Bulls, Bears, Hogs and Beer

There's an old adage that bulls and bears can make money, but not hogs. That is, those who get too greedy inevitably overreach and wind up big losers. The current credit crisis stems from borrowers and lenders alike taking excessive risks and getting burned. Indeed, all asset bubbles, like today's housing bubble or the tech stock bubble of the late 1990s, are indicative of bullishness morphing into hoggishness.

Then there are the multi-millionaires, even billionaires, who foolishly, arrogantly violate securities laws, risking huge fines and prison time in the pursuit of relatively minor gains. More than a few unions have driven their employers into the ground through a stubborn refusal to face economic realities that demand lower compensation or more flexible work rules. Likewise, excessive pay and ill-designed incentive systems have contributed mightily to the financial industry's current woes.

Landlords are another group often guilty of overreach. With mind-boggling frequency, they force out longtime tenants with outrageous rent demands, only to have their space lay vacant for years, yielding no return whatsoever. A current example is the 360% rent increase faced by the Pennsylvania Brewing Company, a Pittsburgh-based microbrewery founded in 1986 that has won numerous national and international beer tasting competitions. Perhaps the landlord, E&O Partners, figures that, since brew kettles and lagering tanks are huge and extremely expensive to move, Penn Brewing is (excuse the pun) over a barrel. Or maybe E&O assumes that Penn Brewing's new owner (Birchmere Capital, which bought an 80% controlling interest from recently-retired founder Tom Pastorius) has deep pockets and will swallow the increase.

Instead, Penn Brewing and its on-site restaurant will close when its lease expires in February, with most of its staff being put out of work. Until a suitable new space can be found, Penn Brewing will contract out production to the Lion brewery in Wilkes-Barre (makers of Stegmaier beer), but the quality is not likely to be the same.

E&O claims that it has yet to see a profit from its rental of space to Penn Brewing since 1989 in the old Eberhardt & Ober brewery, which had been derelict since that company ceased production in 1952. The renovated property, a national landmark since 1987, also includes office space, which E&O Partners still struggles to rent out.

Whether or not E&O's claimed unprofitability is accurate, forcing out your anchor tenant is a highly questionable move during a recession, especially when the remaining space in your building is still a tough sell after 19 years, due in large part to a less than desirable neighborhood. At a 360% rent increase, it's a sure bet that the space will be vacant for many years to come. Indeed, who will want to rent from a landlord that might give a similar surprise in the future? Better some return than zero return.