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It’s A Pure Giveaway

A report from the Wall Street Journal. “We Co. Chief Executive Adam Neumann likes to say that office space is for WeWork what books were for Amazon Inc.—just the beginning. He even boasted that his rental-apartment venture WeLive would become bigger than WeWork. In a 2014 presentation to investors, the company predicted that WeLive would account for $605.9 million in revenue by 2018. The business never got off the ground.”

“In a WeLive building in lower Manhattan, the company and its landlord spent $42 million to turn 21 floors in a former office tower into furnished, shared apartments, according to an offering prospectus for the building. The building’s residential portion has struggled to turn a profit since it opened in April 2016, according to people briefed on its financials.”

From KTBS on Louisiana. “Some homeowners on the west side have had enough of affordable housing and dollar stores. But plans for both are in the works at or near one intersection. A developer has designs for a wooded lot just south of the intersection. Rowanoak Development of Pearl, Mississippi wants to build 44 low-income housing units. But opponents say they’re not needed.”

“‘There is affordable housing available in west Shreveport already. And we have approximately 25 to 26 percent vacancy rate among those 15 complexes that are already within our community’ says Joyce Lawrence, the researcher for the West Shreveport Alliance.”

The Dayton Beach News Journal in Florida. “Six years ago, a Toronto-based real estate development company started looking into constructing a luxury apartment building near the corner of Orange Avenue and Martin Luther King Jr. Boulevard. The project didn’t make economic sense. Why put up apartments that would charge the highest rents in the city in the middle of Midtown, an area long held down by crushing poverty?”

“That deal fell apart and remains mired in litigation. And nearly a full city block in Midtown is wasting away behind a chain-link fence. Now Heron, which still owns the land, has partnered with another developer offering a completely different plan for the 2-acre site. While Beneficial Communities Partners tries to get everything lined up, the vacant apartment site continues to deteriorate. The once-raucous Safari Lounge sits silent, its back deck shredded by strong winds and a rickety wooden fence leaning toward the ground. Three homes next to the shuttered bar that could be charming monuments to early 1900s life in Midtown have dislodged shingles, rotting wood, torn window screens and weedy grass sprinkled with trash.”

The Press Enterprise in California. “The Inland Empire has seen a 243% surge in the construction of large apartment complexes this year. Chris Tourtellotte, managing director of acquisitions for a Los Angeles-based builder of higher-end apartments, said his company and others who build in the L.A. metro region face constant challenges.”

“Tourtellotte acknowledged that more affordable housing units are needed in Los Angeles. But developers are given no financial incentive to build them, he said, and with rents in those units being so low, the projects provide virtually no revenue for builders. ‘It’s a pure giveaway,’ he said.”

The Midland Reporter Telegram in Texas. “Midland again has the highest average rent in the state during the month of August, according to RentCafe. The average rent in Midland was $1,569, which was a 1.4 percent drop month over month and a 1.6 percent drop year over year, according to the August Rent Report. A Permian Basin Apartment Association official reported last week that the vacancy rate in Midland is around 95 percent, down from 97 percent one year ago.”

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This Post Has 74 Comments

  1. ‘developers are given no financial incentive to build them, he said, and with rents in those units being so low, the projects provide virtually no revenue for builders. ‘It’s a pure giveaway’

    I’ll note that this is at a time when rents have never been higher, and the percentage of incomes going toward rents has never been higher. I spotted this in 2014, and there’s no conclusion other than financial mania.

  2. “In a WeLive building in lower Manhattan, the company and its landlord spent $42 million to turn 21 floors in a former office tower into furnished, shared apartments, according to an offering prospectus for the building.

    Will there ever be a memorial to all the trillions of Yellen bux squandered on such fruitless speculative ventures?

      1. We Piddle Around (WPA)

        We Company
        WeWork debacle spells end of private company ‘glory days’, says Capital Group head
        Tim Armour says WeWork’s aborted IPO signals the end of frothy valuations
        NEW YORK, NY – SEPTEMBER 13: A WeWork office facility stands in the DUMBO neighborhood in the Brooklyn borough of New York City on September 13, 2019.
        Robin Wigglesworth 5 hours ago

        WeWork’s aborted listing may herald the end of a “glory period” for amply-funded private companies with lofty valuations as investors dissect their prospects more rigorously, according to the head of Capital Group, one of the world’s biggest asset managers.

        There has been a spate of initial public offerings from high-profile, disruptive technology companies this year, but many have seen their private valuations come tumbling after listing on the stock market.

