Don Tishman's Real Estate Development and Investing Solutions

I received this email from Australia about our activity in Afghanistan.

Afghanistan

“In my opinion, Afghanistan is a lost cause.  I have been there several times

in the late 70s and it was an eye-opener.  The Germans had invested quite a

bit of aid money in infrastructure (Hitler thought the Afghans were the true

Aryans) but it was really primitive.  Rich Afghans were educated in Europe,

mainly Germany.  Elections were on a show of hands and if the results

weren’t what President (he was a cousin of the King he deposed) wanted, then

all bets were off.  People washed and performed their toilet in the river,

which was also where they washed carpets, goats drank and all manner of

other things.  Streets weren’t named, nor were houses numbered and for

ordinary people, if they needed to write a letter, they went to a man in the

street who sat at an ancient Underwood typewriter and wrote it for them.

It really is a barren country and goats have eaten almost all the vegetation

(they eat roots and all).  Aside from opium, they have no exports or

marketable skills.

If you look back at history, no one has been able to conquer Afghanistan.

The Brits tried and failed in the 19th century and of course the Russians

failed in the 1980s – despite having contiguous borders in what was the old

USSR, with Turkmenistan, Uzbekistan and Tajikistan.  Historically, the

Afghans have just waited-out the invaders, who really had nothing to stay

for.  Corruption is a way of life and is unlikely to change quickly.

The quicker the Allied forces get out of there the better.  The real

conundrum is what to do about Pakistan.  It is run by the Military, they

have nuclear bombs and it is totally corrupt.  There’s plenty of evidence

that says that Taliban Central is in Pakistan, rather than Afghanistan.”

Do you agree?

The sale of syndicated home mortgages by unscrupulous sellers contributed to the severe economic hardships suffered world wide. Bank regulators at all levels set the standards for home loans. The bank examiners test bank loans to enforce these standards. How then do we have this overwhelming mountain of homes facing foreclosure? where were the bank examiners?”

The bank examiners did not examine these loans. WHY? Because these loans were NOT made by regulated lenders, but rather these loans were made by UNREGULATED mortgage companies. Each day our TV’s and radios told us about these huge mortgage companies that offering home loans to anyone over 18 whose only requirement was they were alive. The Federal Reserve and the Bush Administration encouraged this conduct. As had the Clinton administration. The equally unscrupulous investment bankers sold these syndicated sub-prime home mortgages to their clients w2hile investing their own funds based on the failure of these syndicated loans. They knew huge loan failures were soon to strike. So when the sub-prime mortgage market collapsed, the sellers of the syndicated loans were proved correct- the investment bankers made a fortune- The fees for selling these worthless syndicated loans and the pay off for betting the loans would fail. When investment bankers testified before Congress, they were asked how the could they sell these loans to their clients knowing the loans were worthless? The investment bankers said this was standard business practice in the investment banking business. The SEC sued Goldman-Sachs in a civil suit over this practice. Goldman agreed to pay a record fine of $550,000,000. This is a 4% of Goldman’s 2009 profit. The SEC is preparing similar law suits against other sellers of these worthless sub-prime loans.

Yesterday, the Congress passed a major overhaul of finance rules. This was the culmination of two years of Wall Street doing every thing possible to stop this legislation. A little history-

After the Stock Market Crash of 1929, and the ensuing Great Depression, Congress passed legislation to prevent a recurrence of those terrible times. Each time Congress acted, Wall Street came up with “legal” schemes to get around the new regulation. Some of the regulations were so strong that only by repealing these laws could Wall Street accomplish their devious goals. The last of the repeals was in the Clinton Administration. With a former head of Goldman-Sachs as Secretary of the Treasury, Clinton recommended the repeal of the Glass-Steagll Act. The Glass-Steagal Act was one of the cornerstone’s of financial reform MANDATED by President Franklin D. Roosevelt.

Daniel Pecora led the fight for financial reform in the 1930′s, taken over by FDR. . Today Representative Barney Frank is the Pecora for today with Mr. Obama leading the fight.

The sub-prime loan disaster caused the economic ruin of many throughout the world. YET almost all Republicans in Congress voted against this reform legislation. Today, Obama’s polls show he is down and many Republicans hoping to gain from this.

I stand behind our President. I admire his courage to insist on making this country a better place for our children, grandchildren and great grandchildren.

