A Lesson in Problem Solving

By: 
Al Jacobs

One recent Saturday afternoon, perhaps against my better judgment, I accepted an invitation to attend a free three-hour seminar, billed as “Investment Advice for the Aspiring Real Estate Entrepreneur.” For those of you not familiar with these presentations, there’s rarely any worthwhile information conveyed. They’re usually hard sell pitches for one of three things: the sale of an overpriced parcel of real estate, an invitation to become a participant in some dubious joint venture, or most likely an opportunity to partake in a more extensive seminar at an outlandish cost.

It turned out the intent of this particular 3-hour session was the offering of an eight-session course of instruction on acquiring properties through tax sales “at the super discount price of only $2,450.” As expected, the short presentation brushed over the details while concentrating on testimonials from persons who made reputed fortunes from their activities. However, a portion of the discussion actually presented problems property owners encountered, leading to the tax sales.  Some of the stories were painful to hear – but believable.

With this said, there’s a point to be made. For you aspiring investors, be aware not every investment begins or develops as you plan. You must be prepared to roll with the punches. Perhaps the following account will provide some insight into the sort of problem-solving techniques the world of investment real estate requires. I hope it provides helpful insight for the unwary.

This story starts with my purchase of a 40 percent interest in a small health services company. I intended to remain a passive participant, uninvolved in day-to-day operations. However, after a set of circumstances – far too painful to relate – I found myself the hapless owner of two Southern California convalescent hospitals and a retirement/assisted living hotel in Orange County. After surveying the facilities, the profit and loss statements, and a current balance sheet – and rejecting my initial impulse of suicide – I took stock of my predicament. Within several months I disposed of the two hospitals, convinced I lacked the expertise to make them profitable.

However, the retirement hotel seemed to offer potential. Its location in prestigious Laguna Beach fronted on well-traveled Pacific Coast Highway (PCH), and graced a site just 400 yards from, and with a splendid view of, the Pacific. The structure, containing 38 individual rooms together with dining area and recreational space, had been converted from a motel. The board-and-care license issued by the California Department of Social Welfare permitted occupancy by 48, evidentially envisioning some rooms shared by two persons, most likely husband and wife. Though I possessed extensive apartment experience, a retirement residence represented a new challenge. I’ll describe what happened.

When I took control, a staff of eight serviced a single paying resident. Within a month I replaced the ineffective administrator with an experienced one. Slowly and systematically, with the help of advertisements, the local registry, and establishment of a favorable reputation, occupancy grew. After eighteen months, 38 persons resided in the 38 rooms. Nonetheless, even with a full house it couldn’t manage a break-even cash flow. To become profitable it needed to achieve the license complement of 48. Unfortunately, the concept of two retirees sharing a room never sold. (As an aside, having now arrived at that stage of life, I better understand why.)

What to do?  The answer became obvious. Only by adding ten more rooms might the facility make it. A description of the property will help you visualize things. The rectangular lot, 150’ fronting PCH and 200’ on a side street, sloped steeply upward from the main thoroughfare. The two-story structure, with elevator, occupied the front 150’ X 150’. The vacant 50’ X 150’ key lot at the rear contained most of the 42 existing parking spaces. My preliminary design on the vacant parcel called for a building consisting of ten 12’ X 20’ rooms, side by side, each with ocean view, supported by 12-foot columns above the parking area.  With an elevation one level above the upper floor of the existing structure, it would connect by an enclosed bridge leading to the elevator shaft to be extended to three stories. Architecturally, it appeared doable. Its approval by a city with an aversion to such improvements seemed the more formidable challenge.

I presumed resistance from nearby property owners to be the first obstacle to overcome – particularly the three whose lots bordered our 150-foot rear boundary.  Their predictable reaction upon receipt of any Planning Department notices: outrage over the possible loss of valuable ocean view. Actually the steepness of slope and the height of our intended building would leave their view unaffected. But perception often gets in the way of reality. This I tackled before ever submitting a proposal by preparing a three-dimensional scale model showing our current and proposed buildings, as well as our neighbor’s structures and the complete layout to the ocean. Then I met with each, assured them of our intentions, and obtained letters by which they approved our project. So far, so good.

The second dilemma proved to be parking. City code called for no less than one parking space per living unit. With 48 units intended, but only 42 parking spaces available, compliance became impossible. I approached this in a manner to stress reasonableness over mindless regulation. During the 1½ months before the public hearing, my on-site administrator took daily photographs – morning and afternoon – of our two parking lots, the large one on the rear lot and a smaller one near the front. Each photo carried an inscription of the time, date, and certifying signature. When we appeared at the hearing to respond to insufficient parking suggestions, I submitted over 180 photographs showing our lot occupancy, with 38 residents, never exceeded 15 vehicles. Though it seems obvious most persons requiring assisted-living services are not likely to own and operate an auto, the obvious is not always obvious. 

In deference to the officials of Laguna Beach, they recognized the unreasonableness of holding our special use improvement to the general use code requirements, and accordingly approved our plan. I’m convinced, however, without the photos, the decision might easily have gone the other way. One other matter you might note: In granting the conditional use permit, the city included a stipulation the property might never again revert to a motel. This was reasonable, of course, but made its use as a retirement residence irrevocable – for better or worse.

As a postscript, I’ll mention the completed facility proved to be modestly profitable, ultimately generating a respectable return. After a number of years I disposed of it at a fair profit. It continues in operation to this day and appears to function well for its current owner. Now, let me conclude with a moral or sorts. A favorable conclusion to what appeared initially to be a hopeless mess didn’t happen by itself. It took more than just time and effort; it took both head-scratching to figure out what tricks might actually work, as well as a willingness not to throw in the towel when all appeared to be lost. Like it or not, this is what the world of real estate investment often requires: persistence, innovation and sometimes both contrivance and connivance.  And with that, I wish you would-be profiteers the best of luck in your endeavors.

Al Jacobs, a professional investor for nearly a half-century, distributes a monthly newsletter in which he shares his financial knowledge and experience. You may view it on www.roadwaytoprosperity.com/ <http://www.roadwaytoprosperity.com/> .

Category:

Beachcomber

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