Friday Lunch At Galatoire's

4 Hours, 3 Cocktails, 2 Desserts, 1 of a Kind Experience

Photo: Central City Millworks  (they did all off the millwork for remodel in 2012)

Having lived in New Orleans for several years in my mid-20s, I indulged in many of the unique experiences that the city has to offer. When I knew that I would be relocating for work, I made a bucket list of all the restaurants that I wanted to visit before my impending move.  One meal that I was unable to cross off my list was Friday Lunch at Galatoire’s. Upon learning that my wife would be traveling to New Orleans for a conference, I decided to tag along and try to get a seat at the table.

Getting a Seat at the table

While most popular restaurants in New Orleans require a reservation, Friday lunch at Galatoire’s is the exception. Tables in the first-floor dining room are reserved on a first-come, first-served basis. A staff member will appear outside the restaurant door around 8am and will begin taking names for the 11:30 seating.  With only 41 tables and 132 seats, the list fills up between 8:30-10am on most Fridays (notable exceptions: the Fridays before Mardi Gras and Halloween when tables are auctioned off for charity.) There are also professional line sitters that will show up early and put your name on a list for a fee. For those who are unable to get a seat during the 11:30 seating, there is a second seating following this (whenever tables open up) and reservations may be made for the upstairs dining room. However, my local friends stressed the importance of eating downstairs with the first seating to really get the full experience.

Unfortunately, I underestimated the impact of the line sitters and did not get to the restaurant until 8:45am.  By the time I reached the front of the line, the list for the first seating downstairs was full, and the host was taking names for the upstairs dining room. So after the crowd dispersed, I went into the restaurant to see if I could grease some palms to get my name on the list. The host declined my gratuity but offered to put my name on the list for the second seating. He instructed me to return around 1:30 and hopefully we’d get seated around 2pm. Seeing that this was my next best option, I put my name on the list and left the restaurant.

 I cursed myself for staying out too late the night before and texted my wife the disappointing news.  She walked over from the conference early anyway to kill time while we waited for our table. After we had made it only a few blocks, I received a text from the restaurant that our table was ready just a few minutes after noon. We raced back to restaurant and the host informed us a table no-showed and that we were the next duo on the list. As the second to last table seated, and having defied the odds of getting a seat without paying a line sitter, we walked into a packed dining room and eagerly awaited our turn at the Friday Lunch experience.

Packed Dining Room taken during our lunch

The Ambiance

The best words to describe the temperment of the room are jovial and energized. With patrons dressed in their Sunday best, multiple tables with large birthday balloons floating above, and a large table of rowdy groomsmen helping send off an expectant groom, everyone in the dining room appeared to be celebrating something.  Throughout the meal, servers would clang glasses to get the restaurant’s attention so that everyone could participate in celebratory birthday toasts and singing "Happy Birthday." The entire dining room participated with the same enthusiasm for each toast as if it were for one of their tablemates.  People were up and about tablehopping, drink in tow, saying hello and catching up with friends who serendipitously happened to be at Galatoire’s as well as visiting with strangers.

It was impressive to watch the staff navigate through the chaos. They had an unbelievable knack of appearing when needed then disappearing to let you enjoy your meal. Plates were cleared as soon as the last bites were finished, and new drink orders were taken as soon as glass bottoms were raised for the last sip. 

With tables placed closely together, you cannot help but interact with the neighboring tables.  We quickly learned that the table next to us consisted of a middle-aged couple treating their college age daughter and her boyfriend to lunch to commemorate the boyfriend’s first trip to the Crescent City. They were regulars at Galatoire’s and wanted their daughter’s boyfriend to have a quintessential New Orleans experience.  When they asked what we were celebrating, I told them about my bucket list and not getting to cross it off during my time living here. They welcomed me back to the city and informed us that we were in for a treat. My wife mentioned that she was here for a conference and that, if we had to celebrate something, she had celebrated a birthday last week.  After discovering we were from out of town, they proceeded to inquire about all the places we had eaten and the sights we'd taken in during the week. We also traded suggestions of books to read, places to eat around town and made friendly conversation.  The only breaks in the conversation were the birthday toasts and eating as the food arrived. However, the conversation would pick back up between courses.  At one point during the meal, the wife snuck off to tell our waitress about my wife's recent birthday so that she could also get her own birthday toast. They were our de facto tour guides for the duration of the meal and definitely enhanced our dining experience.  We ended the meal by exchanging emails and well wishes.

