I doubt that Cormac McCarthy had real estate development in mind when he wrote that line from All the Pretty Horses, but it could not be more on point as respects that topic.
For example, when John D. Rockefeller Jr. leased eleven acres of land in Manhattan from Columbia University in early 1929 for future development, he could not have foreseen that the waiting world would serve up the stock market crash and the Great Depression before the year was out.
As it was, he found himself the proud owner of several blocks sporting flophouses, speakeasies, brothels, and the like, for which he owed $3.6 million a year in annual rent—the equivalent of almost $70 million a year in 2026 dollars. That must have been an eye-watering amount even for someone who literally was, as the old song goes, as rich as Rockefeller.
But he had the balance sheet to see through to completion what eventually would become, over the course of many years, Rockefeller Center, and I mention this in part to draw attention to one of the ways that private real estate development was financed before the modern days of institutional capital. People and companies with big balance sheets could afford to take the risks inherent in that waiting world.
MetLife’s ground up development shortly after World War II of the multifamily project in New York City that came to be known as Stuyvesant Town and Peter Cooper Village is another example that leaps to mind of risks taken on and successfully overcome by a massive balance sheet.
More recently—during the 1960s, when Gerry Hines was developing at one and the same time One Shell Plaza and the Galleria in Houston, Texas—enterprising souls who lacked that kind of capital but had real estate developments to finance would rely on insurance companies for mortgage debt backed by equity capital from third parties; what was then known as OPM, or “other people’s money.”
Hines’s financing of the Galleria is a classic example. Gerry had moved to Houston from Gary, Indiana in the early 1950s, after earning a mechanical engineering degree from Purdue University. While working a job as an engineer of building systems, he felt the need to act on his inner entrepreneur and, along with some buddies, invested $50,000 in a Lincoln Mercury dealership.
It went bankrupt inside of a year, teaching him a valuable lesson: stick to something you know.
What he knew, were buildings. He started small, developing warehouse and office projects in suburban Houston, and establishing himself as a capable and trustworthy partner among the local banks and those people in town who had money to invest.
By the mid-1960s, Gerry was ready to take his business to the next level. He wanted to assemble twenty-six acres of land in southwest Houston—in what real estate people call “the path of growth”—for some kind of project, although he wasn’t entirely sure what kind. Nevertheless, he called on his local friends and business connections to raise half the $25 million he needed for the land assemblage.
Now, if Gerry as the developer wasn’t entirely sure what he was going to do with his twenty-six acres once he owned them, his investors definitely had no idea. They invested with Gerry on the strength of his track record and reputation as a solid, trustworthy fellow Houstonian. They also knew their interests were aligned with his—for Gerry to make money, they’d have to make money too.
There was another factor that was commonly considered by real estate investors back in those days, and that was the potential tax benefits to be generated for them once the project was completed and leased. In the late 1960s, the highest marginal federal income tax rate was a little less than double what it is today, i.e., it was fully 70%.
Such high tax rates created considerable motivation for those with substantial incomes to find ways to “shelter” that income from taxation. Real estate was among the investments to which they turned for that shelter.
An individual might invest, say, $100,000 in a partnership like the one that developed the Galleria. Because the partnership would use its equity to borrow from a bank or insurance company, say, 60% loan-to-cost debt, the investor would benefit from tax losses associated with both depreciating an asset that cost, to his position, $250,000 to build, as well as his share of the deductible interest payments on the lender’s mortgage. Such a project only needed to produce around $150,000 in losses for the investor to recover all of his invested capital through tax savings.
But all those tax goodies would only be available once the project was developed and leased and Gerry’s investors knew this. What they didn’t know, was what kind of project Gerry had in mind building in southwest Houston. They did their best to compensate for this utter lack of transparency by hounding Gerry, ever so politely in the ways of the time, about what the hell he had in mind.
At long last Gerry called all his nervous investors together for a presentation over lunch at the River Oaks Country Club. As the scene is described in Gerry’s authorized biography, Raising the Bar: The Life and Work of Gerald D. Hines, by Mark Seal, Gerry showed up attired in a Brooks Brothers suit, a little thin tie, and a felt hat, carrying a flip chart. He proceeded to describe how he envisioned developing a shopping mall, anchored by Nieman Marcus, the in-line (i.e., non-anchor) stores of which would face an ice-skating rink in the middle.
An ice-skating rink.
In Houston, Texas.
(Inspired, of course, by the iconic ice-skating rink at Rockefeller Center.)
But that was not all.
Gerry was also going to build a hotel there, and an office building and, he announced proudly, on top of the roof of the mall would be a first-class health club and ten air-conditioned tennis courts.
Now, Gerry was well-known among his friends and investors to be an avid tennis player, but no one saw this coming. Ten tennis courts on the roof of a shopping mall, and air-conditioned at that?
One of the investors blurted out, “Thank God you don’t play golf!”
The Houston Galleria had its grand opening in the fall of 1970. The place was a smash hit from the beginning. Tiffany’s had to hire “security guards to escort customers past velvet ropes a handful at a time.” For the first two weeks, the ice-skating rink rented every pair of its one thousand skates each evening, with lines of eager skaters patiently waiting their turn. (Seal, at p. 140.)
And less than three years later, a wide-eyed Jim Hime was being led by the hand through that very mall by his girlfriend.
For that country boy?
He was in love with PRE at first sight.
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