Below is an article from my friend Brandon…..again.  He writes such great stuff….that….for obvious reason….I like to post it!  Enjoy…until next time….rob

The Führer Principle

In grade school, I remember asking myself how could the German people elect someone as evil as Adolf Hitler. How could they allow such a monster to become supreme chancellor? Understanding how it happened is very important, mainly so it does not happened again. The significance of this newsletter will only make sense by looking through the lens of today’s events. Many of the main ingredients that led to the Nazi take over are present today. Recognizing the circumstances is the solution to history not repeating itself.

The beginning of the end for the Weimar Republic began with the Treaty of Versailles in 1919. For the German people, the treaty was humiliating. The treaty placed heavy restrictions on Germany much of which were embarrassing for the once proud nation. The German army was reduced to one hundred thousand solders and arms for citizens became non-existent.  The initial German economic fatalities due to the treaty were shocking. Germany’s territories vanished overnight. Germany lost approximately 13.5% of its total land mass, 13% of its industrial productivity, and more than 10% of its population. Additionally, the loss of important mining regions such as the Saar and Upper Silesia resulted in a loss of some 74% of iron ore and approximately 25% of its coal reserves. Historians and economists have long deliberated the real effects of the treaty but one thing is for certain it lead to “deprivations that shattered their faith in the democratic process and left them cynical and alienated.” –G.A. Craig

Germany’s economic situation never improved. To keep up with the stringent demands of the treaty, the Weimar Republic faced hyperinflation never seen before in history. The German Mark ratio to the U.S. dollar was 4 to 1 near the end of the WWI. It was 8 to 1 in 1919, 250 to 1 in 1921, and 2000 to 1 in 1923. The Weimar government, at various times, faced food shortages, massive unemployment, and an unprecedented economic depression. By 1932, some 6 million Germans were unemployed. Millions of them were homeless living on the streets relying on soup kitchens and charity organizations. “Men standing hopelessly on street corners of every industrial town in Germany; houses without food or warmth; young people without the chance of a job. All these things explain the bitterness which burned in the minds of millions of ordinary Germans.”

The escalation of political violence in Weimar Germany must certainly be factored in as a contributory reason for the country’s political volatility. Beginning with the emergence of the Freikorps, which later became the brutal SS, formed units immediately after the declaration of the Republic. The tendency toward violence became entrenched in Weimar politics after the 1919 assassinations of Karl Liebknecht and Rosa Luxemburg. Large protests and riots became an all too familiar sight for the citizens of Germany.

Among the widespread disarray and frustration, the basic notion of a government was being questioned. What type of government could lead and govern the will of the people? This ongoing debate became known as the Führer Principle. The Führer Principle is established on the acknowledgment that the true will of the people cannot be revealed through plebiscites but that the will of the people in its natural and virtuous state can only be articulated through the Führer. Therefore, a difference must be drawn between the theoretical will of the people in a parliamentary democracy, which simply echoes the discord of diverse social perspectives, and the true will of the people in the Führer-state. Hitler took the Führer Principle and redefined it as himself…he was the Führer. Redefining the Führer was nothing short of audacious. It was captivating and alluring to many who were famished for change.

Many of the governing members in the Reichstag (congress) struggled to tame and communicate effectively to the youth of Germany. The Reichstag members continually doubted the youth’s ability to recognize a just government. Keep in mind most of Germany’s youth grew up in this chaotic state. Their view towards the government was distorted to say the least. The Weimar Republic only lasted 14 years but before that Germany spent the last 5 years in battle. A huge cohort of individuals only knew suffering and turmoil. Disconnect between the defenders of the former Kaiser rule and much more progressive governments were mounting daily. During the short lived Weimar Republic, Communism, Socialism, and a whirl of leaders/dictators were fighting for control.

Hitler knew very well that the youth’s mind were especially susceptible. This is exactly why he began with them. In the beginning, his messages were engineered for the youth. He knew the youth would be prone to messages of change and optimism. Joseph Goebbels (Hitler’s Minister of Propaganda) used propaganda methods to manipulate the masses. It was this desolate desire for change that gave Hitler his power.

The straw that broke the camels back for the Weimar Republic was the American Great Depression. The stock market crash of 1929 sent shock waves across Europe. The crash knocked Germany into the gallows. It was Hitler’s time to move. On September 14th, 1930, the Reichstag elections were held. The results were shocking. The Nazis had entered the register as the ninth and smallest of Germany’s political parties. The German people voted. The Nazis controlled 107 seats after that election. In November 1932, Hitler was defeated in the presidential election to WWI veteran Paul von Hindenburg. He received 42% of the votes. Hitler decided to enter a coalition government as chancellor in January 1933. Upon the death of Hindenburg in August 1934, Hitler become successor by popular vote.

