at hard time. To be truthful, these are issues that ‘could’ have arisen, just w/ changes in traffic patterns or the fortunes of local residents! I know a LOT of CRE owners and their assessment is that it’s tough even in the best of times.

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Comment by ahansen
2009-11-17 12:05:48

Thank you, blue.
RK the wolfhound and Decoy the mastiff are both curled up with the cat, snoring in their hay-bail dog palace even as I type. A goofier, sweeter couple of lunkheads ne’r lived, and other than an extreme aversion to large carnivores venturing onto the property in the middle of the night, you’d never know of their big adventure. I try not to make too big a fuss over them, however, because they both outweigh me by about 2:1 and there’s nothing more rowdy than an amiable, but ill-mannered wolfhound. They do get fed pretty well, though; both out of gratitude and as a bribe against viewing me as anything other than their supreme lord-ess and master.

Right now, I’m defrosting the give-away turkey I got at the grocery store for our dinner tomorrow. We’ll gnaw it to vapor together in the dog palace. (But I’m not sharing the wine with them, no matter how much they beg.)

Comment by ahansen
2009-11-17 13:16:35

Thanks, Blue.
My post to you still hasn’t shown up, but yes, both the hero dogs are alive and frolicking.

Comment by Blue Skye
2009-11-17 09:20:24

Sorry about your friend Arla. I’ve a couple in similar situations, looking over the edge.

In round numbers, she has already lost her entire equity. It wouldn’t be prudent for the bank to give her essentially a no money down loan on the property you describe.

The Fed can’t hold everybody up (sorry for the double meaning) at once.

Comment by Arizona Slim
2009-11-17 11:34:00

As Arla has discovered in her search for refinancing, there is no Fannie Mae or Freddie Mac equivalent for strip malls. And without a GSE conservatorship for commercial real estate, it would appear that the government largesse that residential loan-owners have come to rely upon will not be forthcoming for holders of CRE-backed loans.

I can’t help but hear a lot of footsteps out there. They’re the footsteps of the CRE walkers-away-ers.

Another thing that bopped me over the head about this post was the makeup of this strip mall.

Quoting from up above, we have “…The gift shop and the salon will soon stand empty, and the clothing boutique is obviously on its last legs. The food joint is hanging on, but doesn’t have the cash flow to justify taking over the loan. Apparently a medical supply concern expressed interest in leasing one of the spots, but because of her uncertain financial status the partners decided to pass on the location.”

Folks, I’ll just say it from my little perch here in AZ, but a strip mall with such a retail mix (gift shop, salon, food joint, and possible med supply concern) does not make me want to head over for a look-see. Seems like every little biz in the place is based on consumer discretionary spending, and when that magic potion dries up, look out.

Comment by NYCityBoy
2009-11-17 11:57:02

It is clear this woman had no business investing in a strip mall. Maybe if she had 30 years of experience running strip malls. This was clearly not a well thought out plan. Like so many other people Allena’s friend is sympathetic, but only up to a certain line.

I know so many people like her friend that I tried to warn and they just would not listen. They would pout like little children. They, too, are sympathetic, up to a point. But in the end they must pay for their arrogance and bad decisions. I think I will have a Snickers bar.

Comment by DinOR
2009-11-17 12:28:02


Whoa! Ahem, unlike MY… ‘former’ landlord, at least there -was- an expectation of positive cash flow! So many DH’s flocked to res. rentals fully aware there was no way in hell they’d pencil out?

We can argue that maybe B’field wasn’t the brightest choice..? But, it’s that very neg. cash flow that’s driven so many of these rentals -back- onto the market, oddly all at the same time.

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Comment by varelse
2009-11-17 12:09:03

There is a similar failing strip mall near where I live…the tenants are a pizza joint, a tanning salon, a wedding dress rental shop and a wedding photo shop. The strip malls are built without a plan and space is rented out on a first come first serve basis. It’s a pracitcal way to go about it but not necessarily a recipe for long term success. Alot of these little shops seem more like hobby shops for the wives of rich investors, so they can feel like they’re doing something useful.

Comment by Chris M
2009-11-17 12:43:49

I drive by a strip mall in Elk Grove Village, IL every day that has had zero tenants for over 12 months now. Just down the street are two empty 250,000sf warehouses. I bet there are over a million square feet of vacant industrial space in a one mile stretch. Gas stations are being leveled. It’s just unbelievable. I’m starting to understand what Detroit must feel like.

