Gogolian Arbitrage

In the novel Dead Souls, Nicolai Gogol tells the story of a shady businessman who operates in pre-revolutionary Russia, before the emancipation of the serfs.  At the time, land owners reckoned their wealth in the number of serfs, or “souls”, that they owned.  A census was taken every ten years or so, which counted the number of souls owned by each estate.  A property tax was assessed on land owners with respect to each soul under management.  Serfs did not live forever; when they died, they were taken off the rolls.  Problem was – there was a window of time between a serf’s death and the next census, when the property tax rolls could be updated.  This meant that landowners had to pay tax with respect to a ghost asset during this “stub” census period.  The protagonist of the story, Chichikov, sees this as an opportunity.  He travels around the back roads of Russia cozying up to land owners, buying their dead souls and using them as collateral for secured loans.  In the story, some land owners are easier to charm than others.  Some are suspicious; some are stupid, some are lazy, some run their estates well.  Some have wives or daughters who catch Chichikov’s eye.  After a certain amount of time in each town, Chichikov begins to attract suspicion.  His reputation catches up with him, he bugs out, and starts it up again when he gets to the next town.  He is thrown into jail near the end, but he manages to sweet-talk his way out.  The manuscript ends before Gogol was able to finish it.

Am I a twenty-first century reincarnation of Chichikov?  I drive a Prius instead of a troika – but so what.  I reckon my wealth in lots owned, lots under management, occupied lots and empty lots.  Chichikov reckoned his in souls.  My souls are very much alive in meat-space, but I transact with them mostly as marks on a financial model.  I bought my parks from mom-and-pop mobile home park owners in upstate New York.  I did some cold calling, but the way I really found my parks was by driving around, shaking hands, drinking coffee, eating cheeseburgers and sharing stories about wives, children and grandbabies.  Not unlike Chichikov’s method of sourcing deals.  I help mom-and-pops retire to Florida in a tax efficient manner; Chichikov helped land owners reduce their property tax burden.  We both understand the power of leverage.  Neither of us harm the land-owners we transact with, although we both exploit opportunities unseen by our counterparties.  He monetized a hitherto untapped asset; I routinize management, fix infrastructure, bring lot rents in line with markets, pass on utility costs.  He invented morbidity arbitrage; I exploit an inefficiency in the housing market.  We are more similar than we are alike.

That said, there are some differences.  The biggest material distinction that I can see is that I don’t screw the bank.  My mortgage is backed by a tangible asset.  I own land (real land, not swamp land in Florida).  His mortgage was backed by blue sky.  But that is less of a distinction than first meets the eye.  If Chichikov had played his cards right, he would have taken the money that he raised against his dead souls and used it to buy land (productive farm and timber land, not permafrost outside Archangelsk), and maybe some living serfs.  After that, he could have made his money the old-fashioned way.  That’s not all that different from the way I work.  When I buy a turn-around park, I always over-pay.  The idea isn’t to pay what the park is worth at closing, given Day 1 cash flow; it is to pay less than what the park will be worth once I have my way with it.  That is not quite a ghost asset, but it is an as-yet unborn asset.  The distinction is that I commit to turning it around.  Chichikov dreamed about settling down as a land owner with an as-yet unknown wife and family, but when the cast iron wheel rim met the road, he always flaked out.

Another difference, of course, is that my tenants are alive.  There are good things about dead souls as tenants.  You don’t have to evict dead souls if they stop paying lot rent, or if they cook meth.  You don’t have to tell dead souls to fix their skirting, mow their lawn, keep their kids off the street, replace their steps, turn down their music, or observe the speed limit.  The code enforcer won’t bust them for violation of habitation density rules.  Their dogs have three heads – but they are not dangerous to living people.  But then again, dead souls don’t pay lot rent.  That’s not a problem for Chichikov’s business model, but it’s a big one for mine.

And I have not been run out of town – yet.

Nevertheless, the parallel is powerful, and not entirely flattering.