The Food

While my wife and I enjoy a good meal, neither of us are very familiar with traditional French Creole cuisine. However, we are generally adventurous eaters and enjoy sharing so we get to try everything on the table. Luckily, the table next to us told us close our menus and let our waitress guide us through the meal. Our server, Martine, quickly appeared and took our first drink order.  When she returned, she recommended we start off with the soufflé potatoes and the Galatoire Goute (pronounced goo-tay), which consisted of shrimp remoulade, Crabmeat Maison and a crawfish salad. She instructed us to either dip the potatoes in hollandaise sauce or to stuff the potatoes with the Goute.

Next, we ordered our second round of cocktails and proceeded with the duck and andouille (pronounced an-doo-ee) gumbo and the iceberg wedge salad with apple smoked bacon that was sweet enough to have been candied.   

After letting our food digest and enjoying our cocktails, our server returned to take our order for the main entrees. After telling Martine that we wanted both a fish and a meat entrée, she suggested that we order the redfish with the crabmeat Yvonne garnish and the petite filet cooked medium rare with béarnaise garnish. For sides, she recommended the cream spinach and asparagus hollandaise.  We ordered our third cocktail and eagerly awaited out meal.  When our entrees arrived, Martine had noticed that we had been trading plates mid-course and had the entrees split in half before arriving at the table.

Redfish with Crab Yvonne and Medium Rare Petite Filet with béarnaise garnish

As a self-proclaimed bread pudding aficionado, I was looking forward to trying the house bread pudding with their banana praline sauce. My wife was also eyeing the black bottom pecan pie with an oreo crust and whiskey caramel sauce. After consulting Martine, we ordered both.  Our new friends at the table next to us also recommended that we try the café brûlot (pronounced bru-low) which he described as a brandy spiced coffee drink that is set on fire.  With an endorsement like that, we were unable to say no. Both desserts were delicious, but we both agreed the pecan pie was the superior dish.

Left: Black Bottom Pecan Pie  Right: Bread Pudding with Banana Praline sauce

The Drinks

While neither my wife nor I routinely order cocktails with lunch, we decided that Friday Lunch at Galatoire's would be an exception.  I started off with the Kentucky Reserve which consisted of Woodford bourbon, tuaca liqueur, Angostura bitters and a brandied cherry served up in classic coupe glass. The drink was well balanced with a boozy base and a sweet finish.  My wife’s first round was the Old Fashion, which was made in the classic style, with bourbon, Peychaud’s bitters, house made simple syrup, orange and a maraschino cherry in a rocks glass. 

My wife with her Old Fashion and my Kentucty Reserve in the coupe glass

My wife’s next round was the Galatoire’s Milk Punch, which consisted of bourbon, milk, vanilla, simple syrup, and nutmeg.  It honestly tasted like a boozy milkshake. I went for the Galatoire’s Specialty Cocktail which was essentially a Sazerac with bourbon instead of rye whiskey.

For round three, I ordered a Sazerac which was made up of rye whiskey, Herbsaint, Peychaud’s bitters, simple syrup and a lemon twist.  My wife, who was warming up her palate for dessert, went with the house’s take on the Classic Daiquiri. They used Louisiana’s own Rougaroux Sugarshine Rum, lime juice, simple syrup, lime, shaken and served it neat. The 101-proof rum with the lime juice gave the drink a kick and acidic bite that made the drink much more palatable than the sweeter versions of the drink I have previously encountered. 

Farewell

After eating an incredible meal, imbibing in delicious cocktails and saying farewell to our new friends that we made over the past four hours, we settled up with our server (after taking a selfie together) and made our way out of the restaurant. While I had high expectations for our Friday Lunch at Galatoire’s, the experience exceeded them all.  People often say that outside of New Orleans, Mardi Gras is just another Tuesday, I think the same sentiment can be applied to Friday lunches not at Galatoire's.

Lagniappe: While waiting in line, I chatted up some of the hired line sitters and got a phone number that I can use the next time I want to eat at Galatoire’s. Contact me and I will share the contact information.

Protectionism in the News

One of the advantages of having an unpopular president is that his bad ideas get the criticism that they deserve.  Listening to the mainstream media call tariffs a tax on the American consumer was music to my ears.  Not sure where these critics were when Trump imposed tariffs on solar panels and washing machines in January. With multinational corportations that source materials and manufacture goods all over the globe, it is impossible to impose restrictions in trade without creating some unintended consequenses. 

Below I have included some articles that I particularly enjoyed reading that are critical of recent tariffs and protectionism in general. Please use the comments to share any other articles that you have come across and feel are worth sharing.