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Comment by Steve W
2009-11-17 13:31:39

I just grabbed a Subway for lunch at Chicago Place, a mall that is on Michigan Avenue in Chicago. Pretty much the toniest place in town to have stores.

8 floor building, Sak’s 5th avenue is the main tenant.

When it opened about 15 years ago, 8 floors full of stores.

Today, the entire complex is empty other than the food court on the 8th floor. Not One Store left. Sak’s is still open, but it’s like a ghost town.

Comment by aNYCdj
2009-11-17 14:26:51


I just wonder how many of these places were offered a significantly lower rent and they still moved out?

Its always the landlord playing hardball.

Comment by In Colorado
2009-11-17 14:22:35

Let’s see, what are the stereotypical shops found in a non anchored (no supermarket) strip mall?

Martial Arts School
Mexican takeout restaurant
Mexican store (non restaurant)
Mom-n-pop Asian restaurant
pawn shop/payday loan store
Non chain sandwich shop/pizza joint
Beauty/nail salon
Non chain espresso joint
Liquor store
Dry cleaners
Bicycle store/repiar shop
Insurance store
Nasty looking pub
Cricket cell phone store
Trophy/plaque store
Bead stored
Teddy bear store
Variety of stores with the words “Olde”, “Shoppe”, “n” or “Things” in the name. i.e. “Bears ‘n’ Things”
Hobby store
Antiques store
Mom-n-pop computer store
Rent to own store
Uniform store
Youth club soccer office.
Self serve dog wash salon.
Embroidery store
Veterinarian office
Scrapbooking store
Protestant fundamentalist church
Protestant fundamentalist bookstore
Used clothing store

Have I missed anything?

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Comment by ahansen
2009-11-17 15:28:02

Post of the Day, Colorado.
Totally right on.

You might add,

Packaged “health” food store/vitamin/essential oil shoppe
Dispensing optician
Smoothie emporium.

Comment by Jingle Male
2009-11-17 16:51:02

I did retail shopping center leasing for many years. Our company did a study of business viability in 1989.

Mom and Pop tenants: 83% out of business after 5 years.

Franchise Tenants: 81% still IN business after 5 years.

Comment by lavi d
2009-11-17 17:43:07

Have I missed anything?

Medical - Dental, Chiropractor, Holistic Shaman…
Independent Mortgage Broker
Independent Real Estate Office
Various services - Carpet cleaning, printing, collections…
Professionals - Financial Advisers, Lawyers, Title Cos…
Postal Services

Here in Vegas:
Dealer/Bartender schools
Used slot-machine dealer
Smoke shop

(Love the “nasty-looking pub”. I’d probably have a drink there just to check it out)

Comment by Mot
2009-11-18 22:07:38

To see real desolation, drive through the area just south of O’Hare by Irving Park Road. The area has been bought up by the City of Chicago for runway expansion. It looks like Love Canal.

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Comment by Jim A.
2009-11-17 12:31:19

But aren’t these sorts of commercial mortgages recourse in most states?

Comment by Jingle Male
2009-11-17 14:57:41

No. Most fixed rate long term (10-yrs) commercial real estate loans are non-recourse. All of the CMBS (securitized) loans are non-recourse. Only the property is the collateral.

Most bank loans (shorter terms, floating rate, or resets each few years) are typically recourse.

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Comment by james
2009-11-17 13:13:29


Well, I’d like to start a small manufacturing company selling small R/C robots and larger industrial stuff in China.

However, I think they will just steal my IP and undercut me on wages.

Then some nitwits will tax/regulate/sue me to death.

So, I’m thinking a check cashing place. Possibly a strip club.

Comment by ahansen
2009-11-17 14:57:30

Better yet, a check cashing place next to a strip club. I think you’re onto something here…

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Comment by SteveH
2009-11-17 21:42:41

Or even better, a strip club that cashes cheeks.

Comment by Bad Chile
2009-11-18 04:29:21

You’re mssing the money. ATM machines at strip clubs.

Was on a business trip one time, my coworkers wanted to go. I met them in the hotel bar and declined. The next morning - all of them worse for the wear - I got to talking.

One of my coworkers hit the ATM. $12.00 flat fee to use the ATM, and who knows what his bank hit him for.

Comment by Cassandra
2009-11-17 09:21:10

Thanks ahansen. Well done as usual. And who’d have thunk a strip mall in Bakersfield could have gone wrong? I mean, can’t she get a candle shop or a nail salon as a tenant?