        WeWork last week delayed its own IPO amid concerns over its big losses, corporate governance and eccentric chief executive and founder, Adam Neumann. The real estate company had been valued at $47bn in its last private investment round from backer SoftBank, but its investment bank advisers were forced to ratchet down their price estimates before finally deciding to shelve the listing last week.
        …

        2. “WeWork’s aborted listing may herald the end of a ‘glory period’ for amply-funded private companies with lofty valuations as investors dissect their prospects more rigorously, according to the head of Capital Group, one of the world’s biggest asset managers.”

          “Glory period” = A period of time marked by pure financial insanity.

          “dissect their prospects more rigorously” = read them for the first time.

          2. WeTurbine

            Blade life maybe 10 years! Replacement blades on a 3MW power plant cost $250,000 to $300,000 each. Ouch!

            Where will the money come from to clean these sites up after decommissioning?

          3. From the article:

            “By any definition the decommissioning or rehabilitation of old wind turbines will be costly. And that cost will be borne primarily by the owner operator.”

            But:

            “Bassett: So according to the American Wind Energy Association, as of 2017 86% of U.S. turbines were only less than 10 years old. And that gives the industry time to consider another option you mentioned earlier, which is refurbishing them.”

            “Ray: Yes, that’s right. Wind power proponents say advances in technology have made repowering or restoring wind turbines a much more viable option for owner-operators.”

            “Bassett: And that could also lead to savings for Oklahomans, right? Because as turbine parts are replaced with newer technology the average energy capacity of the turbines increases, while the price associated with wind power drops, correct?”

            “Ray: Well, that’s right. Better technology, better design and better forecasting methods have made wind power much more efficient and affordable over the years.”

          4. Where will the money come from to clean these sites up after decommissioning?

            How much do you reckon a wind turbine generates annually in dollars electricity?

            According to Wind Europe, an average 2.5 – 3 MW can produce more than 6 million KWh in a year.

            So 6,000,000 * $.13 (source: Choose Energy) = $780,000. So in 10 years, that would be $7.8 million in electricity. So replacing the turbine blades would represent only 3% of the gross electricity costs over the 10 year time frame which seems pretty low.

          5. only 3% of the gross electricity costs

            Kudos for trying to do math! Wholesale electric in the US is half what you state, so let’s call it $4 million, not $8 million. There are actually three blades on that turbine, so let’s call that $1million to replace. That is more than 3% don’t ya think?

            The rig cost $4 million to build in the first place and I suspect there are some other costs, like the land rights and grid expansion.

            Never would have happened without government cheese. There won’t be private monies in a safe deposit box to pay for cleaning this mess up when the music stops.

          6. That is more than 3% don’t ya think?

            Yes, that would be more than 3%. A lot of this depends on the assumptions used. For instance, you said $1 million, but if you use the lower bound $250k x 3, it’s $750k. And the newer blades might be more efficient and generate more electricity. If the cost is $750k to replace the blades, then that would be closer to 19% of the replacement cost. ButiIf the windmill runs for 25-30 years, you still have something like a 2-3 MWh windmill generating $4 million in electricity every year, give or take. And with DJT taking us to zero interest rates (or even negative interest rates), there is no reason why one wouldn’t put up more windmills because the cost of capital is so low.

            I don’t see the trend reversing anytime soon.

          7. I don’t see the trend reversing anytime soon.

            Cedar Point Wind Farm near Limon, Colorado, east of Denver.

            ” Adding the PPA and the PTC and the grant; and assuming a 20-year lifetime production of 16,943 GWh; the U.S. federal government and the State of Colorado are providing direct subsidies in excess of $40/MWh to this project.

            Taking all this corporate welfare into account, the payback for Xcel (and the other energy companies involved) is actually more like 8 years; at which time they start raking in the cash for the next 12 years until the wind turbines reach end-of-life. This is a pretty good deal for everyone except the taxpayers and ratepayers.”

          8. Cedar Point Wind Farm near Limon, Colorado, east of Denver.

            That article is about 6 years old. The cost of wind has about halved in the last 6 years.

            The argument about the cheapest source of electricity is really secondary to which source is cleanest and most sustainable. Imagine if I asked, “What would you buy to get the most calories per dollar?” Well, it would be soda or candy. Lowest cost doesn’t mean best. It rarely does. But in this case the renewables are cleaner and more economical.

          9. And with DJT taking us to zero interest rates (or even negative interest rates)

            Pretty sure the president doesn’t set the target funds rate. Probably better to assign any blame (or praise) where it belongs – on the fed bankers.