1. Trade Wars are Easy to Win 
2. Some Questions for Protectionists 
3. Trump's Tariff Folly

Irrational Medicine

While I was reading the current issue of New England Journal of Medicine this week, I came across an interesting perspective article. Usually I skip these articles and focus on clinical studies, images in medicine and review articles that usually have higher yield information that I can apply to help care for my patients. However, Dr. Jerry Avorn's article, The Psychology of Clinical Decision Making- Implications for Medication Use, caught my attention. Essentially, he discusses how a lot of clinical decision making in medical education is based on the assumption that both clinicians and patients "behave rationally" meaning that with appropriate information they will make decisions that maximize health benefits and minimize risk of harm.  However, my clinical experience has shown me, often on a daily basis, that both patients and clinicians act irrationally.  

A relevant example would be the treatment of influenza.  A lot of patients are hesitant to get the flu shot but will call my office for oseltamivir (tamilfu) after the first cough, sneeze, or runny nose despite what most clinicians consider to be overwhelming evidence that the vaccine is significantly more effective that tamiflu. 

A 2014 British Medical Journal sytematic review looked at the 83 articles which reviewed the potential benefits of Tamiflu. From this review, Tamiflu has good evidence supporting reduced time from onset of illness to first alleviation of symptoms from 7 days to 6.3 days (16.8 hours).  When used as a post exposure prophylaxis agent in patients exposed to the flu, it has been shown to reduce risk of symptomatic flu by 55% . There is not evidence to show that it reduces rates of hospitalizations, death, diagnosis of post flu pneumonia (lung infection) , bronchitis, otitis media (ear infection) nor sinusitis (sinus infection) any better than placebo.  Now lets compare tamiflu to influenza vaccine.

According to the CDC, the influenza immunzation (flu shot), has been shown in studies to reduce flu-related hospitalizations for the general population. This impact is even greater in high risk patient groups such as diabetics (79%) and patients with chronic lung diseases (52%). A 2017 study, published in Pediatrics, shows that from 2010-2014, children who received flu shots had a decreased risk of dying from the flu by 51% in healthy children and 65% in children with underlying medical conditions.  There is also an incredibly large amount of information documenting safety of  the influenza vaccine in both children and adults.

From reading the above information, it seems like the rational choice would be to get an annual flu shot. However, a large number of patients are still not immunized. According to the National Immunization Survey-Flu (NIS-Flu) and Behavioral Risk Factor Surveillance System (BRFSS), vaccination rates for adults have been approximately 40% for adults and 55% for children from 2009-2016. This means over 50% of adults and almost 50% of children fail to get immunized despite the above information being known and readily accessible. 

While there is a large amount of research in fields such as behavioral finance, I have not seen anything like this being studied in medicine.   I think this issue is only going to become more important as quality metrics (diabetes bundles, BP goals, Heart Failure bundles,  adherence to guidelines) continue to become more important for physician evaluation and institutional accreditations.  While there is so much we have yet to learn in the field of medicine, I think there is some low hanging fruit in discovering why we fail to provide care to the best our knowledge.  I'd even be willing to wager that some of the tools used in behavioral finance could be used to nudge patients and clinicians into making better healthcare decisions. 

Crowdsourcing for Uncle Sam

Ezekiel J. Emanuel and Bob Kocher's recent WSJ editorial, What Medicare Could Learn from Netflix, discusses a proposed solution to help CMS improve its risk adjusted payment model to better allocate healthcare dollars for its patients. 

While most of us aren't healthcare policy buffs, looking for cost effective strategies to draw on social capital to improve the delivery of governmental services seems like a win for us all. The XPRIZE foundation has created a successful model that could easily be applied to government specific challenges.

Please use the comment section to suggest other govermental challenges that you'd like the our collective knowledge to address. 

The article is behind a paywall, so you need to be a subscriber to read the full story, but I have included a condensed excerpt that I found particularly interesting and hopefully will encourage you to read the entire article.

Tne way for Medicare to do better would be to emulate Netflix... Netflix ran a world-wide contest to improve... its proprietary algorithm for predicting how users would rate films they’d never seen... Within a year, over 2,000 separate teams... had submitted more than 13,000 algorithms. Eventually, the winning team... improved the algorithm by more than 10%. For a tiny cost, Netflix got a huge amount of computer-science research that even its highly skilled employees could not perform.

Medicare should do the same: create a contest open to anyone in the world who can beat its current risk-adjustment model...The winner should be able to use objective patient data to account for at least 45% of the spending variation caused by disease...

Lagniappe: Looks like WSJ is testing a new paywall strategy. Seems kind of cool

More than A Bubble?

