| The proper action when things are going well is to | | | | and remodel more buildings. Nick just couldn't wait |
| pay off debt and consolidate your position. Then you | | | | and consolidate his position. He had every building he |
| will be financially strong and can go for further | | | | owned loaned up to the maximum value that he was |
| expansion without fear of loosing what gains you | | | | able to. The rents were more than enough to cover |
| already have. When you are not deep in debt you do | | | | the payments on each individual building. So what |
| not have to worry about your creditors getting paid. | | | | happened? |
| Since the usual history of a business is cyclic (boom | | | | Two things. The first was his greed. We entered the |
| and then every 7 years (plus or minus) bust) you can | | | | 1991 recession, and the price of buildings went down. |
| predict when it is time to consolidate. | | | | The banks were starting to foreclose on buildings and |
| When the prices are "too good to be true, they are." | | | | put them back on the market for very cheap prices. |
| In the two years just before the top of the market | | | | Nick just couldn't let a deal pass him by. He bought 3 |
| is reached, prices are going up at very incredible rate. | | | | of them. He borrowed the last dime he could |
| I have seen real estate go up 25%, per year, right at | | | | squeeze out of every building he owned to buy |
| the top. This is incredible and I guarantee you it | | | | these buildings, thinking that he could do no wrong. |
| cannot sustain itself, at that rate. As hard as it is to | | | | One bank made him the deal of a century. They |
| give up a profit, it is harder still to sell an investment | | | | wanted a lot of money down but the price "was just |
| when it is going straight up. But, understand this is | | | | too good to be true." |
| when you need to sell. If that is not what you want | | | | Nick was so much in a hurry to get his hands on this |
| to do then you need to go to plan B: pay off your | | | | great deal he didn't bother to do his normal structural |
| debt and get ready for the market drop. | | | | inspections and research. After all, Nick owned 17 |
| If you are debt free you can survive the drop and | | | | buildings in Hollywood by now and knew the market |
| then be solvent and financially secure when the | | | | better than anyone else, he thought. He looked at |
| recovery comes. I would like to tell you a story of | | | | the building and saw it was only 20 years old. The |
| the largest apartment owner in Hollywood. | | | | building was empty, which meant it brought in no |
| It was 1980 when I met Nick. He owned 11 buildings | | | | income. That didn't bother Nick, he would just get it |
| at that time. He bought the worse buildings in town. | | | | rented quickly and the building would support itself. |
| These had the best cash flow. He owned mostly | | | | What Nick hadn't noticed was that the foundation |
| brick buildings. This was because they cost less | | | | was damaged and a $100,000 repair was needed. |
| money than stucco and wood buildings. This lower | | | | This was a repair that Nick couldn't afford. I begged |
| price allowed Nick to generate higher profits. Nick | | | | Nick to walk away from this building and let the bank |
| would buy a building. He then did a market study, and | | | | have it back. He refused and squeezed more money |
| figured out what size apartments and what numbers | | | | out of his collection of buildings. |
| of bedrooms were generating the highest rent, per | | | | As you can imagine, Nick was loaned to the hilt and |
| square foot. Then he remodeled his building to get | | | | had no money set-aside for an emergency. At his |
| the highest price per square foot he could. He spent | | | | peak he owned 17 buildings worth $45,000,000 with |
| over $100,000 per building to do this. He also had to | | | | him estimating his net worth at $7,500,000. He was |
| earthquake proof all of his buildings. | | | | definitely worth a lot of money. That was for sure. |
| One of the reasons that brick buildings sold so | | | | Before we get jealous of him, lets look at these |
| cheaply was that they needed to be earthquake | | | | numbers a different way. If Nick was worth |
| reinforced. When Nick finished remodeling a building, it | | | | $7,500,000 then his real estate loans had to be the |
| was producing a very nice cash flow. Nick would use | | | | difference. That is $37,500,000. These were sure big |
| that cash flow to buy and remodel the next building. | | | | numbers. |
| This was very smart thinking. Where did Nick fall off | | | | Let's look at these numbers in terms of their |
| the rails? First he would find a great deal, while he | | | | percentages. This $37,500,000 was 83.3% of |
| was still in the middle of a remodeling job. He just | | | | $45,000,000. $45,000,000 had to be the retail value |
| couldn't pass it by. He borrowed on one of his | | | | of all these buildings. Nick would not think in terms of |
| finished buildings to get the down payment to buy | | | | selling them. He never sold a building. He only bought, |
| the building. | | | | and bought, and bought. What Nick saw was the |
| Then he would borrow on a second building to get | | | | potential. If property values went up only 10%, Nick's |
| the money to remodel the new building. Now he was | | | | net worth would go up $4.5 M. Property values had |
| remodeling two buildings at the same time. By | | | | gone up over 20% in the 1980's but the recession |
| borrowing on two of his successful buildings, he now | | | | that had started was of no concern to him. It is clear |
| had to pay the loan payments on the two new loans. | | | | that he had stretched himself to the limit. The last |
| The rents from the older buildings now went to the | | | | building the bank sold him put him in trouble. He might |
| lenders instead of to Nick's remodeling project. The | | | | have even survived it if he sold one, two or maybe |
| new building, just bought, didn't produce enough | | | | three buildings. No, Nick wouldn't do that. |
| income to cover the new loan on it because half the | | | | One year later the recession was not over. |
| building was empty due to the remodeling. Nick now | | | | Unemployment in California went up and up. |
| needed to keep borrowing money to fix the buildings | | | | Businesses were closing, President Reagan was |
| and pay the loan payments on the buildings that | | | | closing down Aerospace, and workman compensation |
| didn't generate enough income. When a building was | | | | insurance was so high no one could stay in business. |
| completed it then supported itself very nicely. | | | | Vacancies in apartments were going from 1% to 5% |
| Was Nick happy with that? No, he wanted more and | | | | to 10%. Then it happened, we had the LA riots. |
| more buildings. If at any time Nick had stopped | | | | Hollywood became a ghost town and then it |
| borrowing to buy new buildings, and just finished all | | | | happened again, the earthquake of 1994. Brick |
| his buildings in remodeling, he would have been able | | | | buildings fell down on Hollywood Blvd, none of Nick's |
| to catch up with himself and started expansion from | | | | buildings. People moved away and vacancies rose in |
| a new level of security. That was, using the buildings | | | | Hollywood too as much as 17%. |
| profits after paying all of his loan payments to buy | | | | |