Sept. 23-Financial Crisis Epicenter: Pigtown

My first morning back in Washington I copied some interesting salsa recipes from a book Elliot bought after his visit, which gave me some ideas for using papaya and other Costa Rican fruits. I then headed to Baltimore to meet with Marc, to see what he was doing in Pigtown, where we were involved with some properties that had been previously owned by Lindsey. This had been a big point of discussion during his visit to Nosara, and he seemed to offer the only lifeline available.

Pigtown, located near the stadiums in Baltimore, is a quasi-historic neighborhood like so many in Baltimore that had fallen on serious hard times. For surprisingly little money, Lindsey had purchased, in several chunks, two blocks worth of decrepit, small, brick rowhouses, in the frothy days of real estate. She had lofty intentions of restoring the properties and adding solar and other energy-efficient improvements, and selling them under a scheme that allowed her and the buyers to share in future appreciation. At the time, she was able to find lenders who were way too willing to finance her ambitions, and she accumulated heavy debt on her over-mortgaged home in the upscale neighborhood of Ruxton, massive credit card debt, and financing against the properties themselves. This was a highly speculative venture at best, but as real estate bubbled away, it was easy to point to other real estate development in the area and steadily climbing values as an excuse for behavior that in retrospect was clearly delusional. I viewed her as a poster child for the subprime lending bust.

(Warning: further digression) I had actually become involved in a Baltimore real estate venture myself, less than a year before Lindsey bought her initial 12 rundown rowhouses for the bargain basement price of $35,000. For $65,000, my friend Patrick and I had purchased a three story brick rowhouse on Lombard Street in a once proud neighborhood of Union Square. Once proud, but for perhaps at least since the advent of white-flight some 50 years ago, it suffered from steady decline. So much decline that Patrick had to forcibly evict some crack-head crackers so that we could begin a slow process over many weekends of cleaning the place out and preparing a plan for rehab.

Patrick talked me into this venture and needed my money. I agreed to be the banker, using my home equity credit, and we relied on his experience as a carpenter and jobber as part of our plan to fix up the place and either sell it or rent it. It seemed like a good plan at that price, because houses were being fixed up everywhere and being sold for rapidly escalating prices. We worked weekends for well over a year, as I recall, and the place was nowhere near being habitable. By the grace of God, or whatever force was working in my favor, a buyer came along and offered a great price, leaving me with about $20,000 not including a deductin for $15 per hour for my labor. The sale also occurred not long after my decision in March, 2005, to move to Costa Rica, leaving me free to focus on that transition. While not as lucrative as it would have been if we had just cleaned the place out, I viewed the event as a learning experience. Since the buyer planned to gut the building, putting our labor and money spent to waste, I had to be philosophical.

Jane and I became entangled in the latest Baltimore mess in the final build-up to our departure for Nosara. While we had shed many possessions through yard sales, Craig’s list, and other means, there remained many items that we could not, or chose not to part with. Additionally, Jane felt strongly about the need to keep a living space available in the states where we could stay, and where she could keep a desk and operate her business while in the States.

At the time it seemed like Lindsey was offering a perfect solution by offering us the use of her master bedroom at her spacious home in Ruxton. However, she soon made it clear that a big string was attached, that she needed us to buy one of her Pigtown units and provide her with a much-needed if ultimately inadequate cash infusion. She promised to pay the mortgage on a $75,000 sales price and sell us one of the more habitable units, and at this point it was too late for us to do anything but acquiesce. At about the same time we were going to our Aug. 31 closing on our DC house, we also closed on the mortgage for Pigtown.

Marc is a professional developer, and although the extent of his experience in this area is somewhat murky, he seems to know what he’s doing. I’m not sure how Lindsey found Marc, or perhaps how he found her, but he and his boss, who has the money, were interested in buying her houses. It appeared certain to me that she didn’t have any other realistic options, as she was just about out of cash and credit and at the end of her rope. I got to know Marc in Nosara, and it appeared clear to me that he was our only hope if we were to avoid taking a bath on our property or otherwise avoid a nightmare thousands of miles away.

