Landmark Links March 20th – Chop Shop


Lead Story….  Imagine that you run a commercial real estate fund and made some very prudent investments back when the world appeared to be falling apart in 2009-2010.  You bought trophy buildings when there was blood in the streets and are now sitting on hundreds of millions of gains on some assets, if not billions.  You still like the fundamentals of owning the property long term and do not want to sell it outright.  At the same time, you have low leverage, long term debt at an attractive rate and do not want to further encumber the property in order to take some equity off the table.  We should all be so lucky to have this “problem” but there is an increasingly widespread solution to it: so-called partial interest sales where a seller parts with a portion of the equity but still holds onto a controlling interest.  When it comes to trophy properties, such a transaction is a lot more common than I would have though.  From Keiko Morris of the WSJ (emphasis mine):

Last year, “partial-interest sales” made up 83% of all deals for Manhattan office buildings valued at more than $1 billion, according to real-estate services firm Cushman & Wakefield. In 2015, minority-interest sales made up 42% of such transactions.

Selling a minority stake in commercial properties is far from a revolutionary idea.  It’s been happening for a very long time.  However, recent market and financing conditions have pushed it more into the mainstream thanks to high asset prices and less available debt financing.  Again from the WSJ (emphasis mine):

Before the financial crisis, debt was abundant and cheap, and buyers could borrow at high loan-to-value ratios, making large deals manageable because less equity was needed, Mr. Harmon said. Since then, lenders have been more disciplined, requiring more equity, and those who bought trophy properties during the current cycle are under less pressure to sell.

“If you create enough value and have no pressure to sell, you can sell a 49% interest, refinance and get all your money back and still own 51%, which is what we have done in our properties,” said Scott Rechler, chief executive of RXR Realty LLC, a private real-estate company.

A more prudent approach to debt also has meant investors have to write bigger checks for the equity required for these big commercial deals. In this environment, minority-interest sales of property make the amount of equity needed more manageable and avoid incurring city and state transfer taxes, which, combined, are 3.025%, real-estate experts said. These types of transactions also can widen the pool of potential buyers.

Partial-interest acquisitions, particularly of large, high-end office buildings, have been growing at a time when overall sales of Manhattan commercial properties are down, tumbling 66% from a peak total of $63.2 billion in 2015 to $21.6 billion in 2017, according to Cushman. Some real-estate experts said minority-interest sales often can boost the overall value of these pricey buildings compared with the value achieved with a full sale of the property.

Clearly, this is a trend is not going away any time soon and I think that, if anything, it will become more pervasive in buildings at lower valuations in the future.  Interestingly enough, the Wall Street Journal article quoted above did not make any mention of the technology that is most likely to efficiently make widespread partial-interest ownership a more-liquid reality: blockchain.  Dave Kidder, one of my partners at Landmark has been talking about this for months and I’ve come to agree with him that eventually, this will become a reality.  Today, Bitcoin and other cryptocurrencies hog most of the blockchain coverage.  However, there is a good chance that security tokens or tokens backed by real assets like equity, LP shares or commodities may be where the real potential of distributed ledger technology and smart contracts lie.  If correct, this will ultimately, this will lead to disintermediation, increased liquidity and falling transaction costs as real estate transactions are tokenized.  We could be years off from this actually happening but the amount of capital flowing into blockchain technology and the increasing prevalence of partial-interest sales lead me to believe that a future of being able to buy and sell tokenized shares of an individual real estate asset or portfolio of assets may be coming sooner than we think.


This Time Isn’t Different: Bond king Jeffrey Gundlach called the demise of the housing market and subprime back in 2006.  Today he sees markets on the edge with crypto speculation and the inverse VIX implosion as signs of excess speculation.

Stalling Out: Earlier this year it looked as if the yield curve was going to start widening again.  However, longer rates have stabilized – at least for the time being – as investor begin to question whether or not higher growth is sustainable, flattening things out once more.  See Also: For hedge funds, bond buyers and savers, higher rates are a good problem to have.

Help Wanted: The tight labor market is bringing workers off the sidelines but we are getting close to the point where America runs out of unemployed people to fill available jobs.


Giving Away the Farm: A new study found that all of the tax breaks that cities throw at Amazon do not create enough good jobs to make them a worthwhile investment.  See Also: How Amazon’s bottomless appetite became corporate America’s nightmare.


Locked Out: It’s not only the high barrier to entry markets that have a historic shortage of new homes.  Even development-friendly cities are struggling to add units fast enough to keep up with population growth thanks to labor shortages and rapid cost inflation making it next to impossible to profitably build entry level homes.


What Not to Do: The Toys ‘R’ Us story is a cautionary tale about leveraged buyouts and strategic shortsightedness, and offers a how-not-to guide for the retail industry.  See Also: The failure of Toys ‘R” Us is more about over-leveraging than it is about Amazon. Contra: Toys ‘R’ Us’ management is digging in their heels and blaming the retailers failure on Millennials not having enough children.

Hot Air: Here are the seven most egregious lies that fraudulent blood testing startup Theranos and its disgraced founder Elizabeth Holmes told investors.  See Also: The Theranos crackdown offers a welcome check on the tech startup frenzy.

Challenged: A Supreme Court challenge over beach access filed by a tech billionaire could potentially bring down the California Coastal Commission.  I’m having a difficult time finding a side to root for here as this boils down to a billionaire who wants to keep a beach to himself versus an all-powerful, completely unaccountable and often capricious appointed government entity.  Frankly, I wish that they both could lose.

Chart of the Day



Gotta Hear Both Sides: A man wearing a bull costume was caught on camera trying to burn down his former lover’s trailer park home because Florida.

Extra Protein: An Arkansas man found a dead mouse inside his can of Red Bull.  In an ironic twist, tests revealed the mouse to be the least unhealthy thing in the can.

Thunderdome: Between wrestling moves and flying chairs, this IHOP brawl is one of the best fast food restaurant fights that I’ve ever seen.  The manager should get a raise for the perfectly executed pile driver around the 32 second mark.

Wasn’t Me: China Eastern Airlines is denying that flight attendants took part in an orgy despite being caught on film.  In related news, China Eastern Airlines was recently named the best airline for singles. (h/t Darren Fancher)

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