Chapter 8
How We Lose Money
The box of business cards with Arturo’s new title on them came on the first of July and sat unopened on the corner of Arturo’s desk until after lunch. Arturo had driven to San Antonio and back the day before to look at a parking lot a property manager wanted to repave, and when Esther asked why he had not opened the box, he said he would get to it after the parking lot.
Downstairs the outside compliance lead had the far end of the long table on her first morning, with Anika beside her and a year of testing laid out on a calendar between them, something already written into every month. Beth Ann’s new reporting system had gone live overnight. She spent the first hour of the morning loading the pension’s sample report into it and the rest of the morning finding out which of her LPs’ documents it could not read.
Andy took the stairs at 7:15 and found Scott Engel already at the round table in the corner of his office, with one page in front of him and his reading glasses low on his nose.
It was Anika’s page. It said who sat on the investment committee, who chaired it, how many members made a quorum and who kept the minutes. Andy had signed it at the bottom the night before, at the round table with the floor dark, and had sat some time afterward with the pen capped on top of it. Beside Chair it said Scott Engel.
“You signed this,” Scott said.
“Last night.”
Scott read it again from the top. He had spent most of his career on the asset side, and he went through any document as if it were a loan agreement with a date hidden somewhere inside it.
“I’ve sat in that room with you a long time,” he said. “When you’ve made up your mind, everybody at the table knows it before you say a word. You lean back in your chair.”
“Then I’ll go last.”
“They’ll still watch you lean.”
“You call the names,” Andy said. “You call mine last, and it counts once.”
Scott took his glasses off and held them by one arm. “And the day it’s the rest of us against you?”
“Then we don’t buy it.”
Scott looked at him and said nothing. Then he put the glasses back on and turned Anika’s page over. On the back, in pencil, he had written a few lines of his own.
“One thing before the first deal comes in,” he said. “Every deal brings a page with it on how we lose money. Whoever brings the deal writes it, before the meeting, while he can still see the building straight. Everybody adds to it before we vote.”
“Bring it Monday.”
“Nadia’s building it into her template. I asked her Tuesday.” Scott slid the page into the folder he had carried up and stood.
On his way down the floor he stopped at Arturo’s desk, lifted the lid off the box, took out one of the cards and read it, Arturo Ybarra, Head of Asset Management. Then he stood it against Arturo’s monitor, facing the chair, and went down the stairs.
The committee had always met in Andy’s office, around the round table, and nobody had ever taken a note. Scott moved it downstairs. At nine on Monday the twelfth he took the chair at the end of the long table by the window, and Andy took one halfway down the side, across from Maggie, with Wyatt at the corner beside him. Anika sat at the far end with a minute book. Nadia came in last with copies of her template, warm from the printer, and set one at every place.
She had first drafted it by hand in October, and Andy had read it and said it was good. The Fund IV close had eaten the months since, and it had grown anyway. The first page described the deal in plain sentences. After it, every assumption in the model had a line of its own, with the page in the seller’s documents it came from and the name of the person who owned it. There was a line for who had walked the property and on what date, and a short section headed What we mean, for any phrase in the memo that two people might read two ways. Down the right side of every page ran a narrow column headed Box line, empty. The last page had a heading and nothing under it but one line in italics.
How we lose money. Written by whoever brings the deal, before the meeting. Every member adds to it before the vote.
Maggie turned to the last page first.
“Who decides whether a page is good enough?” she said.
“Anika checks that every heading has something under it,” Scott said. “Then I try to trace it. If I can’t trace a line to something I can open, it doesn’t come into this room.”
“And if the page is honest and the deal still looks good?”
“Then we buy it, and we keep the page.”
Scott asked whether anyone was against making the template the committee’s form. Nobody was. Anika wrote the time in the book and the word adopted.
“The right-hand column needs the box,” Nadia said.
“Andy,” Scott said.
Andy talked for about twenty minutes. He had said most of it so often since the fall that it came out in order, and Nadia typed as he went, and the sentences went up on the screen at the end of the room one under another. He read them over as they appeared and could not find one that was wrong.
Wyatt said nothing. He sat at the corner with his pad in front of him and his pen lying across it, and when Andy looked over, Wyatt was looking at the screen.
“So we look at everything that fits,” Andy said, “and we pass on what doesn’t.”