The recent declines in the US publicly equity markets in response to good US economic data support the argument that quantitative easing and near zero interest rate policy has created a bubble in the US stock prices. There seems to be a consensus that prices will continue to  decline as interest rates normalize.   While I concede that cheap money has been a major driver in the rise in US asset prices, I think there must be other factors at play. Japanese markets have not had the same run up in asset prices, despite similarly low interest rates and quantitative easing.

Tyler Cowen offers a contrarian hypothesis for high US asset prices in his recent Bloomberg article.  He suggests that at least a portion of the rise in US asset prices is due to a lack of alternative financial institutions to store wealth.  According to the Credit Suisse Research Institute's Global Wealth Report 2017, global wealth is up 27% from 2007-2017.  This approximately $60 trillion in new wealth has to be stored somewhere and the US public equity markets have received a large share of invested capital.  I have included an excerpt from Tyler's Article below.

To sum this all up in a single nerdy finance sentence, in a world where wealth creation has outraced the evolution of good institutions, the risk premium may be more important than you think

The Grumpy Economist on Recent "Stock Gyrations"

While I've been inundated with interviews, blog posts, emails and tweets from various sources wanting to share their thoughts on recent public stock market volatility, there has been a dearth of quality insight. One of the main reasons for starting this blog is to highlight good articles that I want to share with my friends.

John Cochrane's recent blog post provides a thorough analysis of the multiple factor that go into asset pricing and his hypotheses for recent changes in the public stock market.  Warning, this is a long post with lots of charts and equations. 

Please use the comment section to share your thoughts or to highlight other articles that are related to this article.

From the Peanut Gallery

Below is a rather thoughtful comment in response to my previous post, License To Pump.  Tip of the cap to SP for taking the time to share his thoughts. 

I think the burden regarding a need for license should be based on the degree of which negligence can lead to harm. I do not think a gas station attendee, hairstylist or manicurist can cause significant harm without committing an act that would be criminal under existing state and federal laws.

I think high risk occupations with specialized privileges should be licensed. However, I think the purpose of licensing should be to validate credentials, demonstrate continuing education in their area of expertise, and to monitor for egregious behaviors (technical, or criminal) that would limit the ability to competently perform key job functions of the licensed profession.

My frustration with medical licensing in general is the amount of redundancy required at each step. In my personal example, this is the third full physician license that I have applied for in my short career. Furthermore, I currently have an active license to practice medicine in another state. In order to get my current license, I had to provide proof that I graduated from medical school, successfully completed a one-year internship, completed a residency training program in good standing, passed STEP I, II and III of US Medical License Examinations. I had to provide proof that I had a residency permit and medical license in the state where I completed my residency and obtained my previous medical license. I also had to prove that I did not have any complaints filed on either of those licenses. In addition to proving my credentials, I had to provide information regarding facilities where I worked, including a part time moonlighting gig at an urgent care center, to verify that I had not been professionally disciplined by my employer. I also had to submit fingerprints for an FBI background check. I also had to verify my DEA license and State Board of Pharmacy license history. All of this information must be sent directly from the third party (for a fee) to the Medical Board where I applied for my license.

Fortunately, my credentials were verified and I passed the criminal background check and obtained a medical license to practice in my current state. Once I had a license, I was able to apply for jobs. To get credentialed to practice medicine (which I was granted a license by the state medical board where my employer is located) at my current employer, I had to verify all of my credentials again. Rather than contacting the state medical board to verify my credentials, I had to contact all the agencies that verified my credentials for my medical license again and have them send my information to my current employer.

Since moving to my current state, I have been continuously employed by one employer, obtained a new DEA and new state controlled substance license, and became board certified by the American Board of Internal Medicine. In order to sit for board exam, you must verify that you graduated from medical school, completed internship and residency in your given specialty, passed USMLE Steps I, II and III. Again these credentials must be verified directly from the agency issuing certifications.

One would think that in order to get a Texas Medical license, I would have to verify my current medical license is in good standing, prove that I have not been professionally disciplined by my current employer, submit to a new FBI background check with fingerprints, verify my board certification, and verify my DEA and state controlled substance license history. Unfortunately, that is not how it works. I had to repeat every single step that was required to obtain my current license. This including verifying that I had completed medical school, internship, residency, passed USMLE Step I,II, III (all of the things my current state medical board and the American Board of Internal Medicine had both already independently verified). I also had to contact the state medical board where I completed my residency and granted me my previous, and no longer active, medical license again. I also had to contact the institution where I did my residency, and the urgent care center that I worked on the weekends during residency to make extra money. All of these agencies and institution were required to directly send requested information to the Texas Medical Board.