Comment by scdave
2009-11-17 09:56:44

candle shop or a nail salon as a tenant ??

Sure, but at what rate ?? Got to do a lot of nails just to pay the rent…And there-in is the problem with all these little strip retail buildings…They were bid up just like residential and over developed with hot money and easy credit…All that has changed now… Retail is toast…Office is burnt toast…R & D industrial has been cremated and reduced to land value..The only remaining strength that I see is in medical…Its bad..Its really, really bad…

Comment by salinasron
2009-11-17 12:04:45

“And who’d have thunk a strip mall in Bakersfield could have gone wrong? ”

I have lived in BK and have to go down there every 5 weeks (last weekend was one). The handwriting was on the wall in 2006. The East Hills Mall (large) was on its way out then. Lots of strip malls and very poor location for foot or car traffic. What BK has is a never ending supply of RE types touting how to get rich. The wealthy businessmen that I know down there started unloading business property, land and rentals in late 2005 and by 2007 were strictly in cash. Someone made some bucks selling her the property.

In 2005 a woman here in Salinas sold her $50K house for $550K, moved to BK and bought two condos (one as a rental) and banked the rest. She’s doing fine!

Comment by pismoclam
2009-11-17 19:22:17

How about a dog biscuit bakery mixed in with a scented candle shop ? hahahahahaha

Comment by swguy
2009-11-17 09:29:44

Commercial, residential whatever, it is going to be a very long haul no matter what the pundits say about the recession being over and consumer confidence or stock market increase.
The problem is generally played down by the press and the federal gov’t because bad news keeps people from spending and the powers to be want you in debt no matter what they tell us.
.5 interest rates in the banks, credit card rates at 21 to over 35%, gold at $1,100 a ounce, empty stores, short sales, and lender owned homes everywhere, it is as plain as the nose on ones face this mess is getting worse by the hour and the house of cards has already come down.
As the coach tells his team, “we are losing 40 to 0 nothing with two minutes left just keep throwing the ball and maybe if we score we can feel good about ourselves at the end the game?”

Comment by Arizona Slim
2009-11-17 11:36:45

As the coach tells his team, “we are losing 40 to 0 nothing with two minutes left just keep throwing the ball and maybe if we score we can feel good about ourselves at the end the game?”

Shades of Michigan coach Rich Rodriguez in this Saturday’s game against Ohio State. Sorry, folks, but even this maize and blue bleeder thinks it’s gonna be a lo-o-ong game up there in Ann Arbor.

Best wishes to the OSU Buckeyes in their post-season bowl game.

Comment by Prime_Is_Contained
2009-11-17 09:43:05

So, what’s the rest of the story; in other words, what did you tell Arla/Alva to do???? And how did she respond? Do you think she will take your advice?

Comment by ahansen
2009-11-17 11:41:30

The rest of the story is a work in progress, Prime. I advised her to walk, of course, but she’s concerned about her credit. I told her that was the least of her worries right now and that in five years no one will give a hoot about anybody’s credit report because only the rich will have any. Somehow people DID manage to get by without it before the 1980’s….

Her 80-something Dad wants her to come back to his place in Oklahoma and live with him, and she’s pretty sure she will. Dad isn’t rich, but he’s reasonably well off and could use someone to help him out. Her husband had a coin collection, (hobbiest, not a gold bug,) which she can sell for some walking-around money, so she’ll not be destitute if she goes.
How doubly ironic, though. Moving back in with the parent at age 55 AND packing everything into the family flivver to return to OK from Bakersfield as the result of another great depression.

Comment by VegasBob
2009-11-17 14:37:08

Arla probably needs to have an attorney negotiate her exit from the strip mall. Or she can hide the coin collection and file bankruptcy.

Comment by pismoclam
2009-11-17 19:30:08

A reverse Jode saga. How ironic. Buck and Merle would be proud.

Comment by ahansen
2009-11-17 12:43:15

My post to you (and others,) still hasn’t showed up, Prime. Looks like the spam filter is still on the prowl against my longer replies. I’ll try again later if they don’t come through.

Comment by Prime_Is_Contained
2009-11-17 12:46:01

Thanks ahansen! I look forward to it, and will check back later for it.

Yes, posting delays seem particularly long today…

Comment by james
2009-11-17 09:53:08

Nice bit of writitng Ahnsen,

I think it was already mentioned above but someone got some very bad advice and didn’t diversify their investment.

Hopefully they get some recovery in forclosure with the 50% stake.

Can she slash rents to attract some other renters? Not sure what her monthly rates look like.