Maggie looked down the table. “Wyatt?”
Wyatt uncapped the pen and put it down again.
“About four hundred twenty deals come in a year,” he said. “I can tell you the property and the city for every one of them. Maybe eighty get a real look. We close seven. The rest have one word beside them in the tracker: pricing, location or basis.” He kept his eyes on the screen. “Since June the inbox reader leaves me a page on every deal by morning, so this year all four hundred twenty will get a look. A page can’t tell me whether you’d buy it.”
Then he turned in his chair to face Andy. “The buy box is in your head, Andy. I’ve been guessing at it for over two years. Some weeks I guess right. Some weeks I bring you a deal, you wave it off, and I’ve got no idea what changed between Tuesday and Thursday.”
At the far end Anika had stopped writing, her pen held above the book.
Wyatt had been at the firm twenty-seven months, and in all that time Andy could not remember him saying that much at once in a meeting. He looked back at the screen.
“Then write down what you’ve been guessing at,” Andy said.
“I’ll have it Wednesday.”
Scott wrote it down. “Wednesday,” he said, and moved to the next item.
Wyatt’s email came in at 6:12 on Wednesday morning, and Andy opened it at his desk a little after seven, with the overhead light still off.
This is what I’ve been screening against. Tell me where I’m wrong.
Two pages were attached. They replaced a chain of emails from 2023 that had been, until that morning, the only written version of what Andy believed about buying a building.
Each line had a heading. Markets named the eight metros in the order the firm had entered them. Product said older garden properties, built a generation or more ago, with room for a renovation the rents could pay for. Size gave a range in units, the one from Andy’s old email, and under it a sentence: Read the way we’ve actually bought, which runs wider at the top than the email says. Basis set a floor below replacement cost that Wyatt had worked out deal by deal from what Andy had approved. Submarket said where we already own, or close enough that our own buildings tell us the rents. Returns said fifteen percent, gross, on the deal’s underwriting.
At the bottom of the second page, under a heading of its own, Things that changed your mind between Tuesday and Thursday, Wyatt had written down the reasons he had seen Andy give for waving off a deal that none of the lines above it covered. A seller who would not let anyone inside the units before the call for offers. A rent roll with too many move-ins crowded into its last two months. A broker who had retraded on the firm at a closing table years ago and had not been forgiven. Beside the broker Wyatt had typed, I’m guessing at this one.
Andy read the box again with a pen in his hand. He would have signed most of it. A few lines he would never have thought to write down, and he recognized every one of them as his own. At Submarket he stopped and drew a circle around the line.
At ten past eight he asked Wyatt to come in. Wyatt shut the glass door behind him and stayed on his feet.
“Most of it’s right,” Andy said.
“Where’s it wrong?”
Andy turned the page around and put his finger on the circle. “I never said we only buy near what we own.”
“You never bought anywhere else.” Wyatt set a broker’s package on the round table. “Which is why I’m here.”
It was an older garden property south of Fort Worth, in a submarket where the firm had never owned a building. The seller had owned it a long time and run it tired, and the broker’s guidance put the basis lower than anything Wyatt had brought him since he joined, well under what it would cost to build the same thing new. It fit every line on the two pages except the one Andy had circled.
“A year ago I’d have typed location beside it and moved on,” Wyatt said. “I’d like to know whether that line is a rule or a habit.”
Andy turned the pages. The photographs showed a pool with a chain-link fence, a leasing office with a hand-lettered sign in the window, carports with their roofs patched in two colors. On the cover the offering memorandum called the property workforce housing, and it said so twice more inside.
“It’s a rule for a market where money was cheap,” Andy said. “When we raised Fund II we could buy near our own buildings and make the numbers work on the renovation. Money costs a good deal more now. Everybody bidding near our buildings is paying for them with that money, and paying up. The return is in the basis now, and this is where the basis is.” He put his hand flat on the package. “That’s going where the market went.”
“Or it’s drift,” Wyatt said. “Fund IV’s investors were shown a map of where we buy. If we go outside it because the basis is good this year, what does the line say next year? Wherever it’s cheap?”
“Low basis is the oldest thing this firm believes.”
“Then put it at the top of the box, take my submarket line out, and tell the investors we changed it.” Wyatt looked at the circle. “And if money costs more, the return line ought to move too. Up. You want to move the line that’s in the way of this deal and leave the one that would make it harder.”