Texas also requires a jurisprudence exam to make sure physicians understands rules that are unique to practicing medicine in the state of Texas. The purpose of this exam is to make sure you know how the Texas Medical Board works and has nothing to with the applicant's ability as a clinician. However, I think it is a fair requirement for physicians who want to practice medicine in Texas.

I would argue that re-verifying information that has already been verified by multiple independent agencies, does very little, if anything, to improve patient safety if I am granted a Texas Medical License.

Financial Samurai on Portfolio Composition and Risk

Came across this interesting blog post on Financial Samurai.  The author discusses investment risk and portfolio allocation.  While I'm not a member of the FIRE (Financial Independence and Retire Early) movement, the article was still worth a read.  I found the charts comparing the average annual returns for various hypothetical portfolios particularly interesting.  I was surprised to see that the average annual return for an 80% stock 20% bond portfolio underperformed an all stock portfolio by less than 1% per year over the past 100 years.

Financial Samurai is a personal finance blog created by Sam Dogen. 

why can't this be fake news

Economist John Cochran shares his thoughts on recent tariffs on washing machines, solar panels and the regulatory hurdles of building infrastructure in the US in his recent blog post. 

While my sentiments closely align with those in the article, I am willing to concede that the impact of tariffs are more nuanced than purely good vs evil.  However, I think creating "optimal tariffs" that precisely balances costs and benefits is impossible and susceptible to cronyism.  I think as a whole, we are better off trying to eliminate tariffs than trying to design optimal tariffs. 

License to Pump

As I am in the throes of applying for my Texas Medical License, I cannot help but laugh while reading Alex Tabbarok's post about government imposed restriction (licensing) on activities of daily living.

Redistribution of wealth Through Time Travel

John Cochrane's recent blog post summarizes the Joint Committee on Taxation distributional analysis of the new tax law. As you can see from the JCT table below, and reading John's blog post, income categories are paying the same relative share of the overall tax bill as before the recent changes in the tax code.  While it is too early to tell how accurate the the JCT estimates will be, it is fair to say that the JCT is expecting less change than the mainstream media coverage would suggest. 

My biggest issue with the JCT report is the $260 billion decrease in total tax revenue collected estimate.  Since the federal government does not plan to reduce spending to offset the decrease in tax revenue, the tax bill will increase the federal deficit and debt. While countless politicians and talking heads argue whether benefits of tax code changes are being distributed fairly between income categories, there seems to be a dearth of discussion about the primary function of the tax code. This failure to fund the federal government's annual spending redistributes $260 billion from future taxpayers to current taxpayers.  This makes the changes between income categories seem trivial.

RealCrowd on Allocation Mix

Paul Kaseburg, Chief Investment Officer at MG Properties Group, shares how he thinks about allocation within the real estate asset class on a recent RealCrowd podcast. He spends a majority of the episode discussing strategies to increase diversification within a real estate investment portfolio.  I found his discussion of vintage diversification as a strategy to mitigate market timing risk particularly interesting.  Individual investors can leverage crowdfunding platforms to implement many of these strategies in their own real estate investments.

RealCrowd is a real estate crowdfunding platform for accredited investors. However, they do have a lot of free learning resources available to the public.

Make Whirlpool Great Again

George Will shows the tentacles of crony capitalism extending into our laundry rooms in one of his recent Washington Post articles. This is just another example where our government has chosen to prop up a special interest at the expense of the American consumer.

I have no doubt we will be seeing many articles celebrating the number of US manufacturing jobs that will be saved by this tariff. However, the article I'd most like to see is one that shows how much we are spending to save each job. While it will be easy to compare the average price of a washing machine before and after the tariff takes effect, it will be impossible to calculate the potential impact of those additional dollars if they had been spent on higher and better uses.  I'd like to think we would all be better off if we spent the same amount of energy and resources creating new jobs and industries as we did protecting the old ones.

If Whirlpool wants US consumers to choose their products, they should make better or cheaper washing machines.

I have included George's description of tariff and the impact of the whirlpool tariff below.

This is a tax, paid by American consumers, on imports that exceed a certain quantity that, in the government’s opinion (formed with the assistance of domestic manufacturers), is excessive...The tariff/tax, which is designed to limit the choices of, and increase the prices paid by, American consumers would be 50 percent on all imported machines, after the first 1.2 million. U.S. customers caused the importation of about 3 million Samsung and LG washers in 2016.

Lagniappe:  A previous Blog post  about crony capitalism in the airline manufacturing sector.

Unleash the Dragon

Timothy Taylor's recent blog post highlights the magnitude of economic growth in China over the past 40 years. I have included the most impressive excerpt below.

