The Trammell Crow Formula: Eleven Steps to Stunning Success in Real Estate

How did Trammell Crow become the greatest real estate developer of all time? William Bragg Ewald's book explains his unique approach to business in great detail. But for those who want a more concise formula, consider the following excerpt from chapter five of Trammell Crow: A Legacy of Real Estate Innovation:

The key was leveraging. He bet on borrowing. When he built the Ray-O-Vac building, for example, Pacific Mutual gave him a choice: a constant-payment, fully amortized 20-year mortgage, or payment of 1/240th of the principal each month plus interest. Crow chose the second. The payments, large at first, steadily picked up speed going downhill. He bet on growth, on the certainty that after 20 years of depression and war expansion would occur. He bet on inflation, on the certainty that the road to financial security lay in acquiring property and holding it a long time. He bet on low interest rates. He bet on an insatiable demand for goods-glutted warehouses. And he bet on innovation, from building speculative warehouses to embellishing them with shrubs and lawns. Such ideas, Crow believed, made all the difference.

In the end, it all came down to a formula:

1. Borrow the money. To Trammell Crow, the way to wealth was debt. "A 30-year note is better than a 20-year note. A 40-year note is better than a 30-year note. The only thing better than a 40-year note," he believed, "was a note that you never have to repay . . . A man's wealth mirrors his debt."

2. Buy the land.

3. Build on speculation, then go find tenants.

4. Lease the space, not for 15 years or more but for ten or three or two. Consider real estate a commodity, a manufactured product. Consider rent a return on the cost of development, not a function of supply and demand. Consider real estate an inventory business in which you can cut delivery to 60 days.

5. Depreciate enough to wipe out your income tax liability. "Paying no taxes," one knowledgeable developer observes, "is the ultimate leveraging."

6. At the end of the short lease, given inflation, lease again at a higher rate.

7. Pay off the debt out of income. Keep all rents in the property. Keep debt service greater than depreciation. As Crow himself said, "Hardly any part of a building would actually depreciate. Steel, concrete, brick! Obsolescence yes, decay no."

8. At the end of 15 years, own the property free and clear.

9. Refinance the first mortgage.

10. Put the yield into new deals.

11. Never sell. Never convert your balance sheet to cash. The history of America, in Crow's view, is that to sell is wrong, to buy is right. The rich sell, the wealthy hang on to their assets and bet on inflation. To become wealthy in real estate, keep your assets and live a long time.

In sum, the formula created value, created it with the contribution of little or no funding from Trammell Crow himself where none existed before. "Ten thousand people," Leonard Huffhines once observed, "have said, 'Let's go out and use the money of the banks and the insurance companies and do all these great things,' and for one reason or another, they never make it work. But Trammell makes it work."

Like many others, Crow had a straightforward view of economics and inflation—a view that the market would expand, that costs would rise, and that over the long term, the ratio of debt service costs to the value of the loan would go down. If you put off building until next year, it will cost more than building this year. So do it today.

The formula has one final provis the rate of inflation must outstrip rates on interest. And it therefore turned powerfully on the sharp-penciled people in Washington who helped set economic policy.

About the Author:

An accomplished author, William Bragg Ewald, Jr. has written eight books, including a biography of former President Eisenhower. He served as a member of the White House staff during the Eisenhower administration and assisted the President in writing his two volumes of White House memoirs. Dr. Ewald received his doctorate from Harvard University. He is also the author of two books on eighteenth-century English literature.

About the Book:
Trammell Crow: A Legacy of Real Estate Innovation

(Urban Land Institute, 2005, ISBN: 0-8742093-5-8, $34.95) is available at bookstores nationwide and major online booksellers or direct from the publisher at uli.org.

The Urban Land Institute

(uli.org) is a nonprofit education and research institute supported by its members. Its mission is to provide responsible leadership in the use of land in order to enhance the total environment. Each year, the Institute honors a land use visionary through the Urban Land Institute J.C. Nichols Prize for Visionary Urban Development. Established in 1936, the Institute has more than 25,000 members representing all aspects of land use and development disciplines.