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Experiment Gone Wrong

November 12, 2010

In hindsight, this was probably not such a great idea to begin with. I found out about a going-private transaction taking place for Phoenix Footwear (Symbol: PXG). So I was thinking that I would try something slightly different from what I normally do.

The transaction announced would give shareholders holding fewer than 200 shares a buyout at $0.75/share. Normally, I would take a position of 199 shares. Wait for things to take course and get cashed out at $0.75.

This time, I decided to try to take a larger position and try to sell into an increasing price. Most of the other “going-private” deals I’ve participated in have had a stock price which slowly closes the spread. On this one I dropped the ball. I failed to pay attention to the average daily volume in the stock. Turns out, the stock was pretty illiquid. Only approximately 5,000 shares trade hands on an average day. Noticing this days after I took my position, I decided that this simply wouldn’t work out as I thought. I began selling shares at a decreasing price (this was the opposite of what I wanted to do obviously). Now, I hold 199 shares and lost some money on the deal. Tuition I suppose.

I still would be interested in hearing from anyone that has tried to do something similar with “going private” deals on more liquid securities…How did it turn out for you?

MMPIQ Update: The OEC

July 20, 2010

Just a quick update on the MMPIQ chapter 11 case that i’ve been following–The Official Equity Committee has been appointed with three members. This is terrific news for holders of MMPIQ equity as now shareholders will have much better representation in the chapter 11 case. Not only that, but I think it is safe to assume that the OEC will immediately begin crafting their own POR to counter all the others that are out there.

Disclosure: Long MMPIQ.

Email from LA County Assessors Office

July 14, 2010

As part of my ongoing research into MMPIQ, I sent an email to the Los Angeles County Assessors Office today requesting information about their property assessments. Not only does it help to understand how they come to those values, but one of my readers mentioned using the assessed value as a type of appraisal. Personally I didn’t think this was the way to go about it and I think the email response from LA County confirms that the assessed value is nothing more than a means for the county tax authority to collect taxes.

In short, my email asked the question whether an assessed value was comparable to an appraised value that one may get from a real estate appraiser. I also asked about the methodology they use to assess properties in LA county?

The response I got was the following:

Properties in Los Angeles County, as well as all properties in California, are assessed in accordance with the California Revenue and Taxation Code, with the most important element being the passage of Proposition 13 in 1978. With the passage of Prop 13, property is only reassessed at a fair market value when there is a reappraisable change in ownership, which establishes the owner’s Base Value. Unless there is a subsequent reappraisable change in ownership, or value added for new construction, the allowable annual increase to the Base Value is limited to no more than 2% per year.

So unless a property had been recently reassessed for a change in ownership, or had a value reduction due to a Proposition 8 Decline In Value review, there is often little if any correlation between the roll value appearing on our website and the actual market value of the property. For information about Prop 13 and Prop 8, please use links available on the Assessor’s website.

If you have the Assessor ID No. and/or the property address, you can use the “Property Sales and Maps” feature on the Assessor’s website ( to find the roll values for 2009. The 2010 Roll Values will replace 2009 within the next 2-3 months.

More about Prop 13

This comes straight from the LA County Assessors Office Website:

Since the passage of Proposition 13 in 1978, property is assessed at its fair market value as of the date it is acquired. Your purchase price generally becomes the taxable “base value” as of that date. From that point forward the taxable value of your property is limited to no more than a 2% increase per year.2 For example, if you purchase a property which gets assessed at $500,000, the annual taxes would be based on $500,000 the first year, trended to $510,000 ($500,000 x 1.02) the second year, and trended to $520,200 ($510,000 x 1.02) the third year, etc. Also see example below.

In a declining real estate market, the market value of your property may actually be lower than your trended base value. In this case, your property may qualify for a decline-in-value reassessment, temporarily reducing the taxable value to its current market value. Once granted, a decline-in-value reassessment is reviewed annually and may be further reduced, partially restored, or fully restored to its trended base value.