Although this rise has been happening right in front of our eyes for almost 40 years, it has changed the lives of more than a billion people in ways that are not fully appreciated. Here are a few measures of how life in China changed between about 1980 and the present, according to World Bank data:
 

• The share of China’s population below the poverty line, modestly defined as having a consumption level of $3.10 per capita per day, has fallen from 99 percent of the population to 11 percent.
•  Per capita GDP has risen from $200 per person to $8,200 per person.
•  Life expectancy has risen from 66 years to 76 years.
•  Infant mortality per 1,000 live births has fallen from 48 to 9.
• The literacy rate for those 15 and older has risen from 66 percent to 96 percent.
• The share of China’s total population over age 25 who have completed a secondary-level (high school) education has risen from 6 percent to 22 percent.

Such a list could be extended, of course. But the bottom line is that more than a billion people in China have risen out of a combination of grinding poverty, poor health and low levels of education to what the World Bank classifies as “upper middle income.” A Chinese person who was a young adult back in 1980 has observed the entire process in his or her own lifetime — and hasn’t yet reached retirement age.

Mismeasuring the impact of foreign trade

George Mason University economist and author of Marginal Revolution, Tyler Cowen discusses the limitations of using common macroeconomic tools like GDP and GNP to evaluate the impact of foreign investment in one of his more recent blog posts.  

If the main purpose of trade is to increase the number of goods and services available to an individual, consumption based measurements should be a part of the analysis.  I am not sure how trade that enables a consumer to purchase more goods for the same level of spending can be bad for an economy.

Lagniappe: Tyler that discusses how the GOP tax plan and Trump's objective to decrease US trade deficit are seemingly at odds in a recent Bloomberg article. 

Crowdfunding Nightmare

Real Estate crowdfunding provides exposure to an asset class that was previously out of reach for most investors. It also allows investors to participate in multiple deals and reduce risk through diversification. While it provides new investment opportunities, it also creates new challenges. Investing with unfamiliar sponsors on platforms with short operating histories increase counter-party risk. While the internet is full of success stories, there are few articles or blog posts that discuss investments that do not go according to plan. I wanted to share my experience of my first crowdfunded real estate investment.  

I signed up for multiple crowdfunding platforms, reviewed multiple deals, sent emails to the platforms to see how quickly they responded to investor questions.  After three months of reviewing deals, I found an investment that looked like a good opportunity.

The Deal

My first crowdfunding deal was a preferred equity investment in a value-add 48 unit apartment building in the DC metro area. The company was looking to raise $1.5 million in preferred equity to complete the purchase, renovation, and stabilization of the property.  At that point, the sponsor would refinance the property to retire the construction loan and pay off the preferred equity investors.  The company had a senior loan of $14.2 million and $2.3 million in sponsor equity. The funds would be used to purchase the building for approximately $9 million, $7.2 million construction and rest for closing costs and working capital.

Investors could purchase shares of preferred equity at $10,000/share. Shareholders would receive a 10% annual dividend distributed quarterly and 11% annual accrued interest at exit.  The length of the deal is 2 years with a sponsor’s option for a 6 month extension.

 For example, a $10,000 investment would get 8 quarterly distributions of $250 and $12,200 ($2,200 accrued dividend and $10,000 initial investment). The preferred equity was subordinate to the bank loan but senior to the sponsor equity.

Due Diligence

Deal

I initially broke my deal diligence into 3 parts; the local market, the financial projections, and the deal structure. 

Things I liked about the local market include; a growing neighborhood, 90+% apartment occupancy rates and continued rent growth.  My concerns regarding the local market were the incredibly low cap rates (4.5-4.75%) and regulatory restrictions.  The property was required offer a fixed number of rent controlled units which would limit the ability to raise rents in the future.

Things I liked about the projected financials include; that purchase price and projected rents were in line with comparable properties in the area and the valuation of the stabilized building was calculated using a capitalization rate that was higher than the current cap rate. I was concerned by my inability to effectively analyze the construction cost estimates or if the construction schedule was actually feasible.

The deal structure itself was also something that I liked about the deal. Having a preferred position on the capitalization table to the sponsor meant that I would have to get paid off before the sponsor would receive any return on investment. Also, my projected exit opportunity was a refinance rather than a sale.  Freddie Mac commercial loans require a minimum of 25% equity to refinance which was significantly lower than our projected 40% equity position after renovations. This provides about 15% cushion in the event the sponsor overestimated the valuation of the stabilized property.  The sponsor had a $2.3 million equity position and long-term plans to hold the property, so they are incentivized to meet their NOI projections. My biggest risks based on deal structure would be inability to the sponsor to refinance out of the deal at the end our 2-year investment term or any major setbacks that would delay completion of the project.