Comment by NYCityBoy
2009-11-17 11:59:19

Landlords hate to slash rents. They know if they do it for one they must do it for all. That means the tenants that are left will expect the same deal and there goes the rent roll. Hand it over to stronger hands. I’m sure a Goldman backed hedge fund will gladly take it off her hands.

Comment by Prime_Is_Contained
2009-11-17 09:53:26

Fed: “”“…Financial institutions that implement prudent loan workout arrangements …will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications…”

Ahansen: “It would appear that the Fedsters are both acknowledging that there is big trouble looming for banks with CRE holdings, and is telling them that they’ll “not be subject to criticism” (!) for write-downs; in essence handing them the legalese version of “you’re on your own, suckers.””

My interpretation of the Fed-speak statement is entirely different from yours, ahansen.

To me, the Fed statment above sounds much more like a nod of approval for banks to extend-and-pretend, and to do so without fear of reproval from the Fed.

“Workout arrangements” implies that the banks will work with the borrowers, not demand their balloon payments at maturity and take back the properties.

And the only way to work with the borrowers who are seriously cash-flow negative, like Arla/Alva, would be to give them the same sorts of mods that the residential modification programs offer: teaser interest rates, interest-only payments, extended terms, or principal reductions. I can assure you that they will NOT pick the “principal reduction” option, since that is the only one that they must book as a loss. The others all let them continue to look like they have performing loans on the books, without paying for it on the balance sheet.

So my interpretation is that we should expect the CRE train-wreck to mirror the residential train-wreck, with more smoke & mirrors, lies, shenanigans, and bogus accounting.

Comment by Jim A.
2009-11-17 12:34:37

See, and I took it to mean that the Fed wasn’t going to worry so much about reserve requriements if workouts forced banks below them. But of my understanding is that it’s the FDIC whose job it is to enforce those, so I’m not sure that the Fed has a vote in the matter.

Comment by ahansen
2009-11-17 13:09:00

“…To me, the Fed statment above sounds much more like a nod of approval for banks to extend-and-pretend, and to do so without fear of reproval from the Fed….”

You may very well be right, Prime. I’m basing my interpretation only on my admittedly jaundiced understanding of current policy– in which the Fed apparently hasn’t (publicly) taken anyone to task for their pretend accounting of the residential mortgage losses. So why would they make a point of it with CRE’s? I suspect we’ll find out soon enough. Sometimes it’s just fun to put on my tinfoil hat and see what comes out of my fingers.

I don’t know if Arla’s situation is necessarily indicitive inasmuch as both her lenders have gone under in succession and their portfolios are likely ripe for vulture capital takeover. (Sorry about the dual moniker, btw, I’ve got my neighbor, Alvie, on the brain. Her son was diagnosed wih inoperable lung cancer last week and we’re all pretty shaken by the news.)

Comment by In Montana
2009-11-17 10:16:59

Excellent post, ahansen. Thanks for reading the tea leaves for us…I got more out of that than pages and pages of financial blogs have given me.

Comment by Ria Rhodes
2009-11-17 10:22:27

Remember Ditech and their teaser ads & billboards?

Steal GM shareholders money (the big insiders get out early on inside information the small investors not privy to), declare bankruptcy & begin stealing again aided by government bailout with taxpayer getting the stiff one again. Focus on short term profit at expense of long term viability was seriously flawed strategy, yet no matter the big shots got huge salaries & perks.

Screw GM & GMAC.

..and as for responsible consumer borrowing:

“For the three months ended Sept. 30, 6.25 percent of U.S. mortgage loans were 60 or more days past due, according to credit reporting agency TransUnion. That’s up 58 percent from 3.96 percent a year ago.”

America will follow England’s example - a superpower in decline.
Have our kids learn Chinese in school, for China is the #1 to be.

Comment by NYCityBoy
2009-11-17 12:01:13

Ditech: “People are smart.”

NYCityBoy: “Bwahahahahahahahahahahahaha. You’re killing me with that stuff. Oh, my stomach. It hurts. Quit.”

Comment by jbw
2009-11-17 23:22:11

China will take over everything just as sure as Japan did after the 80’s hype. I still remember the big push to get all the kids to study Japan and Japanese to prepare for our new Japanese masters. Why is China the current flavor of the month? Why not Pakistan or Korea? How about Iceland and Ireland?

