Archive for the 'Real Estate' Category

Ray Lucia Is Wrong on REITs

March 30, 2012, by Seth Hettena. 1 Comment

Ray Lucia speaking at Sean Hannity's Freedom Concert in San Diego. Photo by Andi Hazelwood.

In 2010, radio talk show host Ray “Buckets of Money” Lucia threatened to sue me for $300,000 for defamation over a blog post on this website. My post pointed out Lucia’s relationship to a securities firm that paid $2 million to settle U.S. Securities and Exchange Commission charges.

Nothing ever came of the threats and, coincidentally, (or not?), Lucia shortly thereafter told the SEC that he would no longer register with them as investment adviser. Lucia still hosts his radio show and rounds up new clients at his free seminars with actor Ben Stein.

I was content to leave things alone until last week when I heard from a client of Lucia’s son, Ray Jr., who now runs the investment business started by his illustrious father.

This person, whom I’ll call Joe, is, runs a small home repair based business and is approaching retirement age. Joe attended one of Lucia Sr.’s “Buckets of Money” seminars 18 months ago and entrusted his money to Lucia Jr.  He wishes he had read this blog beforehand.

Today, they are illiquid. About $80,000 of Joe’s money — 30 percent of his net worth — is locked away in real estate investment trusts (REITs) that aren’t traded on any exchange and therefore can’t be sold for years.

Joe’s wife is ill and may need to take early retirement, which leaves Joe wondering how he’s going to pay the bills.

For some retirees, REITs can be a good investment. REITs are required to repay at least 90 percent of taxable income to investors or the forfeit their tax exempt status. So, they are sort of function like bonds but with much better rates, something like 6 percent.

So what’s the catch? The REITs Joe is invested are non-traded REITs. This is an investment that can’t be sold for years — at least not without taking a big loss. FINRA, the financial industry self-regulatory body, last year issued an investor alert warning about the dangers of these non-traded REITs.

Both Ray Lucia Sr. and Jr. are big believers in these non-traded REITs. What they don’t tell you is that it’s a great deal for the folks at RJL Wealth Management. Brokers love non-traded REITs for the whopping commission a sale generates, which can range between 10 percent and 15 percent (!). If you really feel that you need a REIT in your portfolio, then buy a publicly traded one on Charles Schwab or some other online broker where the commissions run $8.95.

Joe never found out what the commissions were on his non-traded REITs including Behringer Harvard Multifamily I, which for years has combined high fees with poor performance. (For more, see reitwrecks.com’s Non-Traded REIT Forum.)

But that’s not all! For getting Joe in this predicament, RJL Wealth Management, Lucia Jr.’s company, collects a 1.9 percent fee — more salt on the wound. Buyer beware.

 

Who is Jim McCarthy of CounterPoint Strategies?

August 1, 2011, by Seth Hettena. 2 Comments

????????ikoniIf you’ve found your way to this page, there’s a good chance that you’re a journalist who has just had the pleasure of meeting an unusually aggressive PR flak named Jim McCarthy.

Don't let me scare you

First off, relax. If anything, the fact that you’ve run into Jim may be a good thing. This guy has represented some major league Wall Street crooks, so there’s a chance that you’re on to something.

CounterPoint’s current and former clients include:

  • Elliott Broidy, a wealthy California investor who pleaded guilty to paying $1 million in bribes to influence former New York State Comptroller Alan Hevesi.
  • Ira Rennert’s Renco Group and its Doe Run subsidiary St. Louis, the largest lead producer in the Western hemisphere. Jim does not want you to watch this video about the company’s operations in Peru.
  • The Formaldehyde Council
  • The National Fisheries Institute (Think mercury)
  • Bond insurer MBIA.
  • The College Sports Council
  • Hedge fund founder Raj Rajaratnam, who was convicted of securities fraud. (Update: Raj Rajaratnam was sentenced to 11 years in prison.)
  • Dallas-based Kosmos Energy, majority-owned by private-equity firms Blackstone Group and Warburg Pincus.

I had the pleasure of dealing with Mr. McCarthy a few times when I was investigating one of those crooks, a guy named Elliot Broidy, so I decided to put together this handy-dandy guide for the perplexed:

Jim is president of CounterPoint Strategies, a public relations firm in Washington, D.C. that specializes in an aggressive, combative style of crisis management. Jim is the real-life version of the fictional tobacco flak in Christopher Buckley’s novel Thank You For Smoking. His job is to make your story about you.