The Sponsor

The sponsor had a professional looking website with multiple examples of current and past deals in the DC metro area. After looking at the website, I used LinkedIn and Google to learn about key personnel and looking for history of lawsuits or bankruptcy.  I also used Google Maps to verify the physical location of the business address.  After passing my internet screen, I called the company to verify that phone number listed was active.  I also called again to ask about some of their "current" projects to make sure they were in fact active. My impression after my diligence was that sponsor seemed legitimate and had history of operating in the same market as my potential investment.  My biggest concern at this point was that this deal was larger than their typical deal but I was reassured that they had made a $2.3 million bet on themselves. After performing my due diligence, I was comfortable investing with the sponsor.

The Platform

I initially came across the crowdfunding platform after a friend of mine told me he had participated in and successfully exited an investment on the platform within the past 12 months.  After reviewing the platform website, I again used Google and LinkedIn to investigate key personnel. I also used Bigger Pockets investor forums to get more investor reviews on the platform.  After finding no obvious red flags, I began reviewing individual investment opportunities. As part of diligence, I called, emailed, and chatted with platform investor support staff.  If they couldn't answer one of my questions, they would reach out to the sponsor and get back to me in a timely manner.  They also seemed to have steady deal flow with 1-2 new investments being posted on the website each week.  My biggest concern at this point was their short operating history of 2 years. However, my overall impression was that platform seemed legitimate and I felt that my exposure to their ongoing operation risk was limited by short investment term and minimal responsibilities once the deal closed.  After performing my diligence, I was comfortable making an investment on the platform.

The Investment Decision

After performing my diligence, I felt like I had a good grasp of the deal specific risks and thought there was sufficient upside to put my money at risk. However, I was still not comfortable writing a large check to an online investment platform with less than a 2-year operating history.  After discussing the deal with a friend of mine, we decided to split a share, and each contribute half of the investment capital.  That way we'd have some experience with the platform and would hopefully be more comfortable making future investments.

After Writing the Check

The deal closed as expected and we received our first quarterly distribution as expected. However, shortly after our first distribution, things began to slowly unravel for both the crowdfunding platform and the sponsor. We stopped getting timely updates regarding the project.  When we reached out to platform, we were told that it was taking longer to obtain permits than expected, but the sponsor was going to go ahead and start the demolition work, so they could stay on track.  The platform also stopped posting new deals on the website. The explanation that we received was that the platform needed to get a Broker/Dealer license to continue operations. However, they planned to resume operations once they were back in compliance.  We sent regular emails to the platform trying to maintain a line of communication since they quit updating the website.  

Approximately 6 months after our deal closed, we received an email that the founder of our sponsor was murdered while confronting a man who was loitering near one of his other properties. 

Two months later, we received another email that the platform was going to cease operations.  At this point, we faced the LLC declaring bankruptcy or finding a new manager for the project. Luckily, one of the larger investors was willing to take over management responsibilities for a 1% management fee. We had two weeks to review the new operating agreement then vote whether to hire a new management team or take our chances in the bankruptcy process. After conferring with my co-investor, we decided to vote to hire the new management company.  Most shareholders voted in a similar fashion and we hired a new management company to oversee the investment.

Where We Currently Stand (as of 12/1/2017)

The company that took over the management role is trying to get the deal back on track.  The failed platform had 18 months of interest in escrow, so we are still current on our quarterly distributions to date and should remain current through April 2018. After depleting the escrow account, we will have had 15% of our initial investment returned.  We are also getting monthly investment update emails.   They have also reestablished communication with the sponsor.  The sponsor is having liquidity and legal issues resulting from the death of the founder. Fortunately for us, the sponsor is a family business, so they are motivated to keep the business operating.  They are currently selling off assets to get their business back on track. Our project is still listed as a current project on their website and they are still doing demolition work as of our last update.

At this point, I am hoping for a return of my invested capital.  I am glad that I decided to co-invest with a partner because I reduced my potential loss by 50%.  Also, because of high preferred dividend, there was sufficient margin to hire a new management company to try and salvage the deal. While I had no way to predict the death of a sponsor and the crowdfunding platform did not disclose their dire financial situation, this experience has improved due diligence process.

 I have revised my platform diligence process that I have applied to my subsequent crowdfunding investments. Now when I make crowdfunding investments, I try to make sure that the platform is sufficiently capitalized to operate throughout the duration of my future investments and that they have a plan to close out existing investments if the platforms fails.  I also plan to invest to across multiple crowdfunding platforms to reduce my platform specific risk through diversification.

