January 06, 2019

I learned a lesson today. It cost about $10,000—a year of college at a cheap university—it's one I'd rather not repeat, so I'm writing it down, for safe keeping.

It's a lesson about credit, and underwriting.

I bought a distressed commercial property a few weeks ago. It had six leases with staggered expirations. After a bunch of modeling, it looked like a place with a better-than-average central scenario, not much downside risk, and a lot of upside depending on taxes. It took some digging, but there was good value without much risk, so we acquired it at a good price.

Everything looked great. Then I tried to get a loan.

The lender, quote responsibly, went to the property and let me know one of the businesses wasn't operating. This was news to me. I'd checked myself about two weeks prior, and things looked fine. Six leases, six businesses.

Well, it turned out the non-operating business had shut the doors between when I first looked, and my lender did, two weeks later. 45 days into a five-year lease and the place is already closed. The ink was barely dry.

As I said, six leases, staggered. I'd naively assumed a 60-month lease with 59 months on it looked great. Why wouldn't it? That meant 59 months until I had to worry about finding a new tenant.

Only, I'd assumed his credit was good. It wasn't. Delinquent after a month.

Thus the lesson: long-term debt obligations with no payment history are as good as the paper they're written on—largely worthless. They call it "seasoning" in finance—you want the lease/mortgage to have at least a bit of history before it's considered truly "solid". It was subprime all over. I was the buyer, a broker had sold me a trash credit obligation, and I hadn't properly evaluated it.

My bad. No good underwriter would make this mistake. Next time, I won't either.


Two related thoughts. First, industry knowledge.

Any serious credit professional—mortgage underwriter, commercial lessor, bond analyst—wouldn't have made this mistake. They're pros and they—their peers, their managers, everyone around them—their whole industry, collectively knows better.


The same as how someone at Apple knows exactly what to do with the glass on the phone, someone at Boeing knows just how to affix wings to planes, and someone at Andrew, where my dad worked, knows how to keep a corrugator, the machine that puts the little nubs in the cable so it doesn't crease when it bends (see above), from jamming.

Financial seasoning is what Naval Ravikant calls "specific knowledge". You can't learn it in a book or a class. Get enough people with specific knowledge together, and you've got a company; even more, an industry.

That's how great stuff happens. It's powerful and incredibly hard to copy.


Second thought: inheritance.

"Shirtsleeves to shirtsleeves in three generations", they say.

And really, how could it be any other way? You spend your life making small mistakes like this, learning, then you don't make them again.

Then you take the fortune, give it to your kids, and all of a sudden they're big-shot real estate developers, or venture capitalists, throwing their money around like candy. You started with the knife, then got the pistol, the rifle, the shotgun, and finally the assault rifle, only when you could handle it.

The kids have never shot a gun, and they start with the armored assault vehicle. Of course they're going to blow their hand off. They don't get the opportunity to make mistakes; they're playing in the big leagues from day 1.

I don't know how wealth managers solve this, but they must be pretty smart.

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