Andy did not answer at once. “It’s workforce housing,” he said. “The same family we’ve bought for since the syndications.”
Wyatt took three sheets from the back of the package and laid them out on the table in a row. “I pulled everything we wrote this year with that phrase in it.”
The first was Andy’s own memo on a Raleigh deal in the spring. Workforce housing there meant older buildings full of working households, and a renovation that brought the rents up toward the rest of the submarket. The second was Scott’s memo on a Nashville property, where the same two words meant a light renovation that kept the rents where people working shifts at the hospital and the distribution centers could go on paying them. The third was the strategy section of the Fund IV offering memorandum, which Beth Ann had been quoting to LPs all year. There the words meant rents kept within reach of what families in the neighborhood earned.
“Same two words in all three,” Wyatt said. “Three different plans. The foundation thinks it bought the third one.”
Andy looked at the three sheets side by side. He had written the first. He would have signed the second without a second look, and he had never read the third closely.
“So which one is this?” He laid his hand on the offering memorandum.
“That’s what I don’t know,” Wyatt said. “And I shouldn’t be the one who decides it.”
“Scott’s committee, then.”
“Owen says the agents can build the package tonight, if Scott reads their notes before they start.”
“Then he reads them.”
Wyatt picked up the package and the three sheets and went out, and left the door open behind him. Andy sat with the box a while longer. Beside the circled line he wrote rule or habit in small letters, and then he carried both pages down the floor and left them face up on Scott’s desk.
At six that evening Andy came out of his office and found Scott standing behind Owen’s chair at the desk beside Tom’s. Andy stood with them. On Owen’s screen were two notes, one from each agent, each written before the agent had opened a single document.
The first agent would read the Fort Worth folder: the offering memorandum, the seller’s rent roll and a year of operating statements, Wyatt’s model, and the third-party reports as they arrived. It would build the package in Nadia’s template and set every figure beside the document and page it came from. It would compare the seller’s expenses, line by line, with the firm’s own buildings, whose monthly reports now came in from all three managers in the same shape. It would leave the finished package in the deal folder.
The second note was shorter. Read the documents in the seller’s index. Write the case against buying this property. Give the page for every point.
Scott read both notes through and put his finger on a phrase in the second. “The documents in the seller’s index.”
“That’s what it says,” Owen said.
“Title came in yesterday afternoon, and so did the survey, and neither one is in their index.” He straightened up. “Make it everything in the folder.”
Owen changed the line while Scott watched. The note on the screen now read every document in the deal folder, including anything received after the seller’s index.
“Neither of them sends anything to anybody?”
Owen tapped a single page clipped to the edge of his monitor, signed in Anika’s hand. “They leave their pages in the folder and stop,” he said. “Anika signed the access at noon, on my record of the inbox reader’s first month. The deal folder and the managers’ reports to read, one folder to leave pages in, nothing else.”
Scott nodded, took his jacket off the back of Tom’s empty chair and went home.
When Andy came in at 7:15 on Thursday, Scott was downstairs at the long table with the package printed in two stacks, a desk calculator with a paper tape at his elbow and a red pen.
“How long have you been here?”
“A little after six,” Scott said to the page. “I’ve seen three technology promises come through firms like this.”
“And this one?”
“Ask me when I get to the end.”
He was going through the package one figure at a time. Beside every number the first agent had written the document and the page it came from, and Scott opened each one on his laptop and found the number there before he made a small red tick beside it. When he reached real estate taxes he stopped, pulled the calculator over and rebuilt the line by hand.
“Texas doesn’t publish what anybody pays for a building,” he said while he keyed it in, “so most brokers underwrite the seller’s old taxes and the county catches up with the buyer.” He tore the tape off and laid it beside the page. His number matched the one in the package exactly. Wyatt’s model carried the taxes at the county’s rate on the purchase price, and the agent had carried them the same way. Scott put a tick beside the line and went on to the next.
The second agent’s page was clipped to the back of the second stack. It was headed The case against, and it made four points, each with its document and page.