Please use comments to share experiences with other real estate crowdfunding platforms or any lessons you have learned from making crowdfunding investments.

Lucky or Good?

While many investors concede that it is difficult to outperform the market over an extended period of time, Spencer Jakab argues it is even more challenging to tell if those select few who manage to beat the market are more skilled or just lucky.

You will need a WSJ subscription to be able to read the entire article. I have included the part of the article I found most interesting below.  I think the excerpt demonstrates that we often underestimate how much data we need to prove the difference between two data sets is statistically significant. 

While it isn't always feasible to get complete information before making a decision, it is important to realize that you are acting on incomplete information rather than being fooled by randomness.  I hope this article will make you think twice about paying hefty management fees for a fund manager that has outperformed the market over the last 1-3 years.

He and two colleagues told several hundred acquaintances who worked in finance that they would flip two coins, one that was normal and the other that was weighted so it came up heads 60% of the time. They asked the people how many flips it would take them to figure out, with a 95% confidence level, which one was the 60% coin. Told to give a “quick guess,” nearly a third said fewer than 10 flips, while the median response was 40. The correct answer is 143

NFL Draft: An Economist's Perspective

Those of you that play in a fantasy football league with a salary cap will appreciate Brian Burke's economic analysis of the value of individual draft picks in this article.

Reducing Income Inequality at what Cost?

Richard Epstein's article discusses the opportunity cost of the American public's obsession with income inequality.  

Would we make different policy choices if we focused on maximizing purchasing power of the average American consumer rather than trying to narrow the gap between the top 1% and the rest of the country?

Tax Reform: Lies, Damn Lies, and Statistics

With conflicting bills in the House and Senate, conflicting news coverage and conflicting claims regarding the impact of the respective tax reform bills, it is challenging to determine the net impact of the proposed tax bills. Many of the articles I have read make contradicting arguments that are well supported by facts and statistics.  I cannot help but think of the old Benjamin Disraeli adage "there are three kinds of lies: lies, damn lies and statistics" when trying to sort through analysis of the tax bills.

My personal opinion on the matter is that that both proposed bills are very complex and affect a large heterogeneous population making it nearly impossible to determine the net impact of any of the proposed changes to the tax code. Also, since different rules apply to different groups, it is impossible for either bill to have a uniform impact on every taxpayer. 

Below I have cherry picked a few examples to demonstrate that both sides of the argument can be true depending on how the argument is framed.  Please feel free to add more examples or critiques to my arguments in the comments.

The proposed tax cuts are actually a tax cut

Support: The authors of the respective bills have created several hypothetical taxpayer cohorts who will have their 2018 bill reduced compared to 2017. 

Refute: The CBO reports that neither proposed bill will balance the budget and will increase the deficit and overall national debt. Thus, the bills actually are a tax deferral that will have to be repaid by future tax increases. Also, some taxpayer cohorts will actually have their personal tax bills for 2018 increase.

Proposed tax cuts help wealthy taxpayers 

Support: According to the Tax Policy Center research group, 45% of Americans paid zero federal income tax in 2015. While I am willing to concede that there are probably a few high earners in that group, the majority consists of low income earners.  So any additional reductions to marginal tax rates would disproportionately help the top 55% of taxpayers that actually pay federal income taxes.

Refute: According to the same  Tax Policy Center research group, elimination of the state and local tax deduction would increase tax liability for 88% of households with incomes of over $1 million by an average of approximately $46,000 per household.  This creates a scenario where some taxpayers will pay higher tax bills despite having lower marginal tax rates.

Changes to mortgage interest deduction will damage housing sector

Support: A Brookings Institute research paper reports that 26% of US taxpayers (35 million) took advantage of the mortgage interest deduction in 2009.  So if all other conditions are held constant, this group could see their tax bill go up with the elimination of the mortgage interest deduction.

Refute: Home ownership rates in Canada (69%) and UK (71%) are higher than in the US (60-63%) despite not having a mortgage interest deduction.  The additional $12,600 in standard deduction would more than offset mortgage interest deductions for all mortgages below $307,000 (assuming 4.1% rate on a 30 year amortization). 

Proposed bills are simpler than the existing tax code

Support: The proposed GOP House Bill will reduce the number of personal tax brackets from 7 to 4. According to multiple sources, it is also expected to reduce the number of filers who itemize their deductions from 30% to approximately 6%.

Refute: The GOP house bill is reported to be almost 500 pages long and still contains a large number of loopholes. Also take a look at the calculation for tax treatment of small business in this Washington Post article. This is definitely more complicated than the 25% rate for all that is being reported.