Their future depends on a strong, viable, and large middle class. Obama’s legislative program is the answer. Let us work together to insure their future.

The June, 2010 construction industry employment figures are depressing. HISTORICALLY, The summer is the best time for construction jobs. Yet, the figures for last month show a DROP in construction jobs. The same month saw thousands of college graduations for majors in architecture, construction management, planning, real estate, civil engineering, finance, etc.. Their parents and the recent graduates have great hope for their future. These young folks are eager to contribute their newly acquired skills towards solving problems. Then the reality of hitting a brick wall- The firms that they thought would be eager to hire them, instead told them there are not only not hiring but reducing their present staffs. With little new construction, there are no new work for all who depend new construction for their livelihood. This includes a huge field. Not only the recent graduates I have listed, but all those involved in building products used in construction, appliances, furniture, flooring, office equipment, mortgages, title companies, lawyers, accountants,- in fact- almost all businesses suffer when there is a dearth of new construction.

What is the answer to the economic woe caused by no new construction?

Where is residential construction? At first blush, the demand for housing is overcome by a huge inventory of unsold homes. Why do we have this huge inventory? Has there been a reduction in population growth? Has the death rate increased? There has been no change in either the population growth or the death rate. What has changed to bring about this economic morass in housing sales?

The Gross National Product(GNP) is the sum of all goods and services sold in a year. Seventy percent of the GNP is consumer spending. Consumer spending is down. Why? Consumer confidence is way down. Why? With the highest unemployment rate in years, both public and private employers are reducing their staffs. Folks are uncertain of the future. The rate of personal savings is way up. Folks are preparing for what could be a bleak future.

Most buyers do not pay cash for homes or cars. These buyers depend on financial institutions to lend them most of the capital required for their purchases. This available credit is a valuable asset for both the buyer and seller. The stock market September 2008 huge drop in the Dow Jones Index was disaster for almost all U.S. financial institutions.Much of their capital was invested in the stock market. The stock market had lost over 50% of its value. The largest financial institutions were suddenly in very precarious financial positions. Their capital had shrunk below the minimum required to for these financial institutions to lend to their customers. In fact, unless these institutions replenished their capital accounts, they would be required to call billions of dollars of loans, many to America’s leading companies. Lending any new funds was impossible. The Bush Administration sponsored and had passed legislation to loan these financial institutions almost a Billion dollars that would replenish their depleted capital accounts. The goal of this bail out legislation was to get the banks to start lending to consumers. After these loans were made, these same financial institutions that suggested these Federal bail outs, were still so concerned about the economy that no new loans were made to consumers. With consumer sales slowed, companies needed to reduce their operating costs, a huge elimination of jobs followed. This added to the fears of consumers. Although the stock market was steadily recovering, consumer sales remained stagnant. May.2010 retail sale results were a disaster. Many economists and others with crystal balls who had announced the end of the Great Recession, suddenly were changing their tune. Now comes June,2010 retail sales results.

July 7 (Bloomberg) –” U.S. retailers’ sales are growing at the fastest pace in four years, a sign consumers may be overcoming concern about unemployment and depressed home values.Sales probably expanded at an average monthly rate of 4 percent in the first five months of the retail fiscal year that began Jan. 31, the biggest gain since 2006, the International Council of Shopping Centers trade group said in advance of its June report tomorrow. Nordstrom Inc. and Kohl’s Corp. are among chains that will report June sales increases at stores open at least a year, according to analysts’ estimates.

The predictions of the owners of crystal balls and “economists” are on a constant roller coaster. going from one extreme to the opposite opinion in minutes. . Depending on their very subjective interpretation of data and the consensus of these “experts”.

Increased retail sales means more new jobs, just as the recent drop in consumer sales led to huge layoffs. Eventually, this will lead to new construction. How long this will take, is anybody’s guess? As sales volume increases, we must hope for Xmas sales much improved over the last two years. . Remember.many retailers earn most of their profit from Thanksgiving to Xmas. One clue will be increased retail inventories in the next few months. This will show how many manufacturers, retailers, and banks believe there will be much increased Xmas sales. This can the key to new employment opportunities. For now the outlook is improving. Will it stay that way? Will sales grow this summer?

What does your crystal ball show?