He’s the son of liberal journalist and peace activist Colman McCarthy. The acorn fell pretty far from the tree in this case. Young Jim registered as a Republican at age 18.

Early in his PR career, Jim handled a variety of Fortune 500 and foreign government accounts for two public relations agencies in Washington, Ruder-Finn and Nichols-Dezenhall, the “brass-knuckled boys” of DC’s PR world.

Ready to pounce

In 1994, McCarthy started a boutique public relations agency, McCarthy Communications. McCarthy Communications reportedly billed one client, the Saginaw Chippewa Indian tribe of central Michigan, $280,000 for a media campaign designed to force out the head of the Bureau of Indian Affairs. Replying to a BIA spokesman who said he had never seen such tactics, McCarthy said, “I say to Mr. Hackler, welcome to the Beltway.”

A confidential McCarthy Communications proposal was obtained by The Washington Post. (See William Claiborne, “Tribe PR Drive Targeted BIA Head”, The Washington Post, Aug. 16, 1999)

McCarthy was hired by the Augusta National Golf Club in 2002 when the men-only club was under pressure by activist [[Martha Burk]] to admit women. McCarthy advised a “pugnacious” approach. “My clients appreciate that I like to get in the arena, take off the gloves and throw down,” McCarthy told Alan Shipnuck, who wrote a book about Augusta’s battle to keep women out. (See Taking on the Times”, Sports Illustrated, April 6, 2004.)

It’s the first time I’ve done this kind of media criticism as part of an overall strategy for a client, and I don’t know of any other PR firm that has done it. It’s pretty cutting-edge. Big PR firms are like large corporations in that they have always been afraid to take on the press directly, because there is this belief if you create an adversarial relationship, you will never be treated fairly again. But for a venerable institution like Augusta National to embrace that strategy, well, that has certainly opened some eyes. Now I’m trying to build media-crit-driven crisis management into stand-alone business. Who knows? Maybe I’ll be snapped up by a big, deep-pocketed PR firm.

In 2004, McCarthy co-founded Public Interest Watch, a Washington nonprofit heavily funded by Exxon Mobil. According to BusinessWeek, McCarthy’s ex-employer, renamed Dezenhall Resources, helped create PIW in 2002 specifically to prod the IRS to go after Greenpeace.

David "Nick" Nichols

Just as McCarthy had hoped, deep pockets did find him. McCarthy Communications was hired in 2004 to represent investor Kenneth Langone, who was named in a lawsuit by then-New York State Attorney General Elliot Spitzer. On Langone’s behalf, McCarthy has repeatedly attacked the credibility of Gretchen Morgenson, a Pulitzer Prize winning business journalist for The New York Times, saying businesspeople regarded her with “pure contempt.” Apparently, Langone didn’t like it that Morgenson pointed out how Langone was a poster boy for executive overcompensation.

In 2008, McCarthy co-founded CounterPoint Strategies. McCarthy is the oversized face of CounterPoint, but behind the scenes is CounterPoint’s chairman, David “Nick” Nichols, a former investigative journalist who went on to found Nichols-Dezenhall, McCarthy’s old stomping grounds.

Before forming Nichols-Dezenhall, Nichols served as a campaign press secretary for New York City Mayor John Lindsay and then headed to Wisconsin where he served as a legislative staffer. Nichols also served for several as a senior media spokesperson for the Cuban-Haitian Task Force, which was charged with dealing with the thousands of refugees from Castro’s Cuba in the Mariel boat lift.

Share your McCarthy horror stories below:

 

 

Everyone loves an early inflation

August 5, 2010, by Seth Hettena. 0 Comments

Everyone loves an early inflation. The effects at the beginning of an inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the later effects, but the later effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.

— Dying of Money: Lessons of the Great German and American Inflations, Jens O. Parsson, 1974

Life in the Downtown Market?

July 22, 2010, by Seth Hettena. 0 Comments

How much will a San Diego law school student pay in rent?

It’s a good question for Security Properties of Seattle, which made the first purchase of a complex with more than 100 units that downtown San Diego has seen in three years.

Security Properties of Seattle picked up the 172-unit Entrada Apartments on 13th street in the East Village, a few blocks from Petco Park, for $22 million. That’s about $127,000 per unit.

This seems like a steal.  Up the block, the future home of the Thomas Jefferson School of Law is under construction (you can watch on their webcam).