The nearest building the firm owned was across the county, and its rents were evidence of nothing in this submarket. Concessions in the seller’s most recent months were higher than at any time earlier in the year. The renovation premium in Wyatt’s model came from properties the broker had chosen, and nobody at the firm had walked any of them. And the title commitment, on Schedule B, showed a recorded contract giving one cable company the sole right to provide internet at the property. It ran for years past the date Wyatt’s plan started charging residents for the firm’s own internet and smart-lock package. It appeared nowhere on the seller’s list of service contracts. The seller’s operating statements showed a monthly payment to the same cable company that matched no contract on the list.
Scott read the fourth point, found the title commitment in the folder, turned to Schedule B and read the exception for himself. Then he found the technology fee in Wyatt’s model, the line under other income that began with the first renovated unit, and drew a box around it in red. He wrote Wyatt an email of one line: Other income, technology fee: show it with the internet agreement in force, then show me what it costs to get out of it. He sent it at 7:41 and went back to the next number.
Wyatt came in at a quarter to eight. From the end of the table Andy watched him through the glass as he stopped in the back hallway with his phone in his hand and read the email standing there.
“That’s mine,” Wyatt said when he came into the conference room. “I read the seller’s contract list, and it wasn’t on it. Title came in Tuesday and I hadn’t opened the exceptions.” He picked up the second agent’s page and read it to the end. “Good.”
He had the broker on the phone before he reached the stairs.
Owen came down at eight and set his laptop beside Scott’s stacks. On the screen was the night’s record, line by line: every document each agent had opened, in the order it had opened them, with the time beside each. The second agent had opened the title commitment at 2:14 in the morning and stayed in it longer than in anything else it read that night.
Scott looked at the record, and then at the tape beside the tax page, and went back to his numbers. When Andy came down again at half past nine, Scott was writing Traced. One assumption back to W.P. across the top of the cover in red, and he put his initials under it.
That afternoon Andy stopped at Wyatt’s desk on the way back from the kitchen. The broker had sent over the internet agreement itself, and Wyatt had it open on one screen and the tracker on the other. Nadia had pulled up a chair from the empty desk beside his.
Andy scrolled the tracker until he found a Chattanooga deal from the spring, a property he remembered liking, which had traded in June to a buyer from Atlanta. Beside it, in the column for the reason, Wyatt had typed pricing.
“Why did we pass on this one?”
Wyatt looked at the row. “You said the number was wrong.”
“Wrong how?”
“You didn’t say.”
Nadia leaned in to see the screen. “That column holds one word a deal,” she said. “The reason codes don’t exist.” She stopped. “I mean, they don’t exist yet. If Wyatt lets me have his box until tomorrow, they will.”
She had them by Friday at noon. Every line of Wyatt’s box had a number, and every pass in the tracker now took the number of the line it failed, with room beside it for a sentence. A deal that failed no line could not be passed by one person. It went onto Scott’s agenda with a question mark. She and Wyatt went back through the year and coded what they could. Most of the old rows took a number easily. The rest took a sentence, and a few of those sentences Wyatt had to carry up the floor for Andy to finish.
The committee met on the Fort Worth deal at ten on Tuesday the twentieth. Scott had the package in front of him with his initials on the cover.
Wyatt had rerun the model on Monday night with the internet agreement in it. The cable company’s price for releasing the property had come by email that afternoon, and he had carried it as a cost at closing. With the technology fee pushed out to the end of the agreement, the deal at the broker’s guidance no longer reached fifteen percent, gross. It came close.
Wyatt had written the page on how they lost money himself. It named the rents they could not prove and the internet agreement, and it carried a line the agent could not have written: The guidance is this broker’s number, and the last time he gave us one he moved it after we were under contract. Andy read the last paragraph slowly.
If we buy this, we are telling Fund IV’s investors the submarket line was a habit. It may have been. They should hear that from us before they read it in a quarterly report.
“Tell me how we lose money on this deal, then tell me how you vote at the guidance,” Scott said. “I’ll go around once, starting with Wyatt.”
“What are the concessions doing?” Maggie said.
“Climbing every month since the spring,” Wyatt said. “And the move-ins are bunched at the end of the roll.”
“Who gave you the renovation comps?” Scott said.
“The broker.” Wyatt kept his eyes on Scott. “That’s on my page.”
“We lose money if the rents out there are what the seller’s rent roll says and no better,” Wyatt said. “That’s our base case, and we can’t prove anything above it, because we own nothing near it. I vote no at the guidance. Prove the rents first.”
