As we reported yesterday, Grant Cardone offered his tenants a deal: If they paid 12 months rent in advance, he would credit them for 15 months of rent. In this video, Tom Nash offers the opinion that Grant Cardone’s rent concession constitute an effective $300 million devaluation of his real estate portfolio. At the jump we post another video from Jeff and Paul where the downside of Cardone’s high-debt investment strategy is critiqued.
In our opinion, Cardone is making his 12-for-15-rent-prepay offer in an attempt to accomplish three things:
1. To buy time and bring in as much cash as possible right now. This is Cardone’s number one goal as we see it. Cardone Capital needs to put off, for as long as possible, the cash flow problems caused by a financially untenable threshold of Cardone’s tenants not paying rent due to the COVID-19 pandemic. Cardone’s rent concession suggests that Cardone Capital simply does not have the cash reserves to absorb this downturn. Cardone has said that he plans for 85% occupancy, which is 15% vacancy. In a good economy this seems a valid assumption of premium apartment units. In a catastrophe, however, all assumptions are annihilated by the brutal reality of the actual situation.
Grant Cardone has said many times that his goal is to dominate all spaces he enters. This is very much a Scientology perspective in which Scientologists believe they possess an inherent superiority and can therefore impose their will upon all people, things, and situations including the physical universe itself. This elitist Scientology perspective traces its DNA to L. Ron Hubbard’s mentor Aliester Crowley whose Thelemic teaching states, “Do as thou will shall be the whole of the law.” Now, however, Reality itself dominates and has crushed all of Grant Cardone’s spaces, Scientology OT postulates, financial assumptions, and the belief that the great economy will never end.
Grant Cardone sailed himself into a perfect storm. No one saw the pandemic coming; on the other hand Cardone took on more than one billion dollars in debt and created a highly-leveraged situation for himself and his investors. This is capitalism, and, capitalism is based upon both predictable and unpredictable risks. A $50 million G550 private jet is a reward of capitalism; an unforeseen pandemic is an inherent risk. Both the lavish rewards and hellish nightmares go together in capitalism.
2. A hope that the COVID-19 pandemic will be gone by the summer. Many people have this hope. Nevertheless, even if a summer recovery occurs, this does not mean that the economy instantly rebounds and Cardone’s tenants pay their rents and monies owed on back rents. Moreover, some percentage of Cardone’s tenants will have moved to cheaper apartments or moved in with family by the time the pandemic ends. Additionally, landlords will be competing for the best tenants whose credit was not destroyed by unemployment and nonpayment of rents and bills. Landlords will also lower rents just to fill their units with tenants who have returned to work and have a job and paychecks.
Unlike Cardone, who stated in his recent video — and in a threatening manner — that nonpayment of rent will follow tenants around for years and years, the best landlords will understand that everyone was harmed by the pandemic. We believe the best landlords will evaluate pre-pandemic credit ratings as a measure of a prospective tenant. We found Cardone’s “warning” to be heavy-handed and unnecessary.
No tenant owes Grant Cardone an obligation to help maintain Cardone Capital’s creditworthiness or solvency. If Cardone is going to punish tenants affected by the pandemic in the future by by giving other landlords negative references, then this speaks to Cardone’s character as a spiteful little bitch. The pandemic is showing us Cardone’s true colors. Cardone can’t collect rents due to the pandemic and so has stated that he will pass the consequences of his high-debt, high-risk strategy onto his unfortunate tenants who lost their jobs in the pandemic. As a Scientologist, Grant Cardone must acknowledge that he pulled in his current situation by making a series of choices which are now inescapable.
3. To buy time so that Cardone Capital can arrange a major refinancing after the pandemic is over. Ideally, with interest rates down and the Fed pumping money into the economy, a refinance could be much lower than Cardone’s present interest rates. The lower interest rates could, in turn, offset all, or part, of the three months of no cash flow arising from the present 12-for-15-rent-prepay offering. We think Cardone is implementing this strategy because he has no other good short term solutions, e.g. a hard money bridge loan at 6-10% for even one year would has an enormous risk as no one knows when the pandemic ends or where the economy is when it ends.
