Met with a guy yesterday who participated in the Highland Park building boom of the 1980s and early 1990s.
Apparently deals worked like this: You would buy a piece of land for cash. Next, you would get the bank to appraise the land for a lot more than you paid for it. Then, the bank would do a 75% loan-to-cost construction loan to let you build an apartment building.
Seems reasonable, right?
Wrong. Because the bank would put such a high value on the land and construction was so cheap, “75%” was really 110% of your total project cost, meaning you could get the cash you paid for the land back out. So, you were building the whole thing with debt and you’d have your cash back to buy another piece of land.
Rinse. Repeat.
Think about what that meant for him. Because he didn’t have any of his own money in the deals, there was no limit on the number of buildings he could build. And he took advantage, building three buildings per year for a while.
And this guy wasn’t the only one; there was a whole group of builders doing pretty much the same thing.
Eventually, the neighborhood got upset about the pace of construction, the whole area was down-zoned and an HPOZ was created. By then, this guy and his competitors had created large portfolios of non-rent control apartment buildings in an area where further construction was basically halted.
You can imagine how they’ve done over the past 3-5 years as rents in the neighborhood have gone crazy. To say that I admire their achievement would be a major understatement.