Today, we are suffering the ongoing effects of the worst recession since the Great Depression. We are facing a global economic contraction. Greece is on the verge of insolvency and the US is limping along. Worldwide riots and protests have plagued the streets invoking for revolution. Frustration levels are swelling. This is the formula for calamity. However, it begins with the youth. Vladimir Lenin famously referred to youth uprisings as “useful idiots”. With the exception of the American Revolution, most revolutions in history conclude with a radical party seizing opportunity out of the political madness. People such as Hitler, Mao, and Lenin took advantage of a chaotic situation. I do not foresee a Weimar revolution of this magnitude anytime in the near future. Nevertheless, if we are not careful and mindful of the situation it becomes an unquestionable possibility. Education and knowledge of the truth is the only thing that will prevent history from repeating itself.

Have a great weekend my friends!

Brandon Saylor
-Associate

Below is a post from Bob Bach……I hope you enjoy…..rob

Manufacturers Rally

Analysts shuddered two months ago when the monthly Business Outlook Survey from the Philadelphia Federal Reserve plummeted unexpectedly, signaling a worrisome slowdown for manufacturers in the region. Although it covers only a corner of the U.S. – eastern Pennsylvania, southern New Jersey and Delaware – the survey provides an early clue to the more widely followed manufacturing index from the Institute for Supply Management. The dismal August reading from the Philly Fed raised fears that the economy was sliding into recession.

But the manufacturing sector is expanding again according to the October survey, released yesterday. The survey asks manufacturers a list of questions with three possible answers – increase, decrease and no change – and calculates a diffusion index for each question, which is the difference between the percentage of respondents citing an increase and those citing a decrease. The index rose from minus 17.5 in September to 8.7 in October, the largest one-month gain since the early 1980s. The index measuring activity levels expected in six months increased to its highest reading since April before the economy began to slow. The survey doesn’t point to robust growth ahead, but it is consistent with Grubb & Ellis research showing sustained demand for industrial space over the past two quarters and this quarter as well. Together with other recent indicators such as retail sales and weekly jobless claims, the Philly Fed survey suggests that the economy is fighting off a near-term recession.

Have a great weekend.

Best regards,
Bob

Robert Bach
SVP, Chief Economist
Grubb & Ellis
312.698.6754

Today’s post is actually an interview I did with my friend Steve Maxwell from DealAnalysisGuru.com.  In the interview, Steve and I discuss the process of getting to a purchase agreement on a commercial deal.  In other words, explaining the process of getting a commercial real estate deal locked up under  a purchase contract.

In the interview, I answer questions regarding LOIs (Letter Of Intents) and purchase agreements.  The call is broken up into three segments.  The interview was conducted over the phonse so, the call gets dropped a couple times.  But none-the-less….there is some good information.  The links to the calls are provided below.

P.S.  Make sure you check out Steve’s site www.DealAnalysisGuru.com

Interview links on The Process of How to Get a Deal Under Contract:

1. Interview part 1
2. Interview part 2
3. Interview part 3

Until next time……rob

Anyways….

One of the biggest lessons I have learned in my limited time in real estate investing is that the people to learn from are those with real experience.  As with many of you, I started with books and “boot camps”….and in some cases that works well with residential investing.  But with commercial real estate, the stakes are much bigger and the learning curve is much steeper.  But the “gurus” don’t tell you that.

My biggest mistake was I did not research the people I was learning from.  Learning how to invest from a “guru” that had limited experience with commercial real estate was a big mistake.  Even more of a mistake was learning from gurus who were using other people’s experiences and successes as their own to sell their program.  Yes…this happens a lot more than we think.

Luckily, I was so hardheaded and ignorant, that I took the information with confidence and pushed through.  Sometimes you can push so hard that you take down a wall.  Fortunately, at the time, it was the right wall.  But, with that said, there were a lot of mistakes that only guidance from experience professionals could have helped me avoid.

Now…what I am NOT saying is…”it takes years of experience to start investing in commercial real estate.”  That is not what I am saying at all.  But….what it does take is the correct education and guidance.  Honestly….this is the best way and your success can be realized much faster than you think or what others tell you.

So…you are probably expecting a sales pitch here….but on the contrary, here are some tips on how to get started on your own….that is right…. how to get started without a flashy package and a smooth talking guru….

Rob’s thoughts are ideas on getting started in commercial real estate:

1)  Keep your money for now. Thinking about spending 2K, 5K, 10K on a good looking”how to invest in ……” package where the marketing says “20K in value…but for a limited time….only $4,999.00 you can have the plan to wealth…and my personal phone number.”  When you hear that….tighten up…have a cup of joe….and remember my words here…KEEP YOUR MONEY.

