Holding Strategies The Ultimate Holding Strategybringing In A Watchdog
Once again I must use Leonard Kandell as a prime example of brilliant foresight and real estate savvy. Kandell owned land on Central Park South in New York City under a ground lease owned by the operator of a Ritz Carlton Hotel. It was a valuable piece of land in a very strategic spot with a major hotel on it under a lease which had approximately 50 years left to run. The hotel was run by an operator named John Coleman, but Kandell owned the landKandell found Coleman an extremely difficult man to deal with. He was a source of constant trouble: perpetually late in paying rent, taxes, and negligent in carrying insurance. Kandell did not like the aggravation of dealing with difficult people and so had absolutely no regard for him as a tenant. He considered Coleman untrustworthy.With a view toward solving his problem, Kandell asked me if I thought it would be okay if he asked Donald Trump to be his watchdog on this particular piece of property. Now it is very unusual to ask someone to be a guardian of a real estate interest and I had never seen it employed where the person to be the protector was not a family member but merely a business acquaintance. The determining factor in Kandell’s mind was his concern that Coleman would be too tough for his children and grandchildren to handle when they inherited the property, and he didn’t savor the idea that they would eventually have to deal with such a difficult man.
Instead, he reasoned, “I’m going to use Donald Trump as a protective shield and let Coleman deal with Donald Trump. Trump will know how to handle someone like Coleman.” Kandell had the confidence that Donald Trump would protect the valuable asset for him and his family. Kandell gave Trump an overriding lease which locked in behind the Coleman lease and had a longer term. If the Coleman lease was terminated or expired, Trump’s lease became effective. Now Coleman would have to deal with Trump when it came to any issue under his lease. Over the first four years, Trump got nothing for riding herd on Coleman but his being in the picture intimidated Coleman who sold his lease to another hotel operator.
The land eventually came up for reappraisal to determine a new and higher rent. Pursuant to Trump’s overriding lease he was obligated to negotiate the reappraisal and would be entitled to retain 15 percent of any increase in rent. When the time for reappraisal occurred I, as Trump’s representative, dealt with Coleman’s successor. I negotiated the new rent and was able to get a hefty increase, which continued until 2004 when as a result of changed circumstances, the lease was renegotiated. Leonard S. Kandell died in 1991 at the age of 85.
His ground lease has since passed through three hotel operators, and each time I was involved as the overseer on behalf of Trump. I supervised the When the cost of borrowing money is cheap you can get a better price for your real estate because the leverage is better. Leverage is the difference between the rate of return on a “free and clear” basis and the rate of return on invested capital. For example, suppose you are buying a small office building for $10 million and the annual cash flow is $1 million. That’s a 10 percent return on a free and clear basis. Now instead of buying the property for all cash, assume you take out a mortgage of $8 million (80 percent of the purchase price) at an annual interest rate of 7 percent.
The annual cost of the mortgage portion of the investment is $560,000. The annual return on your $2 million investment is $440,000 or 22 percent on your cash. That’s how fortunes are built. There is usually a high demand for real estate when the stock market and the bond market show low returns. It is also true when the rate of exchange of the dollar for foreign currencies is low because foreign investors see bargains in the making. When the rate of inflation starts to rise dramatically buyers will often flock to real estate because increase in real estate prices and rents seem to rise in line with the rate of inflation.
If you have a piece of property in an area that is deteriorating as indicated by “for sale” or “for rent” signs or by increased boarded up or vacant stores or buildings and you have no solid information as to when this cycle will change get out! Take a loss, if you have to, but get out! If interest rates are rising and you have a mortgage, which will be coming due shortly, sell, preferably to an investor that has lots of ready cash, but sell! If you own a building which is going to be adversely affected by a change in traffic patterns or new interstates or highways, sell as soon as you have reason to believe that any of those items will become a reality. If you have a building that you believe will be adversely affected by some new construction in the area, that’s also a time to sell. This is especially true if you have a property with retail stores and new, larger or serious competition is on the way. You should consider selling real estate when you encounter obstacles to the project, such as denial of zoning or approvals and the projected critical path of your project is no longer feasible. You should also consider selling if key relationships or people you rely on drastically change or leave the picture. .