A property was purchased for $500,000. During a three-year period, the real estate market declined and recovered. The property owner filed for a decline-in-value reassessment. The following table shows the trended base value of the property, the market value of the property, and the assessed value of the property. Assuming a 2% annual consumer price index (CPI):

Trended Base Value Market Value Assessed Value
Year 1 $500,000 $500,000 $500,000
Year 2 $510,000 $480,000 $480,000
Year 3 $520,200 $510,000 $510,000
Year 4 $530,604 $550,000 $530,604

In Year 1, the property’s purchase price reflected the market value and was assessed accordingly. In Year 2, the property was granted a temporary decline-in-value to reflect its current market value. In Year 3, the property was partially restored to reflect its rising market value. In Year 4, the property was fully restored to its trended base value (maximum taxable value) even if its market value was now actually higher.

1. Also known as the Proposition 13 assessed value, Proposition 13 trended base value, factored base year value, and trended base year value.
2. The taxable value may increase more than 2% if a transfer of interest or new construction occurs on the property.

More about Prop 8

Again, directly from the LA County Assessors Website:

In 1978, California voters passed Proposition 8, a constitutional amendment that allows a temporary reduction in assessed value when a property suffers a “decline-in-value.” A decline-in-value occurs when the current market value of your property is less than the current assessed value as of January 1.1

Eligibility Requirements

1. You must demonstrate that on January 1, the market value of your property was less than its current assessed value.

2. You must file a Decline-in-Value Review Application, form RP-87, with the Assessor between June 1 and November 30 for the fiscal year beginning on July 1. Application are valid if postmarked by November 30. If November 30 falls on a Saturday, Sunday, or a legal holiday, an application is valid if either filed or postmarked by the next business day.

The Process

1. On your claim form, provide the Assessor with information that supports your opinion that the market value for your property is less than the assessed value. The best supporting documentation is information on sales of comparable properties. You should select two comparable sales that sold as close to January 1 as possible, but no later than March 31. You may query the Assessor’s database for sales in your neighborhood by clicking here. While the submission of comparable sales is helpful for the Assessor in determining the market value of your property, applications submitted without comparable sales will be accepted and processed.

2. An appraiser will review your claim form and the information you provide. Other sales information available to the Assessor may also be considered. If the market value as of January 1 is less than the trended base value2, your assessed value will be lowered to the market value for the fiscal year beginning on July 1. The adjusted value will be reflected on your annual tax bill.

3. If the current market value is higher than the trended base value, no change in assessed value will be made.

If you disagree with the Assessor’s findings, you may file an appeal with the Assessment Appeals Board. You must file your appeal between July 2 and November 30 for your annual tax bill.

A property was purchased for $500,000. During a three-year period, the real estate market declined and recovered. The property owner filed for a decline-in-value reassessment. The following table shows the trended base value of the property, the market value of the property, and the assessed value of the property. Assumimg a 2% Annual C.P.I.:

Base Value Trended Market Value Assessed Value
Year 1 $500,000 $500,000 $500,000
Year 2 $510,000 $480,000 $480,000
Year 3 $520,200 $510,000 $510,000
Year 4 $530,604 $550,000 $530,604

Update: New MMPIQ Court Filing

July 13, 2010

In a move that vaguely resembles the developments in the Chemtura (Ticker Symbol: CEMJQ) Chapter 11 reorganization case from a few days ago, there has been a court filing from a group of investors requesting that the judge in the MMPIQ case terminate exclusivity in order to allow the group to file what they deem to be a superior plan. Based on my initial read of the filing it appears that the possible competing plan would give equity holders 20% of the newly reorganized MMPIQ and would effectively place a floor under the price of the equity of .20/share. If the judge indeed terminates exclusivity it would ordered on or before July 21st , and I would expect the competing POR to be filed very shortly thereafter. It is important to keep in mind that this may not be the end of the story as termination of exclusivity would allow others to come forward with their own POR’s and I would expect other parties to come forward with new alternative plans.

See filing below:

Disclosure: Long MMPIQ and CEMJQ at the time of this post.