They might have a shot at being a real superpower if they killed off about 80 percent of their population first (which wouldn’t be a new idea to them). Managing hundreds of millions of uneducated rural poor leaves China swimming with an anchor around the neck. Still their model of government-owned-only business funded with US dollars, coupled with systematic rejection of anything resembling ethics, has made them temporarily competitive.

Comment by LHawes
2009-11-17 11:04:35

We keep trying to throw money at the top of the problem i.e. bailouts and mortgage relief all the while ignoring the root cause which was mentioned in your great article ahansen. That root cause is productive jobs.

It’s like trying to put out a gasoline fire with water while the leak in the gas line goes un-repaired. We need to patch the leak and until people have productive jobs, those fires of economical uncertainty will continue to burn and no amount of water or federal funds or bailouts or mortgage relief programs or whatever you want to call them will fix the leak nor put out the fire.

There’s plenty of lip service given to providing new jobs to the American work force but the forces that removed those jobs have not gotten any weaker and those in Congress who codified those job removals have not gotten any weaker either.

The task is monumental and will require a lot of courage from our representatives to stand up to the people who feed and clothe them and keep them in office.

OR…we need to begin creating those jobs ourselves. The midwest has plenty of hard working people itching to be productive again but not under the thumbs of the mis-managers at GM or the other corporate behemoths that would sell the souls of their worker for overseas profits.

I think we have it in is us as Americans but it will be tough to change and I don’t know how that will help your friend but I’m pretty certain there will be no help from the people whose job it is to help. They’re too bust getting re-elected and selling our jobs to the highest bidders.

Comment by Arizona Slim
2009-11-17 11:41:15

OR…we need to begin creating those jobs ourselves. The midwest has plenty of hard working people itching to be productive again but not under the thumbs of the mis-managers at GM or the other corporate behemoths that would sell the souls of their worker for overseas profits.

Having come of age in the American Midwest, I wouldn’t bet against that part of the country for a nanosecond. In addition to their affinity for hard work, Midwestern people are courteous and friendly. Those things count for a lot.

As for getting out from under the thumb of GM, this has been going on for a long time. Matter of fact, when I was a young Wolverine back in the late 1970s, I noticed that my fellow students weren’t looking closely at the auto industry for employment. Anyplace but.

The most talented in the ranks were going for that new industry we called “computers.” Matter of fact, one of my classmates did so well in the computer industry that he’s now a multimillionaire. And still one of the nicest, funniest fellows you’d ever want to meet.

Comment by varelse
2009-11-17 12:13:44

There’s a new KIA plant opening up down south. That’ll probably be the trend in the medium term. Folks in the midwest might want to consider relocating down south.

Comment by LHawes
2009-11-17 12:26:29

American wages are dropping fast and are now more able to compete on the world wide stage. Ironic that the country that would send its jobs overseas, eliminating jobs from its own citizens, would find itself in a position of low wages and having other countries sending its jobs over here.

I know it’s more complex in the case of an auto maker like Kia but when a European consortium was deciding where to manufacture a new airplane I believe they chose Georgia because the costs had fallen enough in America to make it wise, and economic, manufacturing decision. Ironic.

Comment by LHawes
2009-11-17 11:07:43

One more comment.

NOWHERE and I mean NOWHERE am I able to read such clear, informative and insightful articles such as the one posted here.

Very well done ahansen.

Comment by Kim
2009-11-17 12:46:04

Seriously, this should be on the front page of the WSJ. Another good job, Ahansen!

Comment by pressboardbox
2009-11-17 14:08:05

Some random reviews:

“A superb read!” - Boston Globe
“Spine-tingling!” - NY book review
“Shoots straight and pulls no punches, a must read.” - K Vonnegut

“Could not put this one down!” - A. Greenspan
“Plot twists with every page!” - S. Spielberg
“Made me vomit.” - B. Obama

Comment by ahansen
2009-11-17 16:58:34

Just snorted vino up my nose, press.

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Comment by ahansen
2009-11-17 14:15:27

Thank you both very kindly. Given my utter lack of “serious” credentials in this arena, comments such as the above should scare the bejabbers out of both our nation’s business editors and its economic academia….

Comment by VegasBob
2009-11-17 14:45:17

Economists are mostly over-educated idiots. It takes a complete lack of common sense to come up with the garbage these people promote as “intelligent” thought.

I used to be an academic but I failed at it because I just couldn’t kill off my common sense…

PhD= piled higher and deeper

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Comment by VaBeyatch in Virginia Beach
2009-11-17 11:11:10

I always thought about trying to live in a commercial space. Maybe it’d be cheaper than buying residential? Might be boring with no neighbors.