At the end of the table Anika wrote his reason down in a single sentence.
“Maggie.”
“We lose money on the internet agreement whether we buy our way out of it or wait it out,” Maggie said, “and either way it’s in the model now. At the guidance it doesn’t clear, so no.”
Anika looked up from the book. “The offering memorandum says rents within reach of local incomes. Our plan raises them toward the submarket. That’s mine to take to counsel before anyone bids.”
“My turn,” Scott said, “and I’ll start with this: nobody from this firm has walked it.”
“Wyatt toured it,” Andy said.
“The broker walked me through the units he picked,” Wyatt said.
“The worst deal in Fund II,” Scott said, “nobody walked the site. We found out in the third year.” He wrote a line on the page in front of him. “No at the guidance, and no at any price until two of us have walked every building.”
Then he looked down the side of the table. “Andy.”
Andy had listened to all three without once arguing back, which he could not remember doing at a committee of his own firm. He found he was sitting forward with his forearms on the table, and he left them there.
“We lose money if I’m wrong about the cycle,” he said. “This is the first deal in a year where the basis does the work, and the basis is what we’ve always bought. Wyatt can’t prove the rents, and he’s right that nobody has walked it. The internet agreement is a negotiation. I’ve bought my way out of worse after a closing.” He looked at the page. “I’d go at the guidance, and I vote yes.”
Scott wrote it down. “One yes,” he said. “It doesn’t pass at the guidance.”
Andy heard Anika’s pen move at the end of the table, and then stop.
“OK,” he said.
“Is there a number where all four of us vote yes?” Scott said.
Maggie pulled her laptop closer. She took the price down in steps, with the cost of getting out of the internet agreement in, until the deal came back to the box’s return line. She turned the screen to face the table.
Wyatt read it. “At that number, yes. If two of us walk every building first, and I pick the units.”
“Yes at that number, after the walk,” Scott said.
“Yes,” Maggie said, and Andy said it after her.
“And the box,” Scott said.
“I’ll write a line for a new submarket, and one for the return if the basis is doing the work,” Wyatt said. “What we have to know before we bid in one, and what we accept. They’ll carry a date, and so will every change after them.”
Anika read the minute back to them before anyone stood up: the adoption of Wyatt’s box, with the submarket and return lines left open until Friday, each member’s view and vote at the guidance in a sentence apiece, the price they would offer and the walk. Andy heard his own name in it once, in its place.
On Thursday Scott and Wyatt drove up 35 before five in the morning and walked every building on the property, and Wyatt chose the units by pointing at doors.
The seller took another bid in the first week of August. The broker rang Wyatt on a Tuesday afternoon to say it had gone above the firm’s number to a buyer who had never asked to see the title work. Wyatt changed the row in the tracker himself: Pass, the number of the basis line, and one sentence. Seller took a higher bid; we offered the price our own page supports.
The pension’s diligence team arrived the following Tuesday, the tenth, a woman who ran their manager reviews and an analyst who carried both their bags, and they kept the conference room for two days. On the first afternoon they asked for the committee’s minutes and every package it had seen since the first of July. There were three, and the woman read the pages on how the firm lost money before she read anything else in them. She read the Fort Worth page longest.
“Who wrote this?” she said.
“Wyatt wrote it,” Scott said, “and then each of us added to it before the vote.”
“And the vote at the guidance?”
Scott read it to her from Anika’s book.
“Who was the yes?”
“Me,” Andy said, from his chair against the wall.
She wrote something down and turned back to Scott, and asked him who had walked the property, and on what morning, and what they had found in the units the broker had not shown. Scott told her. The analyst asked Owen how often the chair sent a package back. Owen opened the record and showed him each package the chair had sent back since July, with the one line Scott had marked on it. The analyst copied them down. They stayed until the second afternoon.
The term sheet came on Wednesday the eighteenth, a little after four. Beth Ann printed it and brought it to his office. Three of its conditions were the questions she had asked in May, written now as things the firm would do. A fourth, which nobody had asked for, said that every investment proposed for the account would go to the pension for its consent before the firm committed, with the committee’s minutes and its page on how the firm could lose money.
Andy read it at the round table. Downstairs the committee was meeting on a Raleigh deal and running long. He carried the term sheet downstairs and took his chair along the side of the table. Scott went around the table and came to Andy last.