Then the economy bombed the boomer. He was more than fully committed, over borrowed and needed quick cash to keep his deal going. An oil shortage, a banking crash and really high interest rates were on the verge of shutting him down.
The Brooklyn Bomber was caught in a bind having already borrowed as much as he could based upon his previous successes. His financing was all in short term construction loans that were coming due, and he had to refinance at higher andhigher rates.
High interest rates hit him doubly. First, his construction loan rates ruined cash flow and ate potential profits. Even worse the high rates increased mortgage payments so young professionals could no longer qualify for mortgages. His bankers were edgy.
At this stage this man consulted me about raising money from Europeans to tide him through his cash crisis.
At his request, I flew to New York and rode with him to the apartments. They were beautiful, so attractively designed that they had been featured in architectural magazines. “Just the kind of place Europeans love” was my thought, “but how do we get quick financing?”
Perhaps, I thought that it would be better to sell apartments to Europeans rather than ask for loans!
Owning houses is something Europeans readily understand. They have confidence in owning houses. Making loans and investing in equities are not so much their deals.
So we treated the apartments as the investment and placed small, classified ads in the Netherlands, England and Germany.
Here is why. Interest rates on the dollar at that time were at all time highs. Plus the U.S. dollar parity was at an all time low versus the British pound, German mark and Dutch guilder. These Brooklyn condos, seemed really cheap, when converted into foreign currency!
We did not try to sell the condos by mail. The sole object of our first ads was to find Dutch, German and English investors who were interested enough in investing in New York, that they would come and look at the condos.
Our sales package was aimed at getting the investors to Brooklyn, not at selling the condos direct. We wanted centers of influence. The marketing package included a copy of the famous architectural magazine showing the condos as well as details about profit potential of the property and the really low price in European and British currency terms. We kept a clear message that we were offering an investment backed by property ownership and that we wanted to meet the buyers and let them see for themselves.
The American buyers who had been buying from the Brooklyn Bomber were buying homes. These Europeans were making an investment which was very different.
We designed a package so the Europeans could buy an apartment, and immediately lease it to an American buyer – with a lease option.
This helped the Americans who wanted a place to live but currently could not qualify for a mortgage. They could immediately move into the house of their dreams and buy it later when they had a larger income (or when interest rates fell).
The lease on the other hand created immediate income for the European investor and the lease option sales price locked in a capital gain for the European.
The Europeans loved this because they earned income now, appreciation later and the entire package was secured by the real estate itself.
This was a win – win deal all made possible by distortions of currency fluctuations. The weak U.S. dollar made this property seem really cheap to Europeans. Yet the weak dollar pushed up oil prices, and interest rates made the condos really expensive for Americans.
One more point can be gained from this Case Study. The developer’s goal was to sell as many apartments to European investors for cash as fast as he could while the distortion remained. Yet we also set up a limited partnership designed for small investors who could not afford to buy an entire apartment. The partnership took title to one condo at a time and sold units of ownership for as little as U.S. $5,000.
This allowed Europeans to own a part of condo and gave the developer investment packages to sell for all ranges of investors. He sold the apartments for $125,000 to $250,000 to single investors, but with his deal could offer a $5,000 investment.
By taking advantage of this distortion this Brooklyn developer did not bomb out! This gave the Brooklyn Bomber a plan to salvage his tight position then, but also gave him much, much more. Once he had developed a group of real estate investors in Europe he had an entirely new source of financing for the future. As interest rates fell and the leasees began to exercise their options, his European investors saw profits and had extra cash. By developing good will with these investors he maintained a steady source of equity finance that allowed him to outgun other developers in the area.
This led the developer into an international business, with an overseas sales company. He learned how to use the Circle of 100. He paid this sales company generous commissions and built an asset protected cash reserve aboard.
This is a wonderful case where the solution to a short-term problem (that could have bankrupted the developer) created a reliable long-term source of finance, solved his current problem and remained so he could also use it in the future.
He gained a source of money in many currencies and often at competitive interest rates. This source of money was available in good times AND bad, when other developers could not get money at all!
He gained an overseas company with 50% non-U.S. owners so he reduced U.S. tax liability. The assets in this overseas company were also protected from lawsuits and litigation in the U.S. See Circle of 100 for more on this at https://www.garyascott.com/archives/2003/04/10/801/
Distortions in currencies and interest rates around the world can bring an infusion of cash, buyers, different rates of interest, opportunities to reduce tax, eliminate liability. The process can also be a great deal of fun, if you learn how to understand markets abroad and adapt your plans to match the market!
See how to reach more investors everywhere using the “Theory of Ten” in next week’s message on raising finance abroad.
Until then may all you business be good.
May we serve you at one of our upcoming courses?
International Business and Investing Course, in North Carolina, https://www.garyascott.com/nccourse
Super Thinking + Spanish https://www.garyascott.com/catalog/sp/
International Business Made EZ Course in Ecuador.https://www.garyascott.com/catalog/IBEZec/
Andes Extension & Real Estate Tour. https://www.garyascott.com/catalog/andeanext/ Andean Shamanic Tour. https://www.garyascott.com/catalog/mingo/ Attend three Ecuador tours and save $398. See https://www.garyascott.com/catalog/save5/
Writers & Self Publishing Coursehttps://www.garyascott.com/catalog/pc/