          10. Pretty sure the president doesn’t set the target funds rate.

            I know. But he does seem to have a pretty big bully pulpit and has been cajoling Powell into cutting rates twice so far. Keep in mind we were scheduled for 3 rate hikes last December before DJT started jawboning for lower interest rates (now negative interest rates). It seems like the Fed board is bending to his will.

        1. Prepending “we” to anything and calling it a new business line reminds me of all the tech wannabe companies that say, “We are the Uber of X.”

          3. It’s like the Iced Tea company that announced they were pivoting to “blockchain” and their stock suddenly rocketed 200%.

      3. The Financial Times
        We Company
        SoftBank moves to oust Neumann as WeWork chief executive
        Board meeting to demote founder of property group could be called as early as next week
        Adam Neumann, co-founder and CEO of WeWork, attends the opening bell ceremony at Nasdaq, Tuesday, Jan. 16, 2018, in New York. WeWork is a privately held shared workspace company based in New York. (AP Photo/Mark Lennihan)
        Adam Neumann, co-founder and CEO of WeWork, attends the opening bell ceremony at Nasdaq, Tuesday, January 16, 2018, in New York. © AP
        Eric Platt and Andrew Edgecliffe-Johnson in New York
        4 hours ago

        SoftBank has lost faith in Adam Neumann’s ability to lead WeWork and is expected to call for a board meeting to demote him as early as this week, after the lossmaking property group shelved its initial public offering and the chief executive’s volatile behaviour and drug use came to light.

        Mr Neumann’s outsized influence over the company has become one of the biggest hurdles in the path of a multibillion-dollar IPO, according to investors and people briefed on the matter.

        SoftBank’s vice-chairman Ron Fischer sits on the WeWork board, as does Mark Schwartz, a former board member at the Japanese telecoms-to-technology group. It was unclear, however, whether a majority of the board members believed Mr Neumann should step down as chief executive.

        The board could decide against changing the CEO role in the end, these people cautioned, and either rally around Mr Neumann or hire a new executive chairman to oversee the company’s management.

        WeWork and SoftBank declined to comment.
        …

    3. “$42 million to turn 21 floors”

      How many units is that? 400? That’s $100K+ per apartment. Which you are expected to share with strangers.

  3. ‘Why put up apartments that would charge the highest rents in the city in the middle of Midtown, an area long held down by crushing poverty?’

    Because they were going to sell them to a greater fool. It worked for years, and then it stops.

      1. Why is this trend “alarming”? If something isn’t priced to sell, it won’t sell. That’s simple supply and demand at work. Get to sawin’ and slashin’, greedhead developers and “investors.”

        1. What’s surprising is the amount of money they apparently have to carry all these empty buildings for years and years on end.

  5. So would like to balance this out a bit as I have close friend who works for WeWork and I have been very nosy.

    So I think I know a bit more details than the people posting here or the journalists writing articles being linked to.

    I have read Adam is akin to Madoff…

    Not going to comment on the things he did as an individual like selling the name rights to his own company but in larger picture…

    The culture for this company and tech/ VC start ups was growth at ANY cost. It was accepted as a cost of establishment of your business that cost didn’t matter. It was encouraged by all players including soft bank so I don’t think it is fair to compare it to a Ponzi scheme or madoff as they “adam and co.” Fully believed, right or wrong that they could pull this off successfully and ultimately become profitable. See quote about welive. They really do believe this stuff.

    Second… it had been talked about the long term contracts. I have heard stuff about one year buy outs in contracts that can protect them from a down turn. It hasn’t really been talked about so I thought I would bring it up.

    Also what isn’t being brought up is what they are doing for b and c properties in terms of improvements for the land lords. This is a very positive thing that isn’t being discussed.

    Finally… listening to the last few conference calls they are now making it their mission to prove everyone wrong by cutting costs and focusing on core business. I personally am curious to see if they can pull it off. It really is just musical chairs… this company has been the lady’s man standing when the music stopped. So they have admitted errors and are making an adjustment.

    Also not being discussed is the amount of enterprise that is signing on to WeWork space that can be put on the books differently in case of a down turn.

    Anyways food for thought.

    1. “The culture for this company and tech/ VC start ups was growth at ANY cost.”

      The business model of a cancer cell.

      “It was accepted as a cost of establishment of your business that cost didn’t matter.”

      An excellent time-tested formula for going broke.

      ‘It was encouraged by all players including soft bank so I don’t think it is fair to compare it to a Ponzi scheme or madoff as they ‘adam and co.’ Fully believed, right or wrong that they could pull this off successfully and ultimately become profitable. See quote about welive. They really do believe this stuff.”

      The believers in Madoff, despite the math, also really believed.

      Time will tell.

