Lessons from the top and my old boss??!!!!!!

When pricing out a loan, my old boss would tell me that "pigs get fed and hogs get slaughtered". After reading several articles on Harry Macklowe's problems with his lenders, my old boss's voice echoed in my head. Ironically, Mr. Macklowe's issues can provide a lesson to all real estate investors: Don't get greedy.


For those who might not be following the situation, Mr. Macklowe - a very successful real estate investor - is tied in a knot with his Senior, Subordinated and Bridge Loan lenders over the $7.1 billion he borrowed (fifteen months ago) to buy seven Manhattan office buildings. To get the deal completed he offered his crown jewel as collateral to secure a $1.2 billion short term bridge loan from Fortress Investment Group. The crown jewel is the prestigous General Motors building on the southeast corner of Central Park. Mr. Macklowe purchased the General Motors building for $1.4 billion from Donald Trump, who bought the approximately 2.0 million s.f. office building for $800 million in 1998.


Well, last week, Mr. Macklowe turn over the property to Fortress, but kept the title to avoid expensive New York City transfer taxes. Yesterday, three bidders put forth term sheets to acquire the property for $3.0 billion. While the 114% appreciation is nice, the equity in the property is going to go to Fortress and the rest to Mr. Macklowe's other lenders.


Mr. Macklowe got greedy with his desire to purchase the seven Manhattan office building portfolio from the Blackstone Group. He put in less than 1% of his own money, and borrowed the rest on short term money. His assumption was that he could easily refinance the short term money after acquiring the property, but today's credit market felt differently as many of the banks were suffering from large write-downs on both their residential and commercial loan portfolios. What seemed as a safe bet in putting up his crown jewel as collateral is now in someone else's hands. So what can we learn about Mr. Macklowe's situation?

1. Don't stretch for a property. Evaluate every property on a stand alone basis. I know that real estate fortunes are framed by the Donald Trump's of the world, but leveraging everything for that big deal doesn't make sense. Also, leave emotion out of the buying equation.
2. Have a back up plan! Structuring the deal as Mr. Macklowe did is sometimes required especially when you have to put a deal together quickly. However, having your eggs in one basket isn't smart. Be prepared to bring partners into the deal if necessary. I know I said the "P" word, but the equity give up by bringing in a partner is less than the cost of a bank coming after you for their money.
3. Be aware of where you are in the Real Estate and Credit Cycles. If you are going to put your net worth at risk, make sure you are fully aware of where you are in both the real estate and credit cycles. Yes, that's right credit availability goes up and down just as the value of your building or house. Banks quickly adjust credit standards and availabilty overnight based on market developements. Usually the adjustments are to harsh and take time to settle out. Talk to commercial realtors, bankers and other real estate investor's before pulling the trigger.

So remember the words of my old boss: "Pigs get fed and Hog's get slaughtered" and you should be ok.