To the Editor:

I have just finished read­ing your articles .regarding publicly owned real estate companies, which were most interesting and perceptive. This is a story that needed to be told.

An item fully as impor­tant as the lack of quantita­tive coverage of dividends may well turn out to be the dubious quality of the in­come of many of these com­panies. Whereas it is some­what difficult in many cases to determine this quality, there are certain known in­stances which literally shout for disclosure, and I think there is reason to believe that continued probing would develop still more instances.

To give you an example of the sort of thing I have in mind, let me cite two in­stances, to which, you re­ferred, from the Kratter Corp. prospectus of 1961, pre­pared in connection with the debenture issue which never materialized:

1. On page 50 of the “red herring” prospectus, refer­ence is made to 140,000 con­tainers under lease to F. & M. Schafer Brewing Co. These containers were pur­chased by a joint venture in August 1958, for $2,800,000 and immediately net leased back to the brewery for five years at $710,000 annually. What this really amounted to, of course, was a financ­ing transaction for the brew­ing company. However, the impression the public stock­holder gets is that this $710,- 000, comingled with other op­erating income from real estate, has the same quality and expected longevity that might be expected from a first-class office building. Therefore, if the casual stockholder takes the $710,- 000 and capitalizes it at 9%, he immediately attributes a value of almost $8 million to something which initially only had a value of $2,800,- 000 and whose value is de­clining at an extreme rate. Various brokerage offices have issued reports involv­ing just this sort of valua­tion. This would appear to be trading upon the lower level of intelligence in Wall Street.

2. On the same page in the “red herring,” reference is made to various machines acquired from Dashew Bus­iness Machines and under lease either to Standard Oil of California or Dashew, itself. There are two ar­rangements here, but suf­fice to say that the eight machines leased to Dash­ew were purchased for $660,000 in August 1960 and leased back for five years for $153,000 per annum with the subsequent five years available to Dashew at $9,900 per annum. Anyone assum­ing that the $153,000, which is contributing just that much to the current operating in­come of Kratter, has the as­pect of long-term prime real estate income is due for a real shock when the renewal period comes up.

This sort of transaction is very similar to buying a royalty on a short-lived oil well. If the gross receipts are spent each year, one soon finds out that the capital is not self-replacing. To ig­nore the concept of amortiza­tion or depreciation on such transactions is dubious, if not fraudulent.
I think you have done a real public service in taking a good, hard look at the “ad­vanced accounting tech­niques” of this new indus­try. It has many of the as­pects of a chain letter scheme or a “Ponzi” opera­tion, and the sooner articles such as yours are given wide circulation, the less likeli­hood of serious harm to the public.

Warren E. Buffett

Genl. Ptr.

Buffett Partnership, Ltd.

Omaha,Nebr.