Book Review: The Death and Life of Great American Cities

Why do some American cities diversify, improve, innovate and grow?  While other cities – most recently and egregiously Detroit – stagnate, shrink, and ultimately fail financially?

I’m way outside of my intellectual comfort zone when it comes to commenting on urban planning policy, but reading Jane Jacobs’ classic The Death and Life of Great American Cities this summer has armed me with enough thoughts to be dangerous.1

Jacobs published this over fifty years ago, but her observations and arguments seem right on target.

I visited New York City last week – my home for 13 years but now just a vacation spot for me – and I heard Jacobs whispering in my ear about the whys and hows this continues to be a dynamic, innovative, prosperous place.  It’s the most exciting place on planet Earth to walk around, stone cold sober, on any given Thursday at 2pm.

jay-z-alicia-keys-empire-state-of-mind

A serious homer

If there’s any obvious critique of Jane Jacobs, she’s what the sports fan world calls a serious homer.  She loves her Greenwich Village circa 1960 (The Death and Life was first published in 1961), and she returns again and again to the ways in which her diverse neighborhood outshines anywhere else.

She considers and praises certain other successfully rejuvenated neighborhoods within great American cities, such as Boston’s North End, Chicago’s Back-of-the-Yards, Rittenhouse Square in Philadelphia, and Georgetown, in the District of Columbia.

But virtually all other cities she ignores or – like Los Angeles – actively denigrates.  The rest of urban and suburban America she refers to sweepingly as “The Great Blight of Dullness.”

So, we may acknowledge upfront that she’s a teensy bit narrow in her praise and appreciation for large parts of urban America.

And yet, when I think about the Leave It To Beaver America of 1960 to which she’s comparing Greenwich Village, can you blame her?  And when I think about the monstrosities of city planning that has led to unbounded suburban sprawl from 1960 to the present day, she’s far more right than wrong.

As to the keys to successfully rejuvenating cities and the common errors of urban planning, as far as I can see, she was absolutely Capital R Right about it all then and even more so today.

The key to a vital city – Diversity

Here Jacobs does not simply advocate “Diversity” in the post-1990s sense – code for a preponderance of non-Northern European ethnic influences – although we can infer from her book that she’s a proponent of that type of diversity as well.

She really means by diversity to advocate against one overly dominant mode of living.  She means the absence of monotony on a very broad scale.

Vibrant cities encompass a wide variety of ages – for people and buildings.  Living cities encourage a plurality of mixed uses, an ever-changing mix of commercial and residential activity.  The best city blocks and neighborhoods, she argues, may hear the shouts of school children in the morning, the swish of retirees rubbing shoulders with tourists at mid-day, and the clink of post-work bar hoppers at night.

Growing and vital cities depend on an ever-changing series of industries and specialists, and do not become overly dependent on a single industry, like Detroit did, or Atlantic City does.  Cities dependent on a limited number of employers or a small number of industries tend to fail.

But if diversity is so important, how do you get it?

Four generators of diversity

Jacobs lays down four essential features of successful, revitalizing cities.  Each of the four tends to produce urban diversity, although each on its own is insufficient to guaranty it.  The interaction between the four factors gives a neighborhood or a city the greatest chance of fostering diversity, which in turn gives a city renewed life.

Mixed Primary Uses – Jacobs has in mind here the healthy effect of city blocks used for more than one purpose, at different times of the day.

A business plaza surrounded solely by office buildings for example, emptied out after 5pm, will tend to stultify in the evening emptiness.  A few luncheon places can survive, but little else.

A residential area full of students only, without the salutary effect of salaried workers, families with young children, and retirees, each using the sidewalks and byways at different times of the day, will tend to stagnate.

A park frequented only by parents, nannies, and perambulators between 9am and 11am will, over time, cease to attract any other lively activity during any other hours.

Mixed primary uses, however, of business, residential, and park spaces, with different functions for different groups at different times of the day, encourages healthy city blocks.

I find myself looking anew at city blocks, mentally counting the hours during which different people will share the same space.  In New York City’s most interesting neighborhoods, the answer is all day, in different ways, by every different kind of person. 2

Small blocks – I lived on the Upper West Side of Manhattan for nearly a decade and never realized just how long some of the East/West blocks are, compared to the Jacobs ideal.

It turns out, according to Jacobs, these long blocks discourage diversity and probably served to hold back the Upper West Side from revitalization for a long time.

A section of Manhattan like Rockefeller Center with smaller blocks, or the irregular small blocks of Greenwich Village, tends, in contrast, to increase the safety, diversity, and cohesiveness of city blocks.  Pedestrians on an errand from point A to point B in a neighborhood of small blocks will vary their route in a way which tends to increase a diversity of uses.

City planners, break up your long blocks!

Aged Buildings – Here Jacobs describes the most counter-intuitive part of city revitalization, and strikes a blow against typical “Tear down the Old, build the New” urban planning.

She argues that revitalized city neighborhoods need – against conventional wisdom -the presence of older buildings to kick-start growth.