But there’s work to do. Security Properties says performance needs improvement. The company says that will happen when the law school relocates to downtown in January. If this devastating review is a guide, the building’s management has had some problems.

SRM Development put up the building in 2004 with a $3.5 million loan from the Centre City Development Corporation, downtown redevelopment agency. The complex has 40 units set aside for low-income housing.

Under a deal with Security Properties, CCDC will receive $600,000 up front and annual payments of $145,000. The $2.9 million balance will be fully paid off in 2015.

Sunstone Walks Away from the W Hotel

July 15, 2010, by Seth Hettena. 0 Comments

Major Foreclosures and Defaults in Downtown San Diego
View Major San Diego Foreclosures in a larger map

When homeowners owe more than their home is worth and walk away, it’s called a “strategic default.” Fannie Mae warned potential strategic defaulters last month that they would never again get another mortgage.

But no one seems bothered that Sunstone Sunstone Hotel Investors Inc. is walking away from a $65 million mortgage on the 258-room W Hotel in downtown San Diego.

The San Diego Union-Tribune’s Lori Weisberg reports that the W Hotel was auctioned on the courthouse steps on June 29. The property is now in the hands of Bank of America, the lender.

Sunstone was underwater on the W Hotel. The Aliso Viejo-based real estate investment trust, concluded that it owed far more than the W Hotel was worth. Sunstone bought the W for $96 million in 2006 from a group led by developer Gatehouse Capital Corp., the Wall Street Journal reported last month.

But Sunstone is coming out ahead. Chief financial officer Ken Cruse crows to the U-T about “a significant gain” on the W San Diego because the hotel was recorded on Sunstone’s books at $35 million.

Thanks, assholes.

Vantage Pointe: Who Holds the Note?

July 14, 2010, by Seth Hettena. 0 Comments
Not much to celebrate now

For San Diego, the troubled Vantage Pointe project is a huge deal. The 40-story tower is San Diego’s biggest condo. Construction was financed at a cost of $210 million — the biggest loan of its kind in city history.

Vantage Pointe now sits on the brink of foreclosure. Its loan is in default and most of its nearly 700 units sit empty.

For the lender, Caisse de Depot et Placement Quebec, Canada’s biggest pension fund, Vantage Pointe amounts to about 2 percent of its holdings of foreign real estate.  If you include Canadian real estate, Vantage Pointe is 1 percent of the $19 billion portfolio.

Caisse has reorganized its real estate division in the wake of devastating losses and a $5 billion writedown last year. That has led to a confusing picture about who actually holds the note.

The Vantage Pointe notice of default identifies the lender as CDPQ Mortgage Corp. (since renamed CDPQ Mortgage Investment Corp.)

CDPQ Mortgage is the official name for Otera Capital Inc., Caisse’s commercial real estate lender with $22 billion in assets. (Canadian records list CDPQ’s mailing address as Otera Capital. CDPQ’s directors are Ross Brennan, Michel Deslauriers, and Marie Giguere are all managers of Otera Capital.)

Caisse’s agent on the deal was MCAP Inc., which manages the pension’s real estate debt.

Caisse has financed other major projects in San Diego. According to its 2009 annual report, the Canadian pension financed 820 W. Ash St. and Caisse holds a stake in a real estate investment trust with properties in San Diego. At one time it co-owned the First National Bank Center at at 4th & A streets, which sold in 2003 for $112 million.

Vantage Pointe: Quebec’s Folly

July 12, 2010, by Seth Hettena. 0 Comments
Vantage Pointe

Kelly Bennett at Voice of San Diego has another interesting story today on Vantage Point, the massive downtown condo complex that’s on the verge of foreclosure.

The 40-story Vantage Pointe, downtown’s biggest condo building, is stuck with 679 units that it can’t sell.

Developers are on the hook for a $210 million loan — the largest construction loan on a single residential building in San Diego history. Lenders filed a notice of default in March with a loan balance of $197.8 million.

Writes Bennett:

Now the building’s being handled like a giant hot potato. While the rest of the downtown market shows signs of stabilizing, no one has yet found a way to make Vantage Pointe profitable enough. The developers have been trying for a couple of months to find a buyer for the whole project or to become a partner. But the bank separately stuck up its own for-sale sign seeking buyers for the mortgage.