I met with Marc at the site of our properties that Tuesday afternoon, and he had a good-sized crew busy at work restoring many of the rowhouses, even building basements in some to create more habitable space, since they were typically only about 500 square feet over two floors. He and his investor-boss had picked them up for about $40,000 apiece from Lindsey, more than she had paid but well below what would have been needed to bail her out of her situation, which also included an empty business storefront in the same neighborhood that was lacking a back wall. Her son Bo had originally partnered with her in this venture, which she called ‘The Green Pig,’ but had separated out of apparent and understandable concern for his own financial self-preservation.

Marc said his plan called for spending $40,000 to $60,000 per unit, and that with all-in costs of about $100,000 per unit they would have a positive cash flow from a monthly rent of $850 or so, which is what he said he could get from the city in subsidized low-income rentals. He said he expected it would take years for enough appreciation in the neighborhood to allow the units to be sold at a profit, but that didn’t matter to him or his boss as long as they were rented out.

My property was an end unit on one of the two rows of houses and was clearly wrapped up in his venture, for better or worse. It had been in better shape than most of the other units, and was currently occupied, albeit not by someone who was paying rent. We took a look inside, and this was actually the first time I had set eyes on my place. It didn’t look too bad, considering the neighborhood, and Marc pointed out some things related to heating and plumbing that would have to be fixed or upgraded in order to qualify for the city’s assisted rental program. He said a few thousand dollars should be enough for the necessary repairs and that he was willing to get the work done with his crew as well as find a renter while he was getting his own rentals lined up.

This obviously seemed like a great proposition, especially since I didn’t have any other good options and was concerned that this could become a real albatross. I put my faith in Marc and left it in his hands. Before leaving we talked about him visiting Nosara again, where he had some additional ideas for property development.

I drove back to DC that evening to spend the night with my friend Craig in his new apartment. He has been going though a terribly painful and contentious divorce, and I did my best to give him solace and support as he related details that were much worse than I had imagined. We sipped on Cuban rum, Habana Club, that I had brought back from the new duty-free shop at the Liberia airport.

Craig had visited me in Nosara in late January, part of a 50^th birthday celebration that included three of his oldest friends and his brother Dave. It was a great adventure, with everyone trying to surf for the first time. As can be imagined, things can get out of hand with men trying to recapture their youths. After a dinner one night at the Tropical Giardino which included many pitchers of Margueritas, I took them up to see the Black Sheep Pub, an isolated but remarkable English pub with a German-style drinking hall. It’s up a steep mountain road above the village of Nosara, and I missed the turnoff on my first attempt to find the place. There were five us in my Pathfinder, since Rob had earlier succumbed to a stomach bug, and they were all loudly wondering whether they would make it back alive from the dark wilderness. Their exclamations of mock shock grew more animated as I climbed the steep dirt road, feeding their drama with my own voicings of concern. I finally pulled into the Black Sheep, around 10 that Friday night, and the owners Joe and Helen said they had just sent the bartender home but would reopen for us. You have to see this place to understand it, it is like entering an authentic English pub, replete with antique wood bar, transported to literally the middle of nowhere. I knew they’d get a kick out of it, and of course more imbibing ensued. Another trio made it up after us, but otherwise we ‘owned’ the place, one of Craig’s favorite expressions.

I wasn’t paying attention to what was going on outside by the pool, but Dave grabbed one of the two women that had accompanied a guy, the other patrons, and fell sidelong into the pool. After they climbed out, she let him have it with a strong slap to the face. Helen said it was time for us to leave, and I didn’t need to be asked a second time. After some initial flirting that apparently turned sour, and a cocky dare to throw her in the pool, Dave just did it, it appeared. In our hurry to leave, I did a face plant on the stairs down to the driveway, ruining a pair of glasses, but my drunken angels kept me from getting hurt. The guys didn’t let me drive back, though, and managed to navigate back.

I was shocked to learn from Craig that during his divorce proceedings, his wife cited his 10-day trip to Costa Rica, a long-planned and well-deserved break, as some sort of example of his lack of responsibility. It shows that she doesn’t have a lot of strong cards in her hand.