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The Shortest Route Is Not Always the Quickest When You Look to Grow

Mar 19, 2008
If your organization wants to get to the top of the heap, beware of a greased pole as your sole means of conveyance. From a distance, a greased pole may look like a regular pole.

You need to check your assumptions about how reliable the route to the top is before you commit to climbing the pole as your only approach. Otherwise, a lot of time and resources can be lost. In the same way, many irresistible forces can look like a sure thing from a distance, but on closer inspection provide some impediments that will delay or deny your progress.

Financing a business primarily with debt can be like trying to reach the top of a greased pole without a crane, because of interest rate volatility. Property developers usually borrow almost all the money they use to create their developments. Many count on selling what they have developed soon after it is complete to reduce their financial risk back to normal levels.

Otherwise, they will inevitably lose lots of money at some point, if the development is unsuccessful. Interest costs alone will quickly turn a development that is making some money into a loser, if the developer can't refinance with equity or meet the interest payments.

Gauging interest rate trends is serious business for a developer because the lenders normally expect them to personally guarantee the loans for the development. This requirement means that having a failed large development often causes a personal and business bankruptcy for the developer.

Bankruptcies are no fun and make it much harder to do the next development. Succumbing to bankruptcy is a little like getting near the top of a tall greased pole and then falling off onto the hard ground with no cushion or net.

What makes the situation even more challenging is that the best time for starting such developments is usually near when the business environment looks the worst. That's when there is little immediate need for new developments, interest rates are high, money for borrowing is scarce, and the outlook is bleak for the development business.

As soon as interest rates start to decline, all of those circumstances start to improve. The longer and more that interest rates improve, the better the current environment is for beginning a new development.

However, at some point, that advantageous environment becomes very risky for making money from new developments because interest rates will soon start to rise again. This future rise will hurt the business prospects for the development and make it hard to refinance the project with equity to replace the construction debt.

Many developers fail to consider the underlying potential volatility of a seemingly good environment, and often act as though the favorable tide in interest rates will not reverse itself. This belief is especially risky because those who try to forecast interest rates generally agree that it cannot be done for very long with very much accuracy.

Consequently, developments that take more than a few weeks to complete and sell to someone else at a good price are always potentially running their developers very close to bankruptcy, unless they finance the development without borrowed money.

At various times property developers will become successful and make large fortunes. However, a minority of them hang onto the full extent of these fortunes, often falling off the greased pole because of not recognizing the potential explosive volatility from the combination of higher interest rates and excessive debt. If you take away the debt, the potential for obtaining a gain is greatly improved because then developers have time to weather adverse circumstances.
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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