David Rosenthal: belief

Transcript context

…I don’t want to say that I guess, I would hope so. I have so little faith that people do that or really do that. There is a big part of me that believes, and you guys can feel free to disagree, that people come up with a valuation and then they back their math into that valuation. If the first one doesn’t work, they will come up with another way to make the calculation. But there is some reasonableness to it because you think about if you think about WeWork, the issue was always they had to spend a lot of money upfront. Their upfront capital cost to lease the buildings but also to do the renovation. It costs money because they were doing full almost demo inside of these things, almost down to the equivalent of studs and then rebuilding them inside. That costs a lot of money. If you got 20 at least, theoretically, depending on the building, you’ll get to break even at year three or year four or at 70%–80% occupancy. That’s when you’re really in the money. That’s how you’re planning it. You know it’s interesting. I haven’t thought about this until now, as we’ve been going through it. I think you could argue then that the valuations for the tech venture capital community look a lot like what you said, but I can imagine Goldman, JP Morgan, they don’t do this. They were looking at the value of this real estate and I strongly suspect, having friends that were at some of these places on real estate investing teams at the time, they probably had big thesis about those years, call it 2010–2014, were years to go big on investing in commercial real estate in major metropolitan area. The counter argument, even at the time, would have been we’re in economic recovery at the time, arguably boom by 2014–2015. Okay, so you’re right. The floor 30 on 6th Avenue, it’s got an intrinsic value to it, but WeWork has decided that they are going to rent it out to short-termers and they were going to spend a fortune renovating it when it was already an office building, generally, most of them, maybe not the one in SoHo, but most of them were probably already office buildings. Could we have done better just calling PepsiCo and somebody else splitting the floor in half and basically keeping the infrastructure exactly the same, maybe with a new coat of paint?…

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