Comment by aNYCdj
2009-11-17 11:23:48

That maybe the next option live-work space artist lofts…plenty of people would do it in a heart beat since it would be cheap, and you would not be subjct to HOA or neighbors complaining about noise.

And there are so many empty building that lend itself to this quick fix.

Comment by polly
2009-11-17 11:39:46

Oy, but the zoning variances….

Comment by Arizona Slim
2009-11-17 11:45:22

In essence, my little place is a live/work space. I work here. And I live here.

And sometimes the two worlds intersect. Right now, for example. I’ve been working on replacing the kitchen faucet since the old one decided that bringing water into the house was no longer in its job description.

Oh, well, that was a Home Depot cheapo that came with the house. I’ve replaced it with a very nice Delta faucet.

All that’s left to do is replace those crummy water cutoff valves that leak when they’re all the way shut off and I’ll be back in action. In the kitchen, at least.

Now, it’s time to get back to my makin’ money business…

Comment by laurel, md
2009-11-17 19:21:28

I just had a leaking toilet shut off valve replaced….I can do small plumbing but not sodering in tight places. $237 ( I had expected $225).

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Comment by Carl Morris
2009-11-17 11:55:52

But that would work against keeping housing artificially inflated.

Comment by ahansen
2009-11-17 14:19:41

A very good suggestion. NYC has its lofts, CA has its strip malls…hmmmm.

Never underestimate the greed of the zoning board when it comes to potential new income streams.

Comment by Jim A.
2009-11-17 12:39:05

ISTR that at bubble height, some NYC office towers were subdivided into condos. Of course most people living in commercial spaces do it on the sly.

Comment by Blue Skye
2009-11-17 14:01:20

All the stores downtown around here were built with generous living space on the second floor. The buildings go for much less than houses outside of town. No zoning problems, and you do have neighbors.

Post industrial rural NY.

Comment by aNYCdj
2009-11-17 16:30:48


The building codes have a minimum of 11′ ceiling for 1st floor retail, but lots of builders even 50 years ago, also made the 2nd floor 11′ so they could have 2 floors to rent out for business and lots of fast food places have seating on the 2nd floor and bathrooms….or rug stores/ artists designers etc. all use the 2nd floor for extra window space and storage sales offices….

Comment by krazy bill
2009-11-17 14:19:34

Here in central Phoenix AZ the City has been very friendly to folks living/working/selling from houses to prevent vacant repossessed homes from blighting a ‘hood.

Comment by SanFranciscoBayAreaGal
2009-11-17 12:21:16


Great article.

I remember our poster voz was hinting at this in his postings.

Comment by Don't Know Nothin About Buyin No House
2009-11-17 12:35:40

I don’t have a good understanding of the various CRE business models but Arla’s story put a face on at least one sector.

Comment by Muggy
2009-11-17 13:14:00

“and the salon.”

OMG, not the salon!! Where they going to get they nails did?

Seriously though, Kunstler said that we’re about to find out if we can run a nation on garage sales. I’d like add: run by people with dull, unkempt nails.

The horror.

Comment by Arizona Slim
2009-11-17 13:54:43

If you’re into Freecycle, there’s quite a bit of action over there too. Case in point: I removed an under-the-sink water filter this morning. Only used it once in five years — and that’s when I accidentally turned it on last week.

You’d be amazed at the number of people who responded to my Freecycle post. I mean, come on. It’s a water filter. They’re not that expensive.

Comment by DennisN
2009-11-17 13:54:30

I’m not sure what she means by walking away - from commercial real estate. The so-called non-recourse status of mortgages doesn’t apply to commercial real estate. Her equity position may shield her if the value at sale is enough that she isn’t underwater.

Like my boneheaded friend in LA. Bought his house in 1987 and paid it off. Then greed took over. In 2007 he HELOC’ed out $700+K and bought 5 strip-mall spots in LA with minimal down, using the HELOC funds.

His house now Zillows for about $600K so he’s underwater on his house, and probably on those commercial holdings. He should be preparing for a comfortable retirement but hubris and greed got in the way.

Comment by ahansen
2009-11-17 14:28:40

Walk away–
From the balloon, from the large down-payment she made, and from the businesses that are left. (Which is the major source of her hesitation to just abandon everything and leave the state.)

She needs to refinance about what she has into the place, and has no real expectation that a short sale would net her anything after fees and expenses. I suspect she’s not alone in her dilemma.