We have already offered our opinion that Cardone’s “cash is trash” mantra was flawed. The pandemic has destroyed Cardone’s mantra by showing that any firm should have cash reserves and manageable debt. Cardone’s brag for years was that he spent his money as soon as it came in. In doing so, this forced him to find new ways to make more money. His 10X events were one of his more recent money-making strategies. In the 10X events, people paid Cardone $20,000 for a booth where they can sell their goods. Cardone took 50% of their sales. With the ban on mass gatherings, that cash stream is gone. The sales of Cardone’s sales training programs in the pandemic with soaring unemployment seems untenable.
In this next video Jeff and Paul offer a brief critique of Grant Cardone at 17:00 forward. This is a fascinating podcast with some good analysis. The beginning three minutes contains a very funny bit of satire.
Categories: The Scientology Money Project
I think Cardone’s 15-for-12 strategy won’t buy him anything. It is an interesting idea, though, because it would allow him to lock in tenants, and it would kick his cash flow troubles down the road by a year.
As I recall from looking at the deal you sent me to evaluate, he’s focusing on second and third-tier cities (think Birmingham, Alabama; Jackson, Mississippi; Chattanooga, Tennessee and other places out of the top-25 metros where the real estate market valuations are way too high and he can’t compete with the big, sophisticated operators like Avalon Bay, Rose Associates, etc.). The second and third-tier cities offer higher risk and lower returns to enable him to get in when times are good, but they have much higher risk in a downturn.
I suspect over the next 6-8 weeks, we’ll see second-tier cities fare worse than large metros like NYC and LA with the coronavirus, since they have a less developed critical care infrastructure. Their economies will also be much slower to rebound than those of the top-25 metros when things subside. For those that don’t follow such things, we’re in the middoe of a significant decades-long shift in power (and population) globally to large cities. In the US, half the population now lives in the top-25 metro areas and about 70% in the top 125. The infrastructure in rural areas and smaller cities is being hollowed out dramatically, and we’ll find that their resilience from an exogenous shock like the coronavirus is much less than the big cities. Yeah, if you read the headlines today, it looks like the big cities are post-apocalyptic wastelands, but just wait a couple weeks…
Point of the long discussion above is that I bet that a vanishingly small percentage of tenants in Cardone’s buildings will have the cash to sign up for the deal. Suppose you and your roommate are splitting monthly rent of $1,200 for a two-bedroom “luxury” apartment in Chattanooga, where you work as a team lead in the Little Debbie Snack Cakes factory there (one of the city’s largest employers). You may well make more than the average wage in the area. But there’s only minimal chance that you and your roommate each has $7,200 in cash lying around to take advantage of the offer.
The other thing about the 15-for-12 strategy is that he may already have been late on some payments in the past and he may be on notice from his banks that they won’t be cutting him any slack. Banks will be pressured by the government to extend mortage terms for landlords so they don’t default and end up with renters on the street. But they will also be exempt from extending terms to people that were having trouble making payments when times were good. So Cardone may be in trouble with his banks already and he has to do a deal that protects his cash flow up front even if it causes him more trouble later.
As far as your comment about refinancing, I don’t have details on this but I suspect that refinancing to bring down interest rates will likely be a low priority for banks, because the government is more likely to focus on net new loans to restart restaurants and retailers, and otherwise focus on loans that will actually get people back to work. Wasting time rewriting a loan so Cardone can boost his profits by a couple of points is not likely to get much traction.
I just want to know how the wife and I can get some of that 1% interest rate cash from the Fed? We have great credit, steady cash flow from two Social Security checks, a few thousand cash in savings, and no debt at all. We re-financed the house last year, and would do it again if the numbers made sense – and how could they not make sense if I get a new home loan at 1%? How about 1.25%? 1.5%? C’mon guys, give a little guy a break, you’ve been letting big banks slurp at that trough of wet-ink cash for way too long already, it’s time to let us little guys take a sip. Just a sip, then we’ll not bother you for 30 years, or the life of the loan, whichever comes first.*
*barring events of god or mammon such as death, another pandemic, an internal revolution with or without guillotines, privatizing Social Security or the U. S. Post Office, going to a single-payer healthcare system, or making Trump Emperor for Life.