The developer is Pointe of View, a Calgary-based company, which formed a California partnership, Pointe at Balboa LP, to build this colossus.

The money for the project came from Caisse de Depot et Placement Quebec, Canada’s biggest pension fund, with $130 billion in assets. In 2008, la Caisse posted a $40 billion (!) loss, due in part to devastating losses on its U.S. real estate portfolio.

Fannie Mae Has It Right on PACE

July 11, 2010, by Seth Hettena. 0 Comments

A decision by Fannie Mae and Freddie Mac to say no to a White House-backed solar energy program has a lot of people in California pretty upset. As much as I like solar power, I have to agree the regulators got this one right.

San Diego County Supervisors Pam Slater-Price and Dianne Jacob pleaded with President Obama and the region’s congressional delegation to save the program and called the Federal Housing Finance Agency’s statement on the matter “insulting.” Gov. Schwarzenegger was disappointed. California Sen. Barbara Boxer, NYC Mayor Mike Bloomberg and many others deluged the administration with letters.

The solar-financing  program, known as “property assessed clean energy program” or PACE would have allowed homeowners in 13 San Diego County cities and unincorporated areas to write off the high up-front cost of solar panels — typically $25,000 or more — over 20 years.

The nascent program was dealt a major setback last week when the federal regulator overseeing Freddie Mac and Fannie Mae said that the federal mortgage giants will not buy or sell mortgages on homes enrolled in the program.

The Federal Housing Finance Agency said in a statement Tuesday that the liens created by the PACE program were senior to existing mortgages. FHFA said first liens “present significant risk to lenders .. and are not essential for successful programs to spur energy conservation.”

The second part of the statement is the one Jacob and Slater-Price found insulting. The first part of the statement — that first liens present significant risks — happens to be true.

San Diego County’s program was administered through the CaliforniaFIRST program. Here’s a sample Pace Agreement.

Homeowners who sign up for CaliforniaFIRST have a “contractual assessment lien” placed on each participating property covering the cost of installation plus interest.

A $25,000 solar panel retrofit would wind up costing $40,000 at 5% over 20 years. Assuming you pay $100 a month in electricity like I do, you wouldn’t save enough power to make it worthwhile.

The lien would be paid through property taxes, and liens would be bundled together and sold to investors as bonds. Communities often issue special tax assessments to cover the cost of infrastructure repairs or improvements, but PACE assessments uniquely cover improvements to a single residence.

For would-be buyers, a problem is that the lien follows the house, not the owner. It would have remained on the property even if the owner sold it.

But the real problem lies in the liens’ “super senior” status, which means it takes precedence over all other debts, including mortgages. So you could lose your house if you can’t or won’t pay. Take a look at this clause in the CaliforniaFIRST agreement.

The Property Owner acknowledges that if any Assessment installment is not paid when due, the Authority has the right to have the delinquent installment and its associated penalties and interest stripped off the secured property tax roll and immediately enforced through a judicial foreclosure action that could result in a sale of the Property for the payment of the delinquent installments, associated penalties and interest, and all costs of suit, including attorneys’ fees.  The Property Owner acknowledges that, if bonds are sold to finance the Improvements, the Authority may obligate itself, through a covenant with the owners of the bonds, to exercise its foreclosure rights with respect to delinquent Assessment installments under specified circumstances.

Another of the FHLA’s concerns that hasn’t gotten much attention bears noting. Homeowners who can’t afford solar panel will now become targets for shady lenders in a repeat of the whole interest-only mortgage debacle that helped fuel the housing bubble. I’m not saying that PACE will create another housing bubble, but do we really need to be adding to personal debt levels right now, especially for people struggling at the margins?

I’d love to end the burning of fossil fuels and dependence on foreign oil too. Increasing debt burdens to pay for it isn’t the way to go about it.

ALTA Responds to “Title Insurance is a Scam”

June 30, 2010, by Seth Hettena. 0 Comments

Jeremy Yohe of The American Land Title Association, the industry’s mouthpiece, has written a lengthy response to my earlier post about title insurance being a scam.

You can read the original post here and Jeremy’s comment appears here.

In his comments, Jeremy has addressed some of the concerns I raised in my piece, but did not address the well-established inefficiencies and structural flaws in the multi-billion title insurance industry.

Jeremy wrote, “A homeowner’s title insurance protects the owner for as long as they or their heirs on the property. And only need to be paid for once.”