Comment by cobaltblue
2009-11-17 14:36:22

Commercial Real Estate Check: 99% Loss

Uh, you think this might be a problem?

Pontiac — Nearly 35 years after taxpayers spent $55.7 million building the Pontiac Silverdome and a year after a $20 million sale fell through, city officials have sold the arena once called the most desirable property in Oakland County.

The price: $583,000.


99% depreciation over 35 years, plus of course all the money poured into property taxes and maintenance.

“The citizens of Pontiac deserve better,” City Councilman Everett Seay said. “This is pennies on the dollar (of what it cost). It goes to show how bad times are … Worse, we don’t even know who bought it.”

Sounds like a Realtor. Oh wait - that’s a Pontiac City Councilman. Same difference.

Hint to the peanut gallery in Pontiac MI:

What something is worth is entirely dependent on what someone will pay you for it - nothing more or less. Ever.

This sale is emblematic of the general state of Commercial Real Estate. Bluntly, too many people built too much crap on wishes and dreams - dreams they financed with other people’s money, either the taxpayer’s (in this case) or with some poor jackass who believed the prospectus on some CMBS deal that screamed “PRIME Commercial Space!”

Well, perhaps. But there are only so many business interests that can inhabit a given area and turn a profit, especially when you send all the good jobs overseas to CHINA and INDIA, rendering unemployed the middle-class call-center employee who used to make $30,000 a year but now makes zero while the Indian or Chinese employee makes $2/day.

Worse, all real estate (that has buildings on it anyway) has a carrying cost, meaning that if you don’t have a revenue-producing use for it the value is actually negative. In the case of the Silverdome basic maintenance on the building and grounds is about $1.5 million a year. If you can’t make enough to cover that nut “ownership” just bleeds you out.

Welcome to the “new normal.”

If this doesn’t send a shiver up your spine on the “quality” of regional banks that are stuffed to the gills with commercial real estate loans made in the last few years, you’re not paying attention.

Don’t worry, you soon will be, as nearly all of these deals are interest-only and have to roll over between now and 2013.

They can’t and won’t.

(Originally posted in Bits Buckets, but hey, this is a CRE thread)

Comment by NYCityBoy
2009-11-17 16:33:03

Since the Lions now “play” at Ford Field I don’t see what value the Silver Dome could possibly have. You have to demolish it and you are left only with the land. Last I heard the Detroit area real estate market wasn’t so hot.

Comment by Professor Bear
2009-11-17 21:09:49

“Commercial Real Estate Check: 99% Loss”

The Fed has any and all losses contained.

Comment by az_lender
2009-11-17 23:34:34

“pennies on the dollar” — City Councilman Everett Seay

I think 1.046 pennies is so close to singular that it should be written “pennie.” where the period stands for 5% of the “s”

Comment by MarkinSanDiego
2009-11-17 17:21:29

Concerning commercial real estate (2 out of five tenants have given notice as of Dec. 21 at the strip mall). . .I talked with the manager of a large national chain at the SanDiego Westfield Mall - he said his store was closing after Christmas, and he knew that two other national chains were closing their stores after Christmas. . .it isn’t just strip malls, even large Westfield will be getting killed - stores have kept locations open for a year hoping customers would return, but they can’t keep bleeding money forever.

Comment by Professor Bear
2009-11-17 21:12:28

Where will my teenage daughter and her friends go to hang out if Westfield Mall shuts down?

Comment by aNYCdj
2009-11-17 23:44:39

where they used to go when you were a kid….to YOUR parents house, then to the friends parents houses….see bear you lucky guy your daughter will be home more often for you to watch and talk to.

Comment by SanFranciscoBayAreaGal
2009-11-17 19:17:57

For some reason my post gotten eaten.

ahansen, great post.

I remember v o z posting about this when he was posting here on the blog.

Comment by Professor Bear
2009-11-17 19:34:00

‘Is Professor Bear’s “Megabank, Inc.” destined to become commercial American real estate’s Fannie Mae and Freddie Mac? That’s a lot of unoccupied commercial property to landlord and manage; they can’t just let it sit around gathering termites and amassing delinquent property tax bills. At some point, someone is going to have to collateralize it, or sell it or lease it, and not incidentally, make someone—presumably someone aligned with Megabank, Inc.,—a whole lot of money. My bet it isn’t going to be Arla.’