Court Memo: MMPIQ

July 9, 2010

I was checking PACER this morning to see if any interesting filings had been made regarding MMPIQ in the last day or two and sure enough the first document I pulled up was full of interesting insights. The document was a court memo regarding The Chamlian’s Second Motion for Relief from an Automatic Stay related to the property located at 2131 Humboldt Street, Los Angeles, California 90031. This was a hearing that was ruled on in June 2010 but the memo gives us some detail about why the court decided to deny the motion on some grounds but concurrently grant some deferred relief. In my view, this paints the judge as quite fair.

Although the filing relates to only a couple of parcels of land owned by MMPIQ, it provides color and perspective on the real estate appraisal process and methods, opinions of property values, the differing views of debtors and creditors, and also gives us some nuggets on who else may be out there looking at this subject property for either purchase or development (According to Richard Meruelo it’s a Church and some big box retailers).

You can view the full document below:

Disclosure: Long MMPIQ at the time of this post.

Properties owned by MMPIQ

July 5, 2010

I took a little bit of time to merge multiple PDF files into one easy to use file detailing individual properties, maps, and photos of each of the properties owned by MMPIQ. This should give us a better picture of the type of properties MMPIQ tends to own and the long range plans they have for each (Each page of the PDF includes a bullet point mentioning their plans for redevelopment of the subject properties). Now, as they say real estate is local so if you have any information that might be helpful regarding  these properties, the areas where they are located, or have information regarding the Los Angeles commercial rental markets please let me know.

Disclosure: Long MMPIQ at the time of this post.

New Holding: MMPIQ

June 20, 2010

I have had Meruelo Maddux Properties on my radar since the end of 2009 (when it was a mere .05/share) and this past week I finally took the plunge and bought a sizeable position in the bankrupt Los Angeles Landlord. I have developed a bit of an affinity for bankruptcy situations as they have been some of my most profitable investments over the last 1 1/2 years.

To review MMPIQ’s situation, I think it is important to discuss some of the things that attracted me to make this investment and then talk about the negotiations that will undoubtedly take place with regard to the POR.

Why do I believe there will be a substantial return for holders of the equity of MMPIQ? Just some positives in no particular order:

  • Insider Ownership:
  • NOL Carryforwards
  • Successful Investor Stephen Taylor owning a large stake going into bankruptcy and adding more while the process runs its course
  • Real Estate Assets far exceeding Liabilities (Liquidation value looks to be upwards of $1/share).
  • Equity Committee in the process of being formed

Earlier this week MMPIQ filed a 2nd amended POR which was received extremely well by shareholders and with good reason. The initial POR mentioned a $10M cash infusion to the company by way of a rights offering only available to “accredited investors” owning more than $50,000 worth of the stock. Something about that just didn’t sound right to me. That would ultimately line the pockets of a few shareholders (including company executives Meruelo and Maddux) at the expense of other shareholders.  At the time it was filed I determined that it made an MMPIQ investment too risky. If approved, a POR like that could result in a permanent loss of capital which I aim to avoid. That being said, the process should always be closely monitored for progress as POR’s are presented or amended. We got one such amendment earlier this week.

The new POR has now included 2 options for investors.

Option 1“: On the Effective Date, or as soon as practicable thereafter, such Holder shall receive on account of and in exchange for its Interests cash in the amount of $.08 for each share of MMPI Existing Common Stock held by the Holder.

Option 2“: On the Effective Date, or as soon as practicable thereafter, such Holder, in exchange for the Holder’s Interests and after payment by the Holder of $.07 for each share of New
Existing Common Shares that the Holder held as of the Record Date.

So option 1 isn’t that interesting from a return standpoint: They are simply offering to buy shares for .08 each. This does however limit downside exposure. The risk of permanent loss of the entire investment would be off the table. Option 2 on the other hand is the rights offering that I mentioned before. For an additional payment of .07/share, you will receive one of the newly issued shares of Meruelo Maddux. That now gives us participation in the upside of MMPIQ’s new equity.

Disclosure: I own shares in MMPIQ at the time of this writing.


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