The best part about her argument, for this ex-banker, is that she employs a financial argument to make her case, which goes as follows.

New construction, most often facilitated by investment capital and market-based loans, typically leads to high rents and low-risk leases.  For investors and their bankers, filling their brand new buildings, only the safest tenants will do.

A chain restaurant, or bank, or insurance company, or any established national franchise, will always be preferred to a mom-and-pop proprietor.  The key to repaying borrowed money, or to returning investment capital, is to achieve the highest return on capital up front.  Starbucks, Subway, H&R Block, Morgan Stanley Dean Witter, let me introduce you to my new construction real estate broker.  Unfortunately, new construction areas are dreadfully sterile.

Older buildings, by contrast, may often be owned by the landlord free and clear of a mortgage.  The building’s original use may have disappeared, so the building needs to be retrofitted, or used despite its imperfect fit for a new business.  Thus the owners, mortgage free, may offer their unusual or slightly rundown space at a lower rent than the new construction building next door.

This lowered rent, or retrofitted space, or building owner not seeking her maximum return on capital, is the key to offering diverse commercial and residential spaces.  How does that new gluten-free bakery start-up in the old shoe store storefront, or the app development company in an old fire station, or the artist’s loft in the empty factory come about?  They could never afford the new rent in the new office building.  But they have a chance to get started in the retrofitted space owned outright by a landlord who is just happy to not own an empty building.

From such humble old buildings, mixed alongside newer development, spring interesting and diverse neighborhoods.

Jacobs does not wish for blocks upon blocks of all dilapidated or empty buildings, but rather a mixture of ages to offer a diverse mixture of uses and opportunities.  In the neighborhood open to urban renewal, today’s new construction buildings become, in 30 years, aged buildings with less debt, and the opportunity for a new lease on life.

Concentration – A key to diversity, says Jacobs, is urban density.  Suburban sprawl, which seems to promise refreshing air and a modicum of the pastoral ideal, instead tends to lead to homogeneity.  Concentrated residential and commercial life, by contrast, encourages specialization through the satisfaction of diverse needs.  A city with density offers greater opportunities for supporting any business the residents can dream of.  Without the concentration of population and businesses, fewer diverse enterprises can survive.

Residents of the revitalizing downtown where I live now frequently complain about the absence of a full-service grocery store.  The reason there’s no grocery store nearby is there’s not enough population density.  Only when density happens can urban amenities like a grocery store survive.

The enemy of vital cities

If Jacobs is the declared supporter of four keys to success – mixed uses, short blocks, old buildings, and population concentration – she also declares herself the enemy of a set of popular ideas that still live on in a certain strain of city planning.  She names the enemy in various guises as the ‘The Garden City,” “The City Beautiful” movement and “The Radiant City.”

You will know these enemies, she argues, by their aesthetic preference for symmetry, homogeneity, pastoral ideals, green but ultimately useless spaces, idealized compartmentalization of functions, and the separation of residential from commercial activity.

My adopted neighborhood

I think about my downtown neighborhood in San Antonio, TX, which I’m hesitant to say – but also proud to say – captures some of the magic that Jacobs celebrates in Greenwich Village of 1960.  We live among an interesting mix of uses by a wide range of ages – from retired historic preservationists to 20-something bartenders – and an eclectic set of art galleries, renowned restaurants, small museums, professional offices, outdoor bars and a linear riverbank park.  We enjoy our short blocks, and preponderance of old buildings, with only a smattering of new construction.

Repurposed building in a revitalizing section of San Antonio TX, south of downtown
Repurposed building in a revitalizing section of San Antonio TX, south of downtown

The only missing element is density, although the number of housing units in the area – due to some newly built apartment buildings – has probably doubled in the past five years and may double again in the next five.  There will be grumbling from some in the old guard about this new density when it finally arrives, but I’m confident Jacobs had it right – we will need the population concentration if our neighborhood is to continue to diversify.

As San Antonio more than doubled in population between 1970 (650,000) and 2010 (1.3 million) most of the growth occurred not in the downtown area but rather in wider and wider rings of newer suburban development.  As in many American cities during this time, the downtown and near-downtown actually lost density and headcount over the decades, even as the total city population soared.

Growth continues at the outer suburban edges, but has also returned, on a small scale, to the inner core.  Not every one of my downtown neighbors will welcome the changes, but I believe Jacobs that we need the influx of population to keep this area diverse.

Seeds of decline, sown in success

Looking ahead, as Jacobs did in 1961 in Greenwich Village and as I do in my own neighborhood, we realize diversity is hard to maintain.

The problem, Jacobs points out, is that success in some particular area leads to more of the same success.  Too much success in a narrow number of ways crowds out the diversity that led to success in the first place.

We know that yesterday’s rapidly gentrifying neighborhood, of course, becomes tomorrow’s unaffordable and exclusive community.  As landscaping improves, the range of conversation topics narrows.