When determining whether there is a demand for  new real estate development, we look for unmet needs.  in other words does the demand for a particular real estate use far exceed the supply. A good indication is: no vacant apartments, , no empty offices,  no vacant stores or  no unsold inventory of homes.  Lack of demand is shown by a surplus of supply: some examples are high vacancy rates in apartments, offices, retail spaces, and large inventory of unsold homes.  When we examine  supply, we must differentiate by types of apartments, offices, retail, and homes. For example- We know that all apartments are not the same. It makes no sense to compare a high rise penthouse of 5 bedrooms in a great location that rents for $10,000 per month to a two bedroom in a less desirable area that rents for $400 per month.  These are two very different markets. How? The size of the households may be different, the incomes may be very different, and what each household thinks is important in choosing a place to live may be very different. This applies to all type real estate. Another example is a hotel suite in the Savoy in London can not be compared to a hotel room without room service and whose the only amenity is a room with a clean bed and a window air conditioner.

What causes shortages in supply? Increased demand for the use.  The multi-family apartments we developed five years ago has had  difficulty filling the units for two years. Suddenly, we are 100% occupied with a waiting list. Why?   There are a great many more users for our apartments. There can be many factors causing the increase in this demand. We may have unique features that the competition does not provide. This advantage can be short lived because the competition may add these features where possible. If they do not add these features when most apartments have these amenities, there units will be considered obsolete and non- competitive. Their rents will drop significantly. Then their value will topple,

The one factor that most causes increased demand is more people needing this use. What brings more people to a community? Jobs. For every new job that is hired  by a local business- a barber, doctor, etc., there is one more job created by this new job. For every job that sends its product out of town, there are two more jobs created in the community by this one new job..  So if an new auto plant comes to town and creates 5,000 new jobs. The impact on the community is 15,000 new jobs. 5,000 new jobs at the auto plant and 10,000 other new jobs created in the community as a result of the auto plant. If the average wage of these new jobs is $70,000 per year, suddenly the local economy has $1,050,000,000 annually added to its economy. What new demands will  over a billion dollars in additional  annual income create?

This is saying the community gross domestic product has increases by over $1 billion. what is the gross domestic product?  The gross domestic product (GDP) is the market value of all total goods and services made within the area in a year.  The gross domestic product for a country is called the gross national product(GNP).

If the local area. population was 15,000 before the auto plant came to town, the new population will exceed 52,500. This assumes that the average household size of the 15,000 new job holders is 2.5 people. The demand for everything after the auto plant is operating will at least triple. This community will need  additional places to live, to shop , to obtain services, for both public and private new recreation, , new places to worship , new schools, and more. Many local government use taxes on retail sales to fund their  gover the out side staffs assemdeveloper dreams about.

Now let’s look a on the dark side.  The auto company’s  automobile car production is cut back because  the locally produced cars are not selling. The automobile company is losing huge sums. Their management needs to take drastic action.  The new auto plant is closed-  5,000 plant  jobs are lost overnight. Many of the other 10,000 new jobs created to service the auto plant slowly vanish. We suddenly have thousands of households without regular income. They  obtain temporary unemployment benefits that are far less than their recent wages. These households had been extended credit based on their employment.  Now do not have sufficient income to meet all of their financial obligations they have recently incurred.  The demand for government services increases by the thousands  recently laid off. A few government jobs are created by this much increased demand for government services. Houses are being foreclosed. The families in these houses stop making ordinary repairs to the houses. Many houses are now on the market with few buyers. Home prices drop because of the over supply and the run down condition of many homes. Certain newly developed subdivisions are hardest hit.

This town that has expanded based on the assumption that the auto plant would prosper has a problem. There is no way the “old” residents can handle the devastation caused by the closure of the auto plant.  What can be done to save the town? First, it is not only the problem of the laid off auto workers. It is the problem of the whole town. If the laid off auto workers families leave the town. The new schools will close. The towns bonds were issued to pay for the school. These bonds must be paid off regardless if the school is operating or not.

On the asset side, the opening of the auto plant brought to the town many very skilled specialists. The auto manufacturer had to search far and wide to assemble the staff of skilled people to immediately start to manufacture a new product. This also applies to staffs assembled by the suppliers, etc, of the auto plant. This an asset the town did not have before. Who else needs these specialists? After analyzing and cataloging the skills of those unemployed, the town must raise enough funds needed to market this pool of talented workers. Any foreign vehicle manufacturer is an obvious choice. Or for that matter any  manufacturer of machinery is a good choice. Some company will show up. This will begin another need for unmeet needs.