A white elephant is something whose cost of upkeep is not in line with its usefulness or value. From an investment perspective, the term refers to an asset, property, or business that is so expensive to operate and maintain that it is extremely difficult to actually make a profit from it.
White elephants also tend to be illiquid assets, meaning they cannot be easily or quickly exchanged or sold for cash without the seller experiencing a significant loss.
Key Takeaways
- A white elephant is a burdensome asset, property, or investment whose cost of upkeep is not in line with its usefulness or value.
- The term derives from the old Thai custom of gifting rare, expensive-to-keep white elephants to the reigning monarch.
- Nowadays it is often associated with unprofitable real estate.
- These assets are often illiquid, meaning the owners cannot easily sell them without taking a substantial loss.
Understanding White Elephants
A white elephant is a burdensome possession. When applied to investments, it can be used to describe anything expensive to maintain, unprofitable, and impossible to sell. In other words, a white elephant is a name given to undesirable investments that are more trouble than they are worth.
Corporations may invest money in property, plant, and equipment (PP&E) with the goal of using these fixed assets to improve the company’s bottom line in the future. However, if economic conditions change, these assets can become white elