Even the Rich Are Treating Their Houses Like Piggy Banks
As reported by John R.Emschwiller of wsj.com.
In recent years, millions of Americans looked at their houses and saw big, fat piggy banks. And it occurred to them to take out big, fat new mortgages.
Few did it on the scale of Ronald Burkle.
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The Green Acres Estate
Mr. Burkle, the grocery-store billionaire, has $56 million in loans against two houses, including $9 million added last year. One is his iconic Beverly Hills mansion, “Green Acres,” a 44-room Italian Renaissance palazzo built in the 1920s by silent-film star Harold Lloyd that more recently was a favorite overnight rest stop for Mr. Burkle’s buddy, Bill Clinton.
Mr. Burkle declined to say how he is using the money. There is no indication he needs it to pay the water bill.
Traditionally, the super-rich didn’t really bother with mortgages. Home loans were for people who carry lunch buckets, not captains of industry.
That changed in the boom years — and it is still going on. Recent big-time home borrowers include fashion entrepreneurs, hedge-fund titans and baseball-team magnates.
Home loans “are a really good source of cheap capital,” says Robert Maguire, a real-estate tycoon who built some of the tallest officer towers in L.A. He has borrowed some $50 million against several properties, including his beach house, which features huge picture windows framing the Pacific near Santa Barbara, Calif.
He has been raising money with an eye toward regaining control of his property firm, Maguire Properties Inc., which he lost during the real-estate bust. Even as he borrows against his beach retreat, Mr. Maguire is trying to sell it for $29 million.
By hocking the house, so to speak, he and others say they are simply borrowing low in hopes of investing in something they believe will yield a high return.
And mortgage rates are near historic lows. In April, Mr. Burkle renegotiated his $56 million in adjustable-rate mortgages down to 3.25%, which was in line with adjustable home loans of a more mortal size. Recently, his rate adjusted down to about 2.25%, based on publicly available documents.
It puts Mr. Burkle’s mortgage interest charge at $105,000 a month, give or take.
Like ordinary home loans, megamortgages flourished during the boom earlier in the decade. The number of home mortgages in the $3 million-and-up category soared to about 3,000 in 2007, from only 1,100 or so in 2004, according to LPS Applied Analytics, a unit of Lender Processing Services Inc.
Not surprisingly, mammoth home loans got scarce during last year’s near-unraveling of the world economy. But now they are showing signs of coming back.
U.S. Trust, which is the private wealth-management arm of Bank of America Corp., has seen a 33% rise this year in home loans, compared to last year, with the average size over $3 million. Jan Reuter of U.S. Trust says clients are using the cash to buy stocks and other assets. Other major lenders tell a similar story.
The federal tax code doesn’t smile upon giant mortgages. It allows mortgage interest to be deducted only on home borrowings of about $1 million or less.
But there are ways around that, says David Adamo of Luxury Mortgage Corp., a mortgage-banking firm in Stamford, Conn. If the cash is used for investment purposes, the loan interest could be used to reduce taxes on income from the investments, he says.
Of course, plenty of rich people still avoid home loans. Partly, it is an image thing. Maria Elena Lagomasino of GenSpring Family Offices LLC, a Palm Beach Gardens, Fla. wealth-management firm, says a mammoth mortgage implies to her that someone is “borrowing because they have to.”
One rub for zillionaires who value their privacy: Mortgages are a matter of public record.
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