Comment by Muggy
2009-11-17 19:58:31

Man Vs. Megabank

Comment by Muggy
2009-11-17 19:44:31

BTW, Allena, the little gal monkey — just finished a 2 hr. stretch of her napping on my chest. Heaven.

Comment by Professor Bear
2009-11-17 20:26:29

She’s a beauty. Enjoy her while you can, before she turns into a teenage smart-@$$…

Comment by SanFranciscoBayAreaGal
2009-11-17 21:03:21

Hang in there PB, the teenage smart-@ss will grow out of it.

Comment by Professor Bear
2009-11-17 21:08:19

I am holding out hope (and trying my best to overlook smart-@$$ behavior in the mean time)…

(Comments wont nest below this level)
Comment by SanFranciscoBayAreaGal
2009-11-17 21:17:23

My mom had to go through all five of us going through our smart-@ass stage.

Comment by SanFranciscoBayAreaGal
2009-11-17 21:11:01

She is beautiful Muggy.

I remembe that feeling of my nephew falling asleep on my chest, feeling his heart beat. That is a feeling I will never forget.

Comment by ahansen
2009-11-17 21:28:03

AWWWWWWW. Lucky you, Mugz.

Comment by SUGuy
2009-11-17 21:01:02

I expect stories like this one to be the new normal routine postings and discussions for an extended period of time. I am sad to hear what is happening in our country? I wish I could wave a magic want and make it all better. Thanks for a well written piece.

This has a similar ending

Game Over For New England Retailer

Comment by az_lender
2009-11-17 23:41:47

Forty years ago when “Bowl and Board” was only three years old, I worked at a supermarket in Somerville Mass (the site of the article in the link), which struck me as an extremely overpriced slum. Proximity to Harvard & MIT made it attractive to inertial alumni and other hangers-on, but I’m not surprised to learn that those folks are not buying their Stuff at retail prices any more.

Comment by Bad Chile
2009-11-18 04:48:12

About Bowl and Board:

1) They didn’t sell anything you couldn’t get on-line for significantly cheaper. Bowl and Board didn’t carry high end items, it only carried items with high prices. It was all the same “Made in Chindia” junk that every other home store carried, but priced higher and sold with a more condesending attitude. And 36″ diameter clocks are so…2005.

2) Blaming going out of business on Ikea opening nearby, two things. Bowl and Board had stores around the Boston metro area that have been closing for years, one at a time. And the Ikea is still a pipe dream. It was a pipe dream in that area 10 years ago, is a pipe dream now, and the NIABYEism (Not in anyone’s backyard ever) of the New England regional psyche means it will be a pipe dream in 10 years.

Comment by Professor Bear
2009-11-17 21:07:20

I see evidence that gender lines are forming in the global bank regulatory sector, with males playing the role of Megabank, Inc’s apologists and females playing the role of defenders of right against wrong.

May females with balls win the battle!!!

The Financial Times
Visionary Kroes gets my vote
Published: November 18 2009 02:00 | Last updated: November 18 2009 02:00

From Mr Lex Dekkers.

Sir, The right man in the right job is often a woman indeed, as Margot Wallström, Diana Wallis and Neelie Kroes claim in a letter (November 16) to your newspaper. And for one of the roles they are alluding to, the one of president of the European Council, one could easily envision a woman to be a viable candidate indeed: Ms Kroes.

She deserves that candidacy, however, not based on being a woman, but on being a strong, visionary leader. Quite frankly, she is one of very few (if any) strong and visionary leaders we have inside the European Union/European Commission offices today. Even her direct boss isn’t coming close, by a long distance.

Also, looking at candidates currently still residing in local roles (prime ministers, MPs and so on), I see no strong leaders who could be the first president of the Council. All I see are boring grey suits, who could probably be great apparatchiks but who are no material for an exciting, innovative role with immense visibility, having the guts to take the European community to the next plateau in the global arena. Candidates such as Herman Van Rompuy or Jan Peter Balkenende seem merely to be burn-out victims looking for a quiet job so as to escape the mess in their own countries.

Europe deserves better. My vote is for Ms Kroes, not because she is a woman but because she has got balls.

Lex Dekkers,

Amstelveen, The Netherlands

Comment by SanFranciscoBayAreaGal
2009-11-17 21:19:02

I wish nhz was still posting. He would give us some feed back about this.

Comment by jbw
2009-11-17 23:39:41

So she’s a drag queen, then?

Comment by SanFranciscoBayAreaGal
2009-11-18 00:33:05

Is nhz a woman. For some reason I thought he was a male. My apologies if I was wrong.

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