Thinking about the path not taken

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Recently, I’ve been doing a lot of thinking about where we are in the cycle, debt, risk and asset allocation.

You see, many of my contemporaries have been doing fairly high-leverage development deals and doing very well with them.

We at Adaptive have shied away from those sorts of deals, for two, related reasons:

  1. You to pay income tax on the profits of for sale development deals, instantly chopping your profit roughly in half; and
  2. Because of the tax treatment, the only way to make these deals make sense on a post-tax basis is to use construction loans, which are always recourse

For better or worse, we are risk averse. We are trying to avoid losing money on any deal. And we certainly don’t take recourse on construction loans, because we’re trying to go through our careers without having to give back properties or declare bankruptcy (both of which happen to many developers who use a lot of debt).

So, we avoid for sale development, at least in this part of the cycle. Objectively, this is the strategy that makes sense for us.

And yet, every time I see one of these development deals do well, I’m totally green with envy. After all, when you hit one of these things, the returns are pretty amazing.

I have to keep reminding myself that a dice roll where a few of the outcomes are incredibly bad is not one I’m willing to make, even if the others are pretty good.

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