BIAS DRIVES PERCEIVED VALUE

WHEREVER YOU GO, THAT IS WHERE YOU ARE

Your comments are solicited on the new CHESSLAWFIRM.COM. This is my first attempt to build

on my own website. I decided to follow the KISS approach (not the Gene Simmons’ band, but

“keep it simple stupid”). Eventually REALTY REALITY will be available in the virtual library. This

is also the first article written on my new MacBook Air (which my son got for me 6 months ago).

Yes, I’m moving into the 21 st century… kicking and screaming, but I am slowly getting there!

WAX ON, WAX OFF

Does what we do become who we are? My brother Bob allowed me to recognize the value of

going onto law school by employing me in his construction firm.

One summer of back breaking work made clear to me that my future was in the study of real

estate rather than in the creation thereof. Walking the length of a 30 footlong porch to place

concrete (as the shoot only reach to one end of the porch) still brings memory pain to my back!

That summer I learned, with certain real estate, a low-cost improvement can make all the

difference in the world in tenant comfort and hence investment value. Large tenants may bring

a more secure balance sheet, but they may not be worth their demands on the owner.

IDEAL REAL ESTATE INVESTMENTS (for me)

One size does not fit all. One type of real estate does not work for everyone. Today we are

focused on buying direct real estate (in a future article we will focus on real estate interest

acquired in a fund). What works for me may not be your cup of tea.

1. TENANTS ARE FUNGIBLE. In certain property types – housing, self-storage, flex – no one

individual tenant makes or breaks the investment. The demise of a large retail (e.g.,

Circuit City) or office (e.g., LandAmerica) tenant may cause the financial roof to collapse.

2. PAY AS YOU GO. Financial engineering to get through a short period of renovation and

leasing may make sense. Financial engineering, though, can also be a way to mask that a

property does not generate sufficient income to satisfy investors.

3. CASH NOT KING. Some investors may prefer a shopping center anchored by the

Salvation Army over one anchored by Wal-Mart! Cash flow alone does not make an

investment great (or even rational).

4. SHORT TERM. The real estate I prefer has the investor accomplishing the repositioning

and up graded leasing within 3 years, followed by a year to “prove concept”, followed

by a sale in the fifth year. I believe you harvest the crop when the IRR yield is at its

highest. Then again, it may just be that I have a short span of attention!

5. CHALLENGED OWNER. My experience is that most of the value achieved with a real

estate investment occurs at the time of acquisition. Anyone giving sufficient time and

money can turn around a challenged property. Only the tenacious and creative locate

the troubled owner at exactly the right time when they will accept a lower offer price.

BOTTOM LINE. I prefer to invest in real estate with fungible tenants (so losing one does not

crush my repositioning plan). I want a short hold (get in, get it done, get on to the next

investment). And having invested over $2 billion in real estate, the best returns were where the

owner was in a challenged position (so that a quick and certain close had a value greater than a

higher price).

Andy Chess