      1. They really do believe this stuff.”

        It actually doesn’t change reality to believe something that’s wrong, it’s still fraudulent.

    2. Not going to comment on the things he did as an individual like selling the name rights to his own company but in larger picture…

      These are crucial details.

        1. Interesting to read Scott Galloway’s take on WeWork. I’ve read quite a bit of analysis from Bloomberg’s Matt Levine and I think he has done a pretty good job of of skewering WeWork lately.

          I don’t personally know anyone who works in a WeWork suite or know anyone who works for WeWork. I would like to talk to someone who works in WeWork office space to get their perspective.

          It seems like these days everyone is trying to sacrifice profitability for growth until they achieve some scale where they have pricing pressure or some sort of moat or competitive advantage in their platform/ecosystem/etc. For each tech company doing this, the question is this: Will it turn out more like Amazon, or more like MoviePass? Time will tell.

          1. I know that startups and their hipster employees love to be located in downtown areas, but realistically, there just aren’t that many firms like that.

    4. “what they are doing for b and c properties in terms of improvements for the land lords”

      Ah yes, good old “value add,” same as for apartments. I think businesses would rather rent c-grade office space for a lower price.

      As for making improvements, the pig didn’t sell the first time, so they are giving it a buttermilk bath. Terrific.

      2. “I think businesses would rather rent c-grade office space for a lower price.”

        The conventional wisdom is that businesses are adding amenities as a substitute for square footage, and packing them in.

    5. put on the books differently in case of a down turn

      Not sure what you’re trying to say but this doesn’t sound good.

      1. @redpilled – when a company is doing a short term lease for a satellite office they can expense it differently ( a long term lease has to have the entire thing go on the balance sheet as a liability)

        1. I was going to say “satellite office” as an example.

          WeWork is really pushing to enterprise the benefits of letting them focus on their core business and let WW handle the office needs. If they were more frugal it wouldn’t be a bad play.

          1. That would be the SaaS (Space as a Service) business model that Scott Galloway addresses at 0:44-1:20 of https://twitter.com/profgalloway/status/1175814709330812933
            Upshot: It’s all about the valuation.

            I would also think that this business model primarily serves small businesses in locations that are small business friendly (i.e., not CA) At some point, it becomes more cost effective for businesses to internalize these functions. Are the vast majority of WW’s locations in business friendly locations?

    1. Opinion: Two-thirds of these corporate insiders now expect a U.S. recession by the end of 2020
      By Mark Hulbert
      Published: Sept 21, 2019 1:08 p.m. ET
      Fading CFO optimism is a warning sign for stocks and the economy

      Corporate America’s chief financial officers have become significantly more pessimistic over the past three months about business conditions, and this has worrisome implications for both the U.S. economy and the stock market.

      That’s the sobering result of the latest Duke CFO Magazine Global Business Outlook survey, released earlier this week. When asked to rate their optimism about the economy on a zero-to-100 scale, with 100 being the most optimistic, CFOs’ responses averaged 62.6. Notably, five times as many CFOs became more pessimistic over the past three months as those who became more optimistic.
      …

    3. Certainly, not after looking at the graph in the story you posted. Optimism was much lower in 2012 but there was no recession within a year. The graph totally undermines the correlation suggested by the story. Seems like more fake news just trying to cause a recession.

    4. Ye vultures be circling o’er head.

      Elliott Management Corp
      Elliott prepares for downturn with new funding round
      Paul Singer’s activist fund is building up a war chest as it expects market disruption
      Paul Singer, president of Elliott Management Corp., speaks during the WSJDLive Global Technology Conference in Laguna Beach, California, U.S., on Tuesday, Oct. 25, 2016. The conference brings together an unmatched group of top CEOs, founders, pioneers, investors and luminaries to explore tech opportunities emerging around the world. Photographer: Patrick T. Fallon/Bloomberg
      © Bloomberg
      Ortenca Aliaj and Lindsay Fortado in New York September 21, 2019

      Elliott Management, one of the most zealous shareholder activists on Wall Street, is going back to investors for more money just two years after the hedge fund raised $5bn in one day as it prepares for a market downturn.