A successful bar on a funky street attracts thirsty crowds, which encourage copycat bars all up and down the street, which indelibly alters the original funky feel.  I’m sure Bourbon Street is great, just as long as I don’t have to live right next to it.

A successfully historically preserved house museum draws a healthy group of tourists, encouraging historic preservationists to start a movement to lock an entire neighborhood in the sticky amber of an idealized historic era.  Fossilization follows.

Whenever the success of today crowds out the possibility of diversity and change, a city neighborhood loses its ability to renew itself.

Seeds of success, sown in decline

But all is not lost.  The lessons of Jacobs are optimistic.  The old buildings which some associate with decline instead provide the opportunity for diversity and therefore new growth.  If real estate prices decline enough in downtowns – hollowed out by the previous generation’s preference for suburban life – the affordable retrofit buildings can welcome a whole experimental group of businesses and activities at a lower price point.

While in New York last week I had lunch with a friend who, for business reasons, had visited 20 cities around the country in the last three months.  His meetings were in the tertiary cities of America; not Chicago or San Francisco but rather less well-known areas – areas that Jane Jacobs probably never bothered to visit.

He noted that in almost every single one he saw there were signs of a revitalizing urban core, a growing and experimental re-urbanization of previously abandoned areas.

The farmer’s market on Saturdays next to the Episcopal church, the brick riverside manufacturing building converted to a glass-blowing operation, the social-media marketing company next to couture cupcakes,3 all of these indicated a new generation of folks in these cities, all over the country, independently and purposefully choosing urban living over the suburban ideal of spending one’s weekends tending to a kelly-green patch of lawn.

The revitalization of American cities he described over lunch last week sounded modest in these places, but the fact that it’s happening all over indicates an unstoppable and healthy trend.

Please see my earlier note on Jane Jacobs, on Detroit, in 1960.

Please also see my review of Jane Jacob’s fascinating Systems of Survival – A Dialogue on the Moral Foundations of Commerce and Politics

And my review of Jane Jacobs’ Cities And the Wealth of Nations

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  1.  I read one book and suddenly I’m an expert on urban planning. You should have seen my confidence with all things medical after I took a 2-week First Responder course. I’m pretty sure I could be a country doctor if it wasn’t for those pesky malpractice laws.
  2.  As Shawn Corey Carter, America’s Poet Laureate of 2023, once proclaimed “MDMA got you feeling like a champion; The city never sleeps, better slip you an Ambien.”
  3. I understand, I get it, you hate couture cupcakes.  I do too.  I mean, I love to eat them, obviously, it’s just the idea of them all that’s just SO 2009.  But still, a couture cupcake store indicates a certain kind of BoBo population living nearby.  I’m sorry, who are the Bohemian Bourgeoisie, you ask?  They’re the people fueling this re-urbanization that Jane Jacobs foresaw in 1961.

Video: Interview with Pawn Shop Owner turned Politico

Taking a break from commenting on Wall Street, the Dow’s highs and personal finance topics, I recorded a show yesterday with San Antonio, TX-based smart commentary site, Plaza de Armas.

A friend and fellow small finance business owner Shirley Gonzales announced her candidacy for San Antonio City Council, District 5.  Shirley had previously introduced me to her Pawn Shop on a podcast, and explained the frustrations of trying to make something nice in her neighborhood.

shirley gonzales

On the video:

0:00 to 5:15 – Plaza de Armas Host Elaine Wolff and I speak about Gonzales’ candidacy.

5:45 to 12:25 – I share a coffee with Gonzales.  She speaks about her vision for her district, zoning frustrations, and the most important day of her life, which had happened 2 days before.

13:15 – 17:50 Wolff, Plaza de Armas contributor Jade Esteban Estrada and I talk about the revitilization of downtown San Antonio, and I explain the most important real estate ‘Buy’ signal ever.

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The Natural Gas Revolution Part VI – Has It Killed Renewables In Our Lifetime?

Here’s my hypothesis[1]: The abundance of cheap domestic natural gas – what I’m calling the Natural Gas Revolution – makes “renewable” energy sources like wind and solar financially untenable, and possibly unnecessary, for the next 90 years.[2]

I can’t prove my hypothesis because energy pricing is complicated.

Figuring out the ‘price’ of energy derived from traditional fuels such as coal, natural gas, and nuclear is not as straightforward as it may seem.  I’ve made an attempt based on a conversation with an official at my local utility company.  But every financial assessment depends on a series of assumptions: from the future price of input fuels, to regulatory changes, to models that take into account the depreciation of assets such as a nuclear or coal plant.

We know that energy produced from nuclear and coal plants has relatively low prices, partly because, in the case of my local utility, it bore the cost of building the nuclear and coal plants long ago.  As a result, we can afford that energy.  We also like the price of natural gas, because both plant construction and current market prices are low.

