Our story takes place in the town of Bloomington, Indiana where I live and work. Bloomington, of course, houses Indiana University at Bloomington which is the flagship of the IU system. The town has a population of about 40000 townies, which includes many faculty and staff. In addition, on the order of 40000 students live here "temporarily."

Most of the economy of Bloomington is tied up with the university. A few industrial concerns operate here, but many older ones have been shuttered for decades. The presence of the university has made Bloomington very recession proof. Until recently, I had not felt the recent real estate crash or credit crunch personally at all. I am a professor of mathematics here. I am generally uninterested in local politics but have gotten slightly more involved in the local goings on as a result of sending my 6 year old hyperlexic son Dagon to the Pinnacle School, a local independent private school for children with processing disorders.

The larger economic tides are affecting Bloomington. In part, this hub is an attempt to describe how by following the career of a local real estate magnate, Peter Dvorak, over the last twenty years.

Our story begins in 1989, when Peter Dvorak was 21 years old and a sophomore at Indiana University. He did not like it and dropped out to do something more rewarding. What he liked to do was to buy and renovate housing. He bought his first house with a down payment of just $900. He refurbished it with his own hands, and rented it out to students. Within ten years, at his peak in the residential rental business, he controlled some 2000 rental units.

I don't know the details of how such growth is accomplished, but the ingredients of the mechanism seem quite clear. Dvorak was highly leveraged: he bought all his properties with loans and low down payments. He was quite efficient at refurbishing. His rental operations were profitable. His growth during the nineties is consistent with doubling his number of units each year. This could be done if his investment costs were low enough and his operations profitable enough that the profits from one unit in one year could pay for the investment costs (i.e. the down payment and repair costs) for one new unit.

Aya wrote a hub on growth and ecology. It is somewhat clear that Dvorak's rise could only have occurred in an atmosphere of easy credit as existed in the 1990's. It is not clear that Dvorak's work was environmentally harmful. He rarely ever erected his own structure. Rather he recycled existing structures that others considered close to unusable. He created affordable housing, not for people with low incomes, but for all comers. Most notably those comers were students.

For people who think the free market produces good economic results, Dvorak's rise might serve as a model.

In Bloomington, there is a law called the occupancy law. It says that no more than three "unrelated" persons may occupy a private residence.As one might imagine, this law is nearly impossible to enforce and it is enforced quite selectively. In the mid-90's, the city of Bloomington tried to enforce it against Peter Dvorak. It is not clear whether they did this because they felt threatened by the growth of his business, or simply because he was not judgment proof.

In any case Dvorak was enraged. He felt the law was unconstitutional, that it violated equal protection provisions of the Indiana state constitution. The law constituted government discrimination against sets of unrelated persons and particularly students. He sued to have the law overturned.

The ensuing legal battle lasted for seven years, from 1996 to 2003. A court of appeals ruled in Dvorak's favor to overturn the law. The supreme court upheld the law, however, since the public danger of students' playing loud music outweighs any rights of equal protection the students might have.

My colleagues tend to favor the occupancy laws. They are homeowners and they care only about their own interests. They believe that occupance laws keep housing unaffordable, i.e. raise their property values. I will demonstrate at the end of this hub, how in fact, the occupancy law harms their interests.

By the time the supreme court decision came down, Dvorak was no longer in the residential real estate business. This reminds me of the reasons Midas Mulligan quit in Atlas Shrugged. But a less pure, more practical interpretation may be put on it. Dvorak decided to work in the parts of the real estate business in which local government official would be on his side and not against him.

In the last decade, Peter Dvorak has been developing commercial real estate and hotels. Largely he has still been in the business of recycling buildings. But he has been recycling big ones, often turning abandoned factories to new uses. This requires large scale backing. He gets the backing of local governments who want their city centers revitalized and large banks from which he needs sizable loans to finance his projects.

As an example of they type of building, he controlled, I mention a Bloomington landmark, the Johnson Creamery building. As its name implies, raw milk used to be shipped there where it was made into milk and ice cream, delivered door to door by trucks and earlier by horse drawn carts. Eventually it was deemed more efficient to deliver the raw milk to Indianapolis and the creamery closed. Today the creamery is being used as an office building which houses the Greater Bloomington Chamber of Commerce, some law offices, and offices of the FBI. Until a few days ago, Dvorak owned it.

