Land Deals

Paul Keil at TPM Muckraker lays out the problems with The Reid transaction story and Terry at Nitpicker covers the legal features of what Reid did.

I worked with people associated with development in California and am very familiar with what Reid did and why it was done the way it was done.

Reid bought a nice piece of property with his available money, but he was limited because he bought the property to sell, not to hold, and if he had mortgaged it, there would have been problems with the sale. The adjoining property was also available and Reid found a friend to buy it. The two of them formed a partnership based solely on the ownership of the land. Because they now technically owned the partnership and the partnership owned the land, the entire parcel could be sold in a single transaction.

Developers don’t like to buy multiple parcels when they can avoid it, because there is always a chance someone won’t want to sell, and when you are working with borrowed money more time means more interest payments. They also don’t want to deal with mortgaged property, because that slows up the process, adds another voice to negotiations, and more legal costs to the transaction.

The larger the parcel of land you can package, the better the price will be within limits. The major developers around Las Vegas aren’t interested in developing a 10-house tract, because their costs are too high. The big guys don’t build strip malls, in the desert they do enclosed malls.

Las Vegas has been growing like crazy for over a decade, and Harry Reid lives there. He would have been crazy not to buy land away from the center, because the city was expanding.

Reid paid the taxes on his parcel and his partner paid taxes on his land. That saved a lot of accounting costs for the partnership, which wasn’t generating any income. The land was his share of the partnership. They were equivalents. There is no deception involved.

I would note that Harry paid out more than $400,000 in this deal: he paid property taxes and fees associated with both the purchase and sale of the property, as well as the licenses and fees associated with the partnership. He made a good investment by buying early and waiting. Until recently a lot of people have had the same and better returns buying and selling houses, but they didn’t wait as long as Harry did for the money.