On the other side of the ledger, my local utility in recent years added solar- and wind-derived energy to its energy portfolio, both of which cost considerably more.  At a free-market price, wind power would be about 50% more expensive than natural gas energy, but a federal government Production Tax Credit (PTC)[3] brings the wind-energy price within the range of natural gas-derived energy.

Solar power is even more expensive than wind.  Solar may cost three times as much per KW hour as natural gas – assuming current technology – but with a federal subsidy through tax credits,[4] solar energy can be priced at a cost about twice as expensive as natural gas.

The energy provider of my home city targets a ‘portfolio mix’ by 2020 of 20% ‘renewables’ – at this point primarily wind and solar energy.[5]

As a retail consumer, I pay 9 cents/Kilowatthour on my energy bill.  This retail price reflects a blend of energy costs from the utility’s primary sources of nuclear, coal, natural gas, and renewables, plus the cost of administration and delivery to my house.  The price per KWhour could be brought down, somewhat, by prioritizing energy sourcing purely on a cost basis, which would favor coal and nuclear, and increasingly – given the natural gas revolution – natural gas.  Wind and solar make less sense on a pure cost basis without the federal taxpayer subsidies that make them feasible for the local utility.

My local utility has chosen to build a portfolio to include wind and solar energy; as a person with environmental sensibilities, I see the benefits of this and I feel good.  In addition, from a risk-mitigation perspective, the utility wants to stay ahead of regulatory changes which may make coal production more costly[6], or periodic events that make nuclear untenable[7], or market prices that would increase the cost of energy from natural gas.

So the local utility embraced wind and solar in part as a reasonable portfolio hedge against the risk of high natural gas prices.

But the future price of natural gas, and the likely range of prices for gas[8], just shifted massively with this natural gas revolution.  Folks I’ve spoken to in the natural gas sector forecast 90 years’ worth of known, accessible, cheap natural gas in shale rock formations.  All of this natural gas we really had no way of bringing to market just 4 years ago.

As a result, from a purely financial perspective I fear we’re locked into paying extra for renewables in a way that makes much less sense than it did just a few years ago, before the natural gas revolution started.

Fans of renewable energy are not going to like this message, I know.  In the largest sense, however, it should be seen as good news, and I’ll explain why.

It’s a huge economic boon to the entire country.

So why is cheap natural gas such good news?  For the majority of consumers the natural gas revolution will benefit their pocketbooks in subtle but important ways.

A drop in the price of energy impacts the price of nearly everything, keeping goods and services cheaper than they otherwise would be.  Just as expensive oil during the Oil Embargo of the 1970s kicked off a round of intense inflation, cheap natural gas will act to keep inflation contained in the future.

To ask people to throw away cheap energy and adopt expensive energy is a lot like asking everyone to throw away cheap food to consume expensive food.

The closest analogy I’ve come up with for renewable energy is the organic food movement.

Organic food works on a small scale, with a dedicated group of true-believers who eat food as an expression of their values.  It’s interesting to think about, but I’m not betting on widespread adoption.

Of course I’m in favor of organic food, and I serve it to my daughters whenever I can.  I’m happy to pay a little extra for the pleasant feeling of using fewer chemicals on the earth, or to support happy, free-range chickens.  The vast majority of food consumers in this country, and the world for that matter, however, do not have the luxury of paying more for food today for some intangible or unvalued long term benefit, even if it ‘costs’ more in terms of health or environmental impact in the long run.  The organic food movement pushes against the immutable logic of the wallet.

Similarly, renewable energy has required people to express their values through their energy consumption, paying more for something that impacts the earth less.

I’m generally in favor of renewable energy, and I would love for more things to be powered from solar and wind generated energy.  Unfortunately renewable energy is a luxury, and it just became even more so with the natural gas revolution.  The risk of future natural gas price spikes decreased dramatically with this revolution, making a portfolio including renewables less financially relevant than it was until recently.

Most people live in a resource-limited world, where cheap food or cheap energy is not a choice, but a necessity.  In my city, San Antonio, for the 25% of residents and 30% of children who live with daily food insecurity, the organic food movement exists in a parallel, irrelevant universe.

Most people I talk to don’t seem aware that the natural gas revolution of the past 4 years has made renewable energy untenable, financially. for the next century.

I see two reasons not to mourn the financial marginalization of renewables right now.

The first is purely financial since the tax subsidies needed to close the gap between wind and solar and more ‘market-based’ energy sources such as natural gas would have to grow in the future rather than shrink.

The second is more political.  This next point is more my instinct than provable fact.  But here goes: Whenever you have an important business – like renewable energy – wholly dependent on government subsidies, the opportunity for power-brokering by public officials and ex-public officials becomes extremely tempting.  More than tempting, it’s inevitable.

I have a real issue with ex-government employees who go out and create ‘green energy’ investment companies, which fund companies whose major source of income is government guaranteed contracts for expensive energy in the form of wind and solar.  Since it’s all divorced from market prices, there’s a huge opportunity for influence peddling and government favors for former public servants.

