Stripnomics

Here in the Silicon Valley I meet plenty of people that have multiple homes. Unfortunately, many of the people are stuck with little boxes filled with ticky-tacky in Stockton, Modesto, Vegas and Henderson and they can’t unload them or rent them. So what is a homeowner to do? If you’re the CEO of ProLogis, you just have your company buy it from you. (Read the Rocky Mountain News article about it HERE.) So what if the company pays $3.125M, sells it for only $2.52M only six months later and pays $232,221 in Utilities, closing costs and other expenses along the way - that’s the company’s business!

After all, ProLogis is all about conducting real estate transactions with themselves. Not only do they buy Florida mansions for losses - they also sell commercial real estate to themselves (actually, to their own ”Unconsolidated Entities”). Hmmm…I wonder who determines the price on those transaction??? Does the party or the counterparty choose, or does it really even matter?

Here is an excerpt that I cut & pasted from the bottom of page 19 of ProLogis’ 10-Q (filed with the SEC on 08-06-08) that describes their CDFS business:

“CDFS business — primarily encompasses our development of real estate properties that are subsequently contributed to a property fund in which we have an ownership interest and act as manager, or sold to third parties. Additionally, we acquire properties with the intent to rehabilitate and/or reposition the property in the CDFS business segment prior to contributing to a property fund. The proceeds and related costs of these dispositions are presented as Developed and Repositioned Properties in the Consolidated Statements of Earnings and Comprehensive Income. In addition, we occasionally acquire a portfolio of properties with the intent of contributing the portfolio to an existing or future property fund. The proceeds and related costs of these dispositions are presented as Acquired Property Portfolios in the Consolidated Statements of Earnings and Comprehensive Income. We also have investments in several unconsolidated entities that perform development activities and we include our proportionate share of their earnings or losses in this segment. Additionally, we include fees earned for development activities performed on behalf of customers” [Emphasis Added]

From page 9 they also disclose:

In our CDFS business segment, as further discussed in Note 12, we develop and acquire real estate properties with the intent to contribute the properties to various property funds in which we have an ownership interest and act as manager. Upon contribution of properties to a property fund, we realize a portion of the profits from our CDFS activities, while at the same time, we continue to maintain a long-term ownership interest in our CDFS properties. This business strategy also provides liquidity to fund our future development activities and enhances future fee income. We generally receive ownership interests in the property funds (based on our pre-contribution interest) as part of the proceeds generated by the contributions of properties. The property funds generally own operating properties that we have contributed to them, although certain of the property funds have also acquired properties from third parties. We recognize our proportionate share of the earnings or losses of each property fund, earn fees for acting as the manager, and earn additional fees by providing other services including, but not limited to, acquisition, development, construction management, leasing and financing activities. We may also earn incentive performance returns based on the investors’ returns over a specified period.

WOW! That’s a great deal huh? Actually its GENIUS!!! You form a real estate development business where you (1) buy land, (2) “develop” it, (3) “contribute” it to a fund (probably an LLC) - BY THE WAY, YOU ARE AN OWNER AND THE MANAGER OF THAT FUND!  Oh yeah, the “proceeds” ($) are presented on your consolidated earnings statements! Basically, you get to buy property, sell it to yourself and report the profit on your financial statements. On top of all that, they use those damn unconsolidated investees.  See what Dr. Larry Crumbley, LSU professor & renowned forensic accountant, says about the use of unconsolidated investees and ENRON at his website: FORENSIC INVESTING RED FLAGS.  (By the way, thanks for taking the time to talk to me doc.)

See why it doesnt really matter whether the party or the counterparty picks the price - its all you baby! That’s a great business, in fact I’m gonna do a transaction right now…

VOILA: I have just sold my house to myself after “developing it” (vacuuming).  I bought it for $999,999,999,999,999.  I am now the richest man in the world!

So Bow Down, Recognize and HOLLA!

You can download all ProLogis’ 10-Q’s at http://ir.prologis.com/investors/sec.cfm

I got more good stuff coming! (I haven’t even touched the numbers yet!)

This entry was posted on Thursday, September 18th, 2008 at 12:34 am and is filed under Accounting, ProLogis (PLD), Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.