When I was a graduate student at Columbia University’s real estate program, a grizzled veteran of the real estate industry opened his class with the following loosely quoted statement (the passage of more than a decade has rendered me unable to remember what he said verbatim): “I don’t know what all this business is with conduit and mezz and CMBS. If you’re in real estate, there’s a loan and there’s cash; debt and equity. It’s pretty simple, actually. Once you get away from cash and debt, you’re no longer playing the real estate game, you’re in the realm of financial engineering. That is not real estate.”
That statement has stuck with me throughout my career. This was, by all accounts, a successful developer and investor imploring us to stick to the basics. As students, we had enrolled in a real estate program, not a finance program. That said, there is certainly an ability to create more value through the proper use of financial mechanisms, in some cases. It is also a different real estate investment landscape today than fifty years ago, roughly when my professor would have started his career. After all, to be successful in a hyper-competitive bidding environment, you need to exploit every advantage you are legally able to utilize.
But, what happens to our built environment when strategies centered on financial maneuvering supplant physical manifestations of our decisions?
Taking real estate decisions out of developers’ hands and putting them in to financial analysts’ hands strikes me as similar to allowing insurance companies to make health care decisions, rather than doctors. Granted, real estate is not a science with life or death implications, but it does affect all of us, sometimes in very profound ways.
As has been previously mentioned, the physical environment matters in many different ways. If a project only works as a result of complex financial maneuvering, perhaps that is a signal for the developer to re-examine his/her strategy, public planners to re-assess as-of-right approvals and, yes, even the lender to go back to the underwriting drawing board.
Real estate development is the practical application of dreaming and reality, so long as those doing the dreaming and those bringing them back to earth are in the right roles.