There may be some of this going around in my city of San Antonio, but there are also big national examples of this.  Yes, I’m looking at you Terry McAuliffe and your GreenTech Automotive.  Most egregiously, I’m looking at you, Al Gore, and your New York Times-reported net worth over $100 million, largely built on this power-brokering technique,[9] earned in just 12 years since leaving office.  I’m very sorry you weren’t president, but your way of making money since then disgusts to me.

As the gap between the cost of natural gas energy and government-subsidized renewables grows in the coming years, one of the main externalities of the renewable energy sector is the opportunity for government graft.  So I’m not just concerned that we’ll pay more than necessary for energy, but I’m also convinced some of our public servants will make sure that the green energy industry pays them back handsomely for their support.

 

See also Part I – Mad Max Bizarro World

Part II – Big, Corporate, Well Capitalized

Part III – The Drilling and Fracking Scene

Part IV – How Big Is This?

Part V – The Labor Market

 



[1] I can’t prove this with data, hence it’s only a hypothesis to be tested over time.  But I still think I’m right.

[2] The natural gas revolution is happening mostly in the United States right now, in the Eagle Ford area of Texas, as well as the Bakken in North Dakota, and the Marcellus Shale of the Eastern US.

[3] Created by the Federal Government’s Energy Policy Act of 1992, which allows energy providers an income tax credit of 2.2 cents/KW hour.  Assuming a current natural gas energy derived price of 4 or 5 cents/KW hour, we can estimate the ‘market’ price (before PTC subsidy) of wind energy for the local utility at around 7 cents/KW hour.

[4] Solar tax credits tend to be Investment Tax Credits (ITC), providing 30% of the cost of development of a solar plant.

[5] With a minimal amount of ‘landfill’ gas supplying a third alternative source of renewables.  My local utility’s published description of their mix of energy sources now and in the near future can be found here.

[6] If environmental regulation made utilities pay out of pocket for ‘carbon offsets’ for example, coal could become much more expensive.

[7] Like periodically happens, e.g. 3-Mile Island, Chernobyl, Fukushima.

[8] At the risk of stating the obvious, I believe the natural gas revolution means low natural gas prices at low volatility for decades, perfect if you’re a utility company forecasting your energy portfolio needs.

[9] No, I don’t have a breakdown between fees he’s earned on his movie, speaking fees, and his income from serving on the board of private equity firms that value his power-brokering to the ‘green-energy’ industry.  Kleiner Perkins made him a partner in 2007 and it wasn’t really for his investing acumen.  I just don’t think he’s rethinking the entire private equity business with his Generation Investment Management Fund, the way he describes in this WSJ Op-Ed.  Instead, I think he’s probably doing the same old power-brokering that becomes available anytime a big industry becomes completely dependent on government contracts and subsidies.

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Interview Part II: Pawn Shop Owner Fights The Good Fight

This audio interview is a continuation of an earlier interview with Shirley, in which we talked about her pawn shop, and the customer service they offer that banks rarely offer.

In this portion of the interview Shirley and I talked about serving the traditionally Hispanic West Side of San Antonio, and the barriers to trying to build something new and beautiful on the West side.   The barriers come from the neighborhood, city government, and even from within.

Shirley:                 My name is Shirley, and I’m a long-time pawn-shop owner.

Michael:               Thanks for joining me on Bankers Anonymous, Shirley. I really appreciate it.

I had a conversation with my friend Shirley, whose family has run a pawn shop on the West Side of San Antonio for 50 years.  In the course of the discussion I learned about the type of customer she serves, who typically is under-served by the traditional banking sector.

I learned something else though, about the challenges of trying to get ahead in the world, if you come from the West Side of San Antonio and try to do something good in that area.

Michael:               Who is your ideal customer or regular customer that you depend on?

Shirley:                 The average customer that comes into a pawnshop is a woman in her mid-thirties. She is usually a single mom. She’s working. Usually she might bring in something like a television and we would lend a hundred dollars. She would then within thirty days come and pay 120 dollars and redeem that item.

Seventy percent of the time, a customer does come back and pick up their merchandise. It’s a short-term collateralized loan where the person has   sufficient — usually the person has every intention of coming back and getting their merchandise. That’s how it’s designed to work. If they don’t, there’s no recourse. We are non-recourse lenders. A person doesn’t have to pay the loan back. We don’t call them. We don’t notify them. We do occasionally send reminders but nothing that forces them to come back and get the item.

Michael:               You and I live in the same city. We live in a Hispanic-dominant city. I know you’re located on the side of the city that traditionally is Hispanic. Would you say most of your customers are Hispanic origin? Do they speak Spanish at home, or are they just of origin and it was great-granddad from three generations ago move to that area of town? Do you know that demographic?

Shirley:                 Demographically it’s ninety percent Hispanic. We do require all our employees to speak Spanish so they can communicate well with the customers. I would say at least half of the customers are Spanish-speaking only. We communicate back and forth between English and Spanish all day long.

