Don’t Blow Your Money on a White Elephant!

May 6, 2020

Real Estate

For many, real estate has been the path to tremendous wealth, but some unfortunately head toward the “white elephant” property (WEP) trap. In ancient Asian cultures, receiving a rare white elephant as a royal gift was both a great honor and a financial calamity. It was disrespectful to either put the trophy to work or dispose of it, but its upkeep was a terrible drain for the “fortunate” recipient. Today, “white elephant” describes anything that seems very attractive on the surface but in actuality is a crushing financial burden with limited practical use.

Many novice investors, especially those from big cities where virtually all real estate has great value, scoop up WEPs, which seem very attractive but can’t be profitably leased, developed, or sold. Excitement quickly turns to fear as WEP owners realize they’ve got a gigantic problem on their hands.

Great building in the wrong location

One common WEP is the former trophy corporate headquarters. A successful founder or CEO who grew up in a small town or city sometimes insists on locating their company’s headquarters in the “alte heim.” As the only significant employer, the town’s favorite son brings hundreds or even thousands of jobs with him and spares no expense in building them a new office building. But companies today often merge, get bought out, or go bankrupt quickly, and CEOs get thrown out too. When that happens, the trophy building, which may have cost tens, even hundreds of millions to build, becomes a WEP.

No one needs a massive office campus in Yahupitzville, regardless of how stunning and luxurious it may be. After the company closes or consolidates, this beauty languishes on the market with little demand from local tenants or purchasers. When an uninformed out-of-towner scoops up this “metziah,” whom will he lease it to? Even at pennies on the dollar, an out-of-place building is often a disastrous investment.

Also in the “right building, wrong place” category are far-flung and vacant school building or medical facilities. These may have been built at great cost with public dollars, but if the politics or demographics around the location change, demand can completely disappear. In that case, these special-purpose properties are often worthless, more costly to maintain than any lease will bring in.

Great location but the wrong building

Sometimes the opposite WEP scenario unfolds: a property is well located but the building is so flawed it can’t cover even its maintenance costs. For example, one otherwise-excellent industrial property in Central Jersey that I reviewed had serious and unquantifiable environmental contamination. It’s in an excellent location, but a purchaser of that building can easily go bankrupt on the cleanup.

Another property, an assisted living facility in a major city in the Midwest, has been sitting vacant for years, “eating” but not capable of producing. This WEP doesn’t conform with strict medical building codes, and the cost of either fixing it or even tearing it down makes it a losing proposition. If someone naively jumps into such investments, he will probably burn through much money, time, and effort simply getting rid of them.

Residential white elephants

Residential real estate has its share of WEPs too. Hundreds of thousands of abandoned houses in Detroit, Cleveland, St. Louis, and other urban areas cost more to upkeep than they are worth. Crime in the 1960s and 1970s drove huge portions of the population to flee to the suburbs, leaving behind solid houses in areas no one wants to live in. Unfortunately, many frum novice “ investors” from NY, NJ, and even Eretz Yisrael have been duped into buying worthless homes for tens of thousands of dollars.

At the other extreme, many celebrities build mansions with grandiose and ostentatious upgrades only to find that no one wants to buy their meshugasen when they choose to sell. These home can sell for pennies on the dollar, often just for the land value, and are then torn down!

Indulgence or Investment?

Even in strong real estate markets like NYC and Lakewood, upgrading a home well above average community standards is usually an expenditure, not an investment. Whether it’s $200,000 kitchen cabinets, a private mikvah, or a wing with 10 guest suites (all real-life examples), those wealthy enough to afford such things will usually want to put in their own chatchkes, not pay full price for a previous owner’s. These upgrades may bring a lot of personal joy and benefit but very often don’t increase the resale value of the home. Real estate indulgence is not a real estate investment.

From White Elephant to Cash Cow

There are exceptions to every rule. Some investors with a combination of mazal, deep pockets, hustle, and creativity can take something everyone else considers a WEP and turn it into a cash cow. Because WEPs are practically given away, those who turn them around can make spectacular sums of money. During the 1980s and 1990s, abandoned buildings in much of Brooklyn and the Bronx were WEPs, but those who somehow held onto them made many millions as NYC’s prospects dramatically improved. A multibillion-dollar WEP turnaround is underway right now in the American Dream Mall, once called “NJ’s biggest White Elephant.” By adding massive entertainment components to the shopping mall, a niche expertise of the current developers, this WEP nightmare may turn into an investor’s dream.