2) Buy a good book on commercial real estate. Don’t buy a book from a “guru” where all the information in the book is to push you to a boot camp.  Now…there are good books out there that are trying to sell you something, but they give you a lot of value too.  One of my favorites is Investing in Commercial Real Estate for Dummies by Harris and Conti.  A great book in explaining the basics.  Another of my favorites but will bore you to tears is The Handbook of Commercial Real Estate Investing by John McHan.  The importance of reading up on commercial real estate is to see if you even have a true interest.  If the books above get you excited, you may have commercial real estate in your blood.

3) Take a Real Estate Licensing class. I recommend Kaplan based on my experience.  The licensing class does not mean you have to get a license.  It is a good course to get you familiar with the laws, codes, etc., in your area for not only real estate but property management as well.  I learned a lot in my licensing class.  More than I thought I would.  But I also learned that one of my instructors had no clue about commercial real estate….just residential 

4) Take the Certified Commercial Investment Member (CCIM) courses. This is the boot camp you want to attend.  Yes…it is somewhat expensive and time consuming.  There are four classes and each class lasts five days.  But, if commercial investing is where you want to be, this is the course you want to take.  This will help you analyze projects at depths you had no idea existed.  You will also learn how to do demographic studies, leases, etc.  Plus the networking at these courses are invaluable.  When you finish all the courses, you will have an opportunity to get certifed but you will have to meet some strict and demanding guidelines just to qualify to take the final test.   But…I digress.

5) Find a friend, make a friend. Find someone in your local area that is successful at doing what you want to be doing and follow their lead (also known as modeling).  This is by far the best advice I can give you.  If you have a great interest in commercial real estate, finding someone who is a success at it is the best thing you can do for yourself.  This may take some time and it is uncomfortable at first….but well worth it.  Chances are this person/mentor will be a real estate agent/broker/CCIM investor.

If you do all the above and still want to go to a smooth talking guru…..by all means….but I definitely went full circle starting out with gurus and ending up with the “right way.”  Real experience from real investor is by far the best way to find success in commercial real estate.

Until next time…..rob

Jefferson Memorial was purchased on a Wrap.....okay okay...that is not true

Greetings from Washington D.C. (actually…not anymore…but when I wrote this…that’s where  I was…as if you cared).  Still my favorite metropolis (other than Cedar Crest, NM…of course).

Anyway….

With all that is happening with our economy, specifically, lenders not lending.  Creative financing (owner financing) is showing up a lot more.  Great for us…the investors.

In most cases, many of the “owner financing” deals have an existing mortgage in place.  So…for a seller to sell his/her asset with seller financing, the seller may choose to sell via a Wrap Mortgage.  What in the world is a Wrap Mortgage, a.k.a, a Wrap-Around Mortgage?

I have seen many definitions for a “Wrap Mortgage.”  But for us, the investors, a “wrap” is basically taking the existing asset’s mortgage and wrapping it (hence the word “wrap”) with a brand new mortgage.  In other words, a new legal document is created that refers to the existing mortgage (first position) but with the wrap mortgage now making the new owner liable.  The beauty here is, the new owner is only liable to the seller.  The “Seller” is still liable to the original lender.

****Note….A “true” Wrap is NOT an assumption….at least what I am defining here as a Wrap.

There is a lot more to this but the above is the general idea.

Many investors and sellers get a little jumpy when they find out there is a “Due on Sale” clause in the original mortgage when selling an asset creatively.  A “Due On Sale Clause” is simply where the lender can call a loan due if certain points of the mortgage are compromised i.e., a “wrap mortgage.”

Have I ever experienced a lender initiate a “Due On Sale” clause? No.  Have I heard of other investors have to deal with a lender exercising the “Due On Sale” clause?  Yes…but only in a residential investment he or she bought on a wrap.  But….that was the only one.  Even in that instance, the lender worked with the investor on refinancing the asset.  Go figure!

I have yet to experience or hear of it on a commercial deal specifically due to a “wrap mortgage” transaction.  That is not to say that it does not happen.  But my question is, will a lender excercise the Due on Sale clause on a performing note?  I doubt it….but none-the-less it is a possible downside.

Just a few more thoughts regarding a Wrap:

1) the terms of first-position mortgage may or may not be reflected in the Wrap.  Usually, the terms are negotiable with the first-position mortgage being the base line.

2) Legal instruments are used to put the Wrap in place, i.e., REC (Real Estate Contract).  Usually, in a commercial transaction, the documents are a little more sophisticated (uhh…hmm…more complicated since attorneys are involved).

3) In some cases, an escrow company or attorney is used for the ongoing management of the transaction.  In other words, a third party is usually used to make sure payments are collected from the new owner and payments are made to the first-position lender.  This protects both parties.

Of course, there is a lot more detail involved but overall….I love buying assets with owner financing and a Wrap is a great tool.

Until next time…..rob