So the majority of people are Spanish-speaking, and what’s the most important part for us is that our employees can communicate with them and explain the lending process to them, so that they understand what the transaction is and what they’re getting into and what their recourse is if they don’t — well, there’s no recourse if they don’t pick it up, but explain that whole process to them.

Michael:               Do you have a sense that your customers are also going into a bank and they’ve just preferred to do this, or would you say most of your customers never — pretty much never set foot into a traditional bank?

Shirley:                 Most of the customers don’t step foot into a traditional bank. I also feel like not just our customers, but my employees don’t want to go to a traditional bank. Recently when we tried to change the way we do our payroll, the employees didn’t want to go to a bank either. It seems like traditional banking as we know it may not be what a younger generation or a more recent immigrant generation of people want — how they want to deal with their money.

The market that we serve daily, and we know, we understand the pressures that people are facing just to make ends meet. I think the larger community doesn’t really understand that there’s a whole segment of our population that really is paycheck-to-paycheck, and a weekly paycheck-to-paycheck.

They can’t guarantee that they’re going to get work every single week consistently month-after-month. All these people still have the same needs that all of us have. They just don’t have the same access to credit cards. They don’t have necessarily people to ask to bail them out because most of their families are in the same situation.

There is a sense that there’s a large group of people that get left out of traditional financial services, whether they’re credit cards, whether they’re banks, whether they’re equity loans or even just regular every day, consistent payroll. We’re filling that gap. The pawn industry feels like we’re filling that gap, and we do absolutely no harm to people.

I’m very proud of being able to provide that service to a very large group of people that often get left out. I think that our industry does it clearly and fairly, without doing any harm.

I quickly came to understand an irony of Shirley serving the underserved and unbanked of San Antonio’s West Side with her pawn shop.  Because when she had a vision for developing her entire city block, she found barriers on all sides, from the City, from the banks, and even from within.  I’ll let her tell her story.

Michael:               Can you tell me about the scope of the project that you have in mind that you either are going to do or have wanted to do for a long time? What does it mean, the project you’re trying to do?

Shirley:                 We are working on a new building within our existing space, but we’re looking at a 10,000 square foot addition, about 5,000 square feet of retail space and about 5,000 square feet of warehouse. It’s going to be a beautiful project here. We feel like we’re one of the only people that are here on the west-side of San Antonio that have done a private investment in the community in many, many years. It’s going to be a really beautiful project. We have a great architect who designed our building, and we’re working with every detail to make sure it’s something that the community can be proud of, that are many long-time customers can be proud of. It’s a whole new retail space, and a whole new building that I think is going to be the pride of the west side.

But barriers came from the City.  A special IDZ, or Infill Development Zone, was supposed to make this type of project easier on the West Side, but in fact because of that it became somewhat of a nightmare.

Michael:               It’s the Infill Development Zone that’s been hurting you also?

Shirley:                 It delayed us ten months.

Michael:               In what way, what are they doing?

Shirley:                 We needed council approval for that and there was some concern that we were changing our — I think it’s possible that it was just a miscommunication with the councilman and our neighborhood association, that we were not changing our zoning. We continue to be in a “C2”.  We just needed an overlay, an Infill Development Zone overlay to allow us the parking waiver.

Michael:               So they create this special zone to help you but P.S., it’s actually another barrier to getting done what you need to get done.

Shirley:                 First of all, it was very complicated, so that I could not read it and understand it and go myself to council, or rather to the board of adjustments. I had to hire lawyers. I didn’t have to hire lawyers, I suppose I could have hired a consultant but it was complicated. It was very important to me because we’ve been here for fifty years and it was recommended to me to hire a lawyer to help get that passed. The lawyers were very expensive. Then I think unfortunately complicated the issue even further because once lawyers get involved it seems to be more complicated. They didn’t quite seem to understand that we were just asking for an Infill Development Zone.

Delays came not just from City Council and lawyers, but from her bank.  This got Shirley to reflect on the financial barriers, the political barriers, and the barriers from within.  But she’s still trying her best.

Shirley:                 Again, I’ve been hitting my head against the wall for two years and I can’t get it done. But I think that for a long time I thought it was me, because I’m not competent enough or strong enough, or I don’t have the qualities that are necessary to move this forward.

I think it’s possible that as a community we feel like “it must be me,” that I can’t get things done. But I think there’s a possibility that maybe in fact that’s not true. There are in fact these real barriers, so even just recognizing that there may be something that’s beyond myself, it’s not just me, that people that are working in these communities, that there are barriers. We have a bit of a hard time navigating them because at the same time this is what we know. But I think that by having our mayor speak the way he does, and having some of the other politicians come in and really working within this community, there starts a change. It’s slow-changing but even just recognizing that we have the power to make that change.

Without sounding too trite about it, I really do think it’s possible. It’s just a recognition that there is plenty of opportunity right here in this community. First of all recognize that it’s actually happening, but then move forward.  I think the fact that everybody else is starting to recognize, the politicians are starting to recognize that we have a very powerful voice here.