Recently, the real estate crash and credit crunch hit. Various projects Dvorak was involved in lost their banks support. Banks that has extended loans to begin the projects, did not lend the money to complete them. Dvorak now owed money on uncompleted and hence largely worthless real estate. In a chain reaction, his empire collapsed. He had to sell otherr buildings on which he probably also owed money to satisfy his creditors. He had to close his real estate and investing company, Pinnacle Asset Management.

It was reported in the local newspaper yesterday that investors from California have purchased the Johnson Creamery building for $4.4 million.

Incidentally, this outcome seems not be singular for local real estate developers. There is a nephew of the Dalai Lama who lives in Bloomington, invested in real estate, and is in similarly dire straits.

Among the buildings that Peter Dvorak owned were the ones that currently house the Pinnacle School. For me and Dagon, they were particularly well located, a pleasant, less than 1 mile walk from our house. Dvorak had rented them out to the school far below market value. But he had to sell the buildings (for about $1 million) to satisfy his creditors. The result is that the school is moving. They took out a bank loan to buy a property in the less well off end of town. (1503 Arlington Rd. to be exact.) This was how I learned about Peter Dvorak.

What it means for me and Dagon is that we'll have to ride the bus every morning. We'll take the #5 from the stop nearest our house. It will carry us through our neighborhood, past the university and towards downtown. Then we will switch to the #2 bus which takes us near the new site of the school. We tried this on Saturday and it all seems a practical way to get there. Incidentally, the culture of the #2 bus is noticeably different from the #5. It is far more crowded, and we have not been able to get on without being accosted by strangers offering candy. [See Aya's hub.] (I'm not making this up.)

The Pinnacle school changed its name some 6 years ago from the DePaul school (after a famous educator for dyslexics) to the Pinnacle school (after Dvorak's real estate empire.) One aspect that was hard for me to understand was Dvorak's interest in Pinnacle. Did his children go there? Was he interested in dyslexia for some reason? I put this question to Denise Lessow and she replied matter of factly that when she was looking for a new building for the school, Dvorak was a person she knew and he had said he happenned to have a building.

Not being a member of the hoi polloi myself, I found this difficult to swallow. But on further reflection, I believe it to be literally true. Simon and Garfunkel put it best:

He freely gave to charity;

He had the common touch.

And they were grateful for his patronage.

And they thanked him very much.

One of the buildings which Peter Dvorak is trying to sell to pay his creditors is Park Place, his mansion located less than 2 miles from where I live as the crow flies.

The house has 5 bedrooms, six bathrooms, and 9000 square feet of living space. (The ad says that this is the requisite space for modern living and entertaining.) The grounds are 10 acres of a park like setting. The asking price has been reduced to $2,450,000 from $2,950,000 although I understand that if you pay the latter price, you get a free helicopter which can land on the roof.

Seeing these ads, I felt an immediate twinge of desire to buy the place. I came to my senses quickly. I can't possibly afford it. Like most academics, I would be hard pressed to go over $500,000 for a house. In fact, I like the house we live in very much. We paid less than $200,000 for it some seven years ago. While it is not in the fanciest neighborhood, and it doesn't have the most impressive facade, it is an easy walk to work and has about 3000 square feet counting the basement. Nice houses very close to the university run closer to $500,000 and many of our colleagues live in such houses.

I suddenly remembered visiting a friend of mine from college in the 90's who was working for an internet start-up in Silicon valley. Real estate was outrageously expensive there, so he and some of his friends had a communal living arrangement. They jointly bought a house, valued at around a million dollars, which they shared.

I started having a wild fantasy about five bachelor academics at IU who would jointly buy Park Place. Each one would get one of the bedrooms. They could live and entertain in a modern way. If they really splurged, maybe they could even get the helicopter. It would make great fodder for a sit-com or a reality show. But then I was jolted back to reality. The communal living arrangement is impossible.

The reason my fantasy can't work is that it is illegal under the occupancy law! We can't have the five academics playing loud music and disturbing their neighbors on the other side of the ten acres. I find it beyond ironic that while Peter Dvorak fought a protracted legal battle to allow the hypothetical five academics to live as they saw fit, the academics themselves support the occupancy law and want to deny themselves the chance.