  • Why then was my $625 title insurance fee necessary on my refinance? Chain-of-title, the major service provided by title insurance, was previously established in my case. A Lexis search would have turned up a lien or a judgment. Interestingly, though, according to CTLA’s Title Wizard, I would have paid LESS in title insurance if I had purchased my home instead of refinancing it.
  • How does ALTA explain the findings of “reverse competition” in the mortgage industry that date back to the 1980 Peat Marwick study for HUD? (Also see Consumer Federation of America, 2006 testimony before Congress; California insurance commission study on title insurance)
  • If title insurance is performing a valuable service and the “preventive measures” are keeping the title insurance industry’s loss ratio low as Jeremy suggests, why weren’t these savings passed along to me and others in the form of lower fees? Are title insurers colluding to keep prices high?
  • How is it that only one company, Entitle Direct, markets title insurance directly to consumers and, as a result, is able to offer me and many other the same service for 35 percent less? Why does Entitle Direct have such a small share of the industry? Am I a customer or merely a fee payer?
  • Why shouldn’t California copy Iowa and just put an end to the title insurance racket?

Curious to hear the answers.

The Scam Known as Title Insurance

June 25, 2010, by Seth Hettena. 12 Comments

“Ever feel like you’ve been cheated?” singer Johnny Rotten famously asked at the end of the Sex Pistols tour of America.

I sure did when I refinanced my home last year and I had to fork out $625 to Chicago Title for title insurance.

Title insurance for a refinanced home loan? This makes no sense.

I paid title insurance to ensure there were no issues when I first bought my home in 2002, so why was I paying for it again?

The answer is simple: Title insurance is a swindle. A scam. A shakedown, a hustle.

When Title Companies Compete, You Lose

Title insurance is less than 1 percent of the price of the home, so we tend to overlook it.

In economics, this is “inelastic” demand, meaning it is not sensitive to price.

Title insurers can virtually charge whatever they wants — even, as in my case, for doing nothing at all.

The result is an industry devoid of competition.

A 2005 report to California Insurance Commissioner John Garamendi found that competition for title insurance and escrow services in California “does not exist.”

A total of four companies control virtually the entire market for title insurance. Chicago Title is owned by Fidelity National Financial Inc., which is the nation’s biggest title company with more than 45 percent of the market.

In California — the big money maker for the industry — title insurance is marked by “reverse competition.” The title insurers don’t compete for business from homebuyers like me, the ones who actually  pay for the service. Instead they pay illegal rebates and kickbacks to a real estate agent, a lender or homebuilder in exchange for business referrals.

The California Land Title Assocation’s Title Wizard service lets you compare prices for title insurers. Here is what the big four would have charged for my home refinance:

Chicago Title $625
Old Republic $645
Stewart Title $625
First American $605

This is a pretty clear cut picture of what collusion looks like.

A toll on the road to home ownership

Title insurers would do quite well in Afghanistan and Iraq or any place where nothing gets done unless certain people are paid.

You don’t get a mortgage without title insurance. It’s that simple. My title insurance “expired” when my first mortgage was paid off. If I wanted to refinance, I had to have title insurance.

Title insurers have managed to set up a toll booth at the entrance to the U.S. housing market, which at its peak was worth more than $20 trillion.

All those tolls add up: During the housing bubble, operating income for title insurers grew 270 percent, soaring $4.8 billion in 1995 to $17.8 billion in 2005.

The money pours in, but it doesn’t come back out. Do you know anyone who actually filed a title insurance claim?

Chicago Title paid out a meager 5 percent on nearly $4 billion worth of title premiums, according to the company’s SEC filing.

In the insurance world, this percentage is known as the “loss ratio.” The loss ratio for title insurance is among the very lowest in the insurance industry. Auto and home insurers pay 80 percent of premiums.

What is Chicago Title doing with my money? The biggest expense on Chicago Title’s 2009 income statement isn’t personnel costs. It’s the whopping $1.9 billion in commissions paid to agents who drum up business.

What you can do.

Title insurance is not required by law in California. However, it’s standard operating procedures as most lenders won’t fund a mortgage without it. But you can shop around.

One alternative is Entitle Direct, which sells title insurance direct to the consumer. Entitle Direct doesn’t pay agents so it is able to charge a third less than most of the big title firms.

I could have saved $268 if I had gone with Entitle Direct. If you don’t feel that it’s worth the trouble, well, I guess then Johnny Rotten had it right.