Michael:               I hope you get a beautiful new construction.

Shirley:                 I can’t wait. I’ll definitely do a big grand opening for everybody when the time comes.

 

Please Also See: Interview Part I: Pawn Shop Owner on the Unbanked

Also see: Video: Pawn Shop owner turns Politico!

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Ask an Ex-Banker: Home Loans and Home Equity Lines of Credit

Q. Dear Banker, My wife and I are planning an addition to our house. We need the additional space, but I do not want this project to stretch our overall budget. Since I have a specific idea of how much I want to pay, a rise in interest rates would cause us to make different decisions on the project details. Unfortunately, we need to make those decisions now but will not need the money for another 8-12 months. I don’t care if interest rates go down, I like where they are now, but borrowing money before you need it sounds foolish. How does your average Main Streeter hedge against interest rate swings?

Bradley T., San Antonio TX

 A. I understand your question to be whether you should borrow money now, before you need it, because rates are ‘low enough,’ and because you worry rates will not be this low in another 9 months when you actually need the money for the home renovation.

My short answer is: “Maybe, although I personally would not” as to whether you should borrow now and lock in today’s low fixed rates, in anticipation of needing money 9 months from now.  I’ll explain what I mean by that in a moment.  The longer answer, which I’ll detail more fully below that, is that you really need a home equity line of credit, not a fixed-rate home equity loan.

The Short Answer                                      

Should you lock in a loan 9 months early because rates are ‘low enough?’  I’ll make a bunch of assumptions to be able to answer the question specifically, and I hope you can adjust the answer to your own particular situation.

I’ll assume you can get a Prime[1] rate home equity loan for a pretty major $100,000 home renovation at 5%.  That means you’ll pay $5,000 per year in interest, or an extra $3,700 for borrowing 9 months early.

$3,700 is not the end of the world for peace of mind, and so I’ll answer “maybe” borrow this way to lock in an attractive low rate like 5% today.

There are a few reasons, however, why I would not borrow money early myself.  Foremost, we really have no idea which way interest rates will go in the future.

As a former bond guy,[2] I pay quite a bit of attention to interest rates.  Had you asked me at almost any time in the last 10 years whether interest rates were likely to go higher or lower in the next 18 months, I would have said ‘higher’ approximately nine out of ten years, and I would have been wrong approximately nine out of ten years.  That’s not because I’m ill-informed, it’s just because it’s much harder to forecast the future direction of interest rates than it seems.

Because of my own deep uncertainty about the future direction of interest rates, I would argue your choice to borrow 9 months early ‘locks-in’ a loan interest ‘loss’ of $3,700, whereas the rate available to you has a 50-50 chance of being higher or lower 9 months from now.  If you accept my view, then your interest cost for the next 9 months, by not borrowing, is $0, which is much more attractive than losing a guaranteed $3,700.

But what if, 9 months from now, your fixed rate jumps to 7% from today’s 5%, and you’re locking in a 10 year $100,000 loan at $7,000 a year, rather than the more attractive $5,000 a year interest cost?  Well, in that case, if you carry the full sized loan for 10 years, you’ll pay a total of $20,000 more in interest over the life of the loan.  In that stark (probably-worst-case-scenario) example you will have lost out, and you will curse my advice, as well as my children’s children.[3]

Given that the starting position of borrowing early is that you’re $3,700 poorer, however, I see many more scenarios in which you come out ahead by not borrowing early.

If you plan to pay down the loan principal faster than 10 years, for example, or rates shoot up less than 2% over 9 months, or rates stay the same, or rates go down even further, you will have broken even or ended up better off by not borrowing early.  So that’s why I wouldn’t take today’s rates.

The Longer Answer

Instead of a home equity loan locking in today’s good fixed rates, what you actually need is a home equity line of credit (HELOC) from which you can borrow money and pay down at any time.[4],[5]

When I started a business in 2004, I met with an elderly entrepreneur who gave me great advice: Obtain the largest possible home equity line I could, not because I needed it now, but, because as an entrepreneur I needed to be ready to take advantage of opportunities whenever and wherever they might arise.

He was right.  In fact, any person who is both a home owner and a business owner, needs to stop everything right now and start applying for a home equity line of credit.  Why are you still reading this blog post?  Go, do it, now.  I’ll wait.

Ok good, you’re back.  You’re welcome.

In your case, Bradley, the potentially higher rates one year from now will be more than made up by the fact that you can borrow only the amount you need, as you need it, for your home renovation.  The slower drawdown of debt principal and the faster payoff of principal via a home equity line of credit is virtually certain to save you interest costs in the long run.

I believe the fact that HELOC rates are floating – they may go up or they may go down over time – are more than made up for by the variable amount of principal you can take out only as and when you need it.  Over the course of your planned home improvement project, if you borrow for example $33,000 for some period of time, rather than the full $100,000 loan, you’re obviously paying 1/3 of the interest costs than you would on the full amount, during the period of the smaller borrowing.  My point is that even if you end up with the same peak amount of borrowing, $100,000, you’re likely to have paid significantly less in interest in getting to that point.  Most of the time, those savings will outweigh the probability-weighted cost of higher future interest rates.