      The $38.3bn activist fund led by Paul Singer has been building up a sizeable war chest to spend on new opportunities, including a $2bn co-investment fund that closed in August to take companies private.
      …

  8. On the previous thread, I pointed out that Trump had a 52% favorability rating on Rasmussen, a six point advantage over Obama at a similar point in their terms. I could not remember the exact numbers Trump had just before the 2016 election but now I have pulled them up. Hillary had a two point lead in the popular vote, she actually finished with around 1% more of the popular vote. Now, favorability and votes are not exactly identical but they track very closely. Trump, if the election was held Tuesday would have a chance of winning the popular vote by a comfortable margin. However, a Republican does not have to win the popular vote to win since the Democrats will probably win California by three million votes. Thus, the meltdown by the Democrats. Now, they want to impeach Trump for exposing Biden and his son’s corruption both in the Ukraine and China. However, they just spent two years trying to say any connection between a foreign government and Trump was treason and an impeachable offense. Yes, that is a winning issue:
    https://thehill.com/media/306721-rasmussen-calls-itself-most-accurate-pollster-of-2016

    1. impeach Trump for exposing Biden

      We live in a world where exposing the truth is a bigger crime than the crime itself.

      Julian Assange’s prison term is ended, yet he’s still rotting in a British jail awaiting extradition to the USA. Land of the free!

      1. “We live in a world where exposing the truth is a bigger crime than the crime itself.”

        Yes, the Democrats seem to have adopted the ghetto mentality of snitches get stiches.

  10. Should I warn prospective homebuyers in the Poway Unified School District about the ticking time bomb of $1 billion in Capital Appreciation Bond interest payments destined to land on area homeowners over the next few decades?

    Nah…let ’em learn the hard way.

    1. Post-Traumatic Stress

      …unlike other districts Poway has the added burden of crushing long-term debt, a legacy left by the administration of former superintendent John Collins who was ousted in 2016 for misappropriating district funds. The lingering trauma of his profligate borrowing and spending will take decades to heal.

      During Collins’ tenure as assistant superintendent, and later as the top dog, the district succumbed to the siren song of investment bankers, selling General Obligation and other bonds that saddled district taxpayers with nearly $1.6 billion in interest by the time they’re paid off over the next 35 years.

      Poway Unified grabbed national attention with its infamous $105 million bond issue in 2011 after it was reported that interest on that bond issue alone would be $876.6 million and that the obligation couldn’t be refunded at lower interest rates. Many of the school buildings refurbished with the money will most likely require additional upgrades by the time the debt is paid off, if not before.

      Other California school districts – including a few Patch districts — were also seduced into issuing Capital Appreciation Bonds during that era by investment bankers, consultants and lawyers who themselves reaped millions on the deals. However, none of these districts came close to the magnitude of Poway.

      At the end of the 2017 fiscal year, the most recent audit available, Poway reported its outstanding principal on general obligation was $484 million. In addition, the district has another $480.9 million outstanding in Special Tax Revenue Bonds issued to fund school improvements in 15 special districts that’s being repaid with specific assessments on property owners in those individual areas. Interest on this debt will total an estimated $332.5 million over the life of those bonds.

      When the district’s total bond debt is combined with additional obligations for retirement liabilities another $450 million is added, exacerbating its annual budgeting headaches.

      However, Poway school officials say these obligations don’t contribute to budget problems.

      “Long-term debt and GO bonds do not adversely impact the district’s fiscal position and operational health,” Christine Paik, a district spokesperson, told Patch. “Our general fund and long-term GO bond debt exist in two separate funding buckets, and the two are not linked. While retirement liabilities do affect the general fund, the bond debt has nothing to do with our annual budgeting or our general fund. In fact, Poway Unified has an excellent record of positive budget certification from the San Diego County Office [of Education].”

      Beatty, who joined the board in 2012 after the damage was done, said the former administration sold voters by devising a way to create “ballooned debt” that had the illusion of not increasing property taxes.

      Cleaning up the mess is “a sticky situation,” Beatty said.

      “Our current board has hired financial advisers to do some preliminary research on the feasibility of buying back some of the bonds,” Beatty told Patch. “All along I’ve been very pessimistic about that because of the non-callable feature of the bonds.

      “Any bondholder is going to insist they get the current market value for their bonds if they were to sell them back to the district so there really aren’t any savings to glean. The only benefit is to just transfer the tax burden from future homeowners to current homeowners. I had always hoped the state would look into how this was all done in the first place and find a way out.”
      …

      1. One of the many factors I considered before deciding on the 1031 exchange rather than a new purchase. Given the superintendent’s history, I would expect that the district’s financial advisors and attorneys are looking into whether the deal involved any financial shenanigans.

      2. With about 70,000 households in the district, $1 billion averages out to about $14,285 per household. Not really a big deal when spread out over 30 years.

  12. Waiting lists are in years and even a decade in some NYC projects…… so they must be so crime ridden even for Free or $50 a month is too much to pay.

    There is affordable housing available in west Shreveport already. And we have approximately 25 to 26 percent vacancy rate among those 15 complexes t

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