Property Grunt

Tuesday, May 05, 2009

No wonder Lehman imploded

Last Sunday the NYT did a great article on how real estate became the downfall of Lehamn Brothers.

How Lehman Brothers Got Its Real Estate Fix

I think this particular paragraph indicates why Lehman f**ked up so badly.

One partnership pursued by Mr. Walsh exemplified his newfound appetite for ever riskier deals: transactions with the SunCal Companies of Irvine, Calif., an operation with an intriguing business model. It bought land, primarily in its home state, and sought government approval for residential development. If it got the green light, it sold the land to builders for an enormous profit. Mr. Walsh lent SunCal more than $2 billion and formed a close relationship with its founder, Boris Elieff. Mr. Elieff did not return calls seeking comment.

When it comes to raw tracts of land, my motto is straight from Nancy Reagan's mouth

I am being dead serious about. Raw tracts of land is the simplest yet most dangerous form of real estate investing in my opinion. The value from land comes from what people want to do with it and if no one wants to do anything with it then there is no value.

For a tract of land to become real estate requires the proper zoning and entitlements. This requires a lot of money and a lot of lawyers. I haven't even begun to talk about the physical costs of turning raw tracts of land into a product that is development friendly.

What killed Lehman was that they were too focused on closing as many deals as possible instead of focusing on what type of deals to close.

One word: Greed.