A special note for small business owners, new and old:  If you’re just starting out, the HELOC may be your only ticket to borrowing money cheaply and flexibly.  Banks only pretend to lend to small businesses, and they certainly do not lend to new small businesses, so it’s hardly worth trying that route.  Banks do lend, however, against houses and home equity, so you’ve got a shot there.

For experienced small business owners: You still need the largest home equity line of credit possible.  You never know when the commercial property right next to your office may become available, and when having $50,000 in ready cash is the difference between acquiring the real estate of your dreams and paying more to lease office space for the next 30 years.  If you have to go to your bank to apply to get the loan to buy the property next door, you’re too late.  You need the home equity line so that you can credibly represent to the sellers your ability to close the transaction within 1 week, in ‘cash.’  That is how the pros do it.[6]



[1][1] Meaning, you have excellent credit, at least above a 720 FICO.  The FICO people sell their scores from all three major credit rating agencies here for about $35.  It’s worth it to pull your score once in a while, so you can confirm you’re eligible for the best rates and there’s no weird activity on your credit reports.  Don’t let FICO trick you into paying $14/month.  That’s stupid.

[2] No, not the Daniel Craig type of Bond guy, much to my wife’s chagrin.

[3] Which is as good a segue as I can think of for repeating Jack Handey’s Deep Thought: “I believe in making the world safe for our children, but not our children’s children, because I don’t think children should be having sex.”

[4] This entire ‘Ask an Ex-Banker’ advice column today assumes you are a responsible borrower, and that debt incurred through a home equity line of credit will go toward productive home and business improvements and not be blown on subsidizing your unsustainable consumer-driven lifestyle.  In your case, Bradley, since you live in San Antonio, that means you can’t blow the whole line of credit on Alamo Lego miniatures and bad Tex-Mex food.   But since www.bankers-anonymous.com readers are, almost by definition, extremely responsible with debt, this hardly bears mentioning.

[5] Most HELOCs give you a drawdown period of, say, 10 years, followed by a payback period of another 10 or 20 years.

[6] While I’m very much in favor of HELOCs for small business owners, I need to acknowledge in the fine print here that things can and have gone wrong for small business owners putting their houses at risk.  Of course this would be terrible.  When you get a HELOC for your small business, make sure you save it for an opportunistic can’t lose situation, not use it to keep your flailing, unsustainable, small business alive.

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Cracker Barrel Amateur Hour

The San Antonio Express-News reported that San Antonio-based Biglari Holdings failed last summer to notify the Justice Department of its intent to initiate an activist approach to investing in Cracker Barrel Old Country Store Inc, as required by law.

Sardar Biglari operates in the exceedingly small financial sandbox of San Antonio, where his firm’s $850,000 Justice Department fine makes news, or for that matter where $10 million in city initiatives constitute a significant portion of local venture capital investments over a three year period.

Does the Biglari fine matter?

It matters mostly to Biglari’s image, something he cares quite a bit about.  This is a businessman who has managed to get every single press mention of himself in recent years to compare him to value investor Warren Buffett.

Nevermind the fact that Warren Buffett has never engaged in hostile, aka activist takeovers, or management shake-ups – Biglari’s preferred investment style.

Biglari, and activist investors like him, seek to acquire enough shares in a target company to demand a board seat, and from that vantage point of power demand changes in management or company direction.  This is the kind of thing explained and exemplified in the popular culture by Michael Douglas’ Gordon Gekko.  Biglari’s fine from the Feds is precisely for not declaring his intent as an activist investor in Cracker Barrel.  Buffett, by contrast, famously only purchases companies in which he already admires and supports management.  Buffett is the opposite of an activist investor.

Also, nevermind the more important point, that a Buffett comparison is best bestowed by the investment world, not claimed by the investor himself.

Biglari’s is the kind of hubris and obfuscation you only can get away with locally in San Antonio, where comparing oneself to Warren Buffett isn’t immediately met with a snort of derision and a rolled eye.  For one thing, people are too polite for that around here.  For another, the wide gap between Biglari’s style and Buffett’s style would be too obvious to anyone from the larger sandboxes of the financial industry to take his self-proclaimed similarities seriously.

Besides just Biglari’s image, does the fine matter to Biglari’s actual business?

It should.  To the extent that a hostile takeover practitioner like Biglari depends on outside capital – as it no doubt does – he needs to credibly present himself as an expert in the field of activist investing, to attract sophisticated capital.  When you miss something as obvious as a regulatory filing – to declare your intent at activist investing – you really are declaring to anyone paying attention that you are not exactly covering all your bases.

This is not necessarily a problem the first time around.  But if I had money with Biglari – I don’t and I don’t plan to – I’d be a lot more skeptical about his claims of expertise as an activist investor as a result of this news.

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