Affordable Housing Institute : US

[Continued from yesterday’s Part 1.]

 

Yesterday’s post starring Manny Ramirez, late of the Red Sox and now tearing the cover off the ball for the Los Angeles Dodgers, had brought him to the point of frustration, because a contract negotiated by Dan Duquette back in 1999 had turned from being a burden on the Sox to a straitjacket on Mr. Ramirez’s psyche. 

 

Even at $20 mil, I looked like a bargain to Dan Duquette

 

As I posted yesterday:

 

Some contracts are too long for their own good.

A contract too long for its own good becomes a liability for the beneficiary …

and ends up getting retraded.

 

Yesterday we saw that a contract whose duration is ‘too long’ can be a liability for the sponsor, and it is definitely a liability for the new player to enter the game: Mr. Ramirez’s new agent, Scott Boras. 

 

2.  A contract too long for its own good becomes a liability for the beneficiary …

 

By the way, the following possible rule of thumb occurs to me:

 

 

In any Garden of Eden there must be a snake, and Mr. Boras is perfectly willing to play the villain – the devil’s advocate, as one might say.  Mr. Ramirez as principal is seeking the maximum total contract value.  Mr. Boras as agent is seeking the maximum value from any contract he has negotiated.  Mr. Boras gets nothing from the Red Sox’ election to pick up Mr. Ramirez’s option; he gets paid only if Mr. Ramirez signs a new contract – thus in engaging Mr. Boras (as opposed to his previous agent, Jeff Moorad, whom Mr. Ramirez dumped), Mr. Ramirez was picking up some principal-agent risk.

 

But I’ve got my eye on the prize – and my agent does too.

 

  

 

In terms of his personal financial goals, Mr. Boras could make progress only by getting Mr. Ramirez ‘into play’ – that is, in upsetting the apple cart of Mr. Ramirez’s current contract.  As Iago to Mr. Ramirez’s Othello, however, Mr. Boras needed his principal to spout off.  So it was depressing, but not surprising, that in the weeks coming up to the trading deadline, Mr. Ramirez misbehaved in increasingly insupportable ways, including:

 

* Acting out petty frustrations (shoving the clubhouse attendant who couldn’t get his entourage tickets)

* Loafing at work (not running out ground balls)

* Calling in sick (sitting out crucial games with an unexamined knee problem)

* Complaining behind management’s back

* Generally acting abused and underpaid. 

 

Hitting means … value for money, value from Manny

 

Mr. Ramirez was engaging in a time-honored tradition: the deniable strike.  Each individual action could be explained; none was disciplinary; all diminished his value; all diminished the team’s value even more.  Mr. Ramirez basically said as much:

 

In an interview earlier Wednesday with ESPNdeportes.com, Ramirez said “The Red Sox don’t deserve a player like me.” He also said he’s seen how the Red Sox “have mistreated other great players.” He wasn’t available for comment before or after last night’s game.

 

Logically speaking, Mr. Ramirez’s statements were nonsense – any dispassionate observer (granted, a rarity in baseball!) would have said that Mr. Ramirez hadn’t deserved an employer as good as the Sox – but that matters not a whit.  Mr. Ramirez had become convinced, probably with the active encouragement of his agent Mr. Boras, that here he was being abused – and if I’m right about the club options, the Sox were sitting on an economic bargain.  Whatever else one may think of Mr. Boras, his track record in levering his clients into higher salaries is impressive, and I have little doubt he will do it again for Mr. Ramirez.  It’s easy enough to write the dialog as Mr. Boras might have said it:

 

What do I want Manny to be quoted as saying?

 

“Manny, there’s no doubt that with Alex Rodriguez [another Boras client] commanding $25+ mil a year, you’re in that league, so the Sox are underpaying you already this year, and they’ll underpay you even more in the next two years.  They don’t deserve the kind of production you’ve been giving them.”  [Of course they do, that was part of the upside optionality the Sox negotiated for when they signed Mr. Ramirez to his enormous contract … but that was then, and this is now.]

 

The deniable-strike strategy works because the capital provider – the team – has a larger objective in mind: in this case, making the playoffs and pursuing a World Series.  Aside from being a nuisance and a distraction, Mr. Ramirez was sabotaging the team’s chances. 

 

What, me sabotage?

 

Many people – I’m one of them – find such behavior reprehensible and infuriating.  It’s breach of contract.  But it works.

 

The same thing works in housing.  Time and again, I’ve seen sponsors start behaving badly when their contract is no longer favorable.  In the short term, they start protracted pointless fights with the regulators, submit reports late, and become unresponsive to resident complaints.  In the intermediate term, an owner who cannot realize residual value stops reinvesting in the property; starts using it as the training ground for junior staff and sending the better staff to other properties; becomes unresponsive to investors; doesn’t bother to investigate transaction possibilities; and starts refusing consent for small courtesies or trying to extract a concession for others (e.g. investor transfer).  In the longer term, I’ve had owners tell me, “They can’t do anything to me, so I’m going to tell them that if they don’t do what I want, I’ll default on the mortgage and they can have the keys – after they foreclose.”

 

There can come a point where the sponsor is a liability to everyone else, where it is in everyone else’s interest to hold their collective noses and pay the sponsor to disappear. 

 

You want me to disappear?

 

I’ve done this multiple times.  We always dress it up.  We call it reimbursement of previously undocumented expenses, purchase of outstanding general partner loans, purchase of a general partner position, a non-compete, or any other fee in creation.  It’s go-away-baksheesh and the awful thing is, the sooner you pay it, the better.

 

That was where the Red Sox were during the last week of July.  The trading deadline was less than a week away (July 31), and Mr. Ramirez’s non-disciplinary misbehavior was heating up.  By this time, it had to have become clear that the Red Sox’s two club options had:

 

Substantial negative value to Mr. Ramirez

Conclusive negative value to Mr. Boras, and finally

Escalating negative value to the Red Sox

 

Given Mr. Ramirez’s behavior, the current contract was lose-lose.

 

Now I’ve got you!

 

That Mr. Ramirez achieved this state of mutual suffering through behavior many would consider immoral, sacrilegious, an insult to the game of baseball, et cetera, et cetera, is largely irrelevant.  Sponsors who are on the wrong end of a ‘too long’ contract can always compel renegotiation through ’sit-down strikes’ or taking the collateral hostage.

 

Let’s talk about my value to you when I’m hitting well

 

Every contract always needs future upside.  It should always be possible to make more by doing more.  Any contract that involves merely ’serving time’ independent of performance is by definition ‘too long.’

 

The Sox had a Gordian-knot-cutting strategy available to them that they didn’t use:

 

A strategy?  What’s a strategy?

 

 

[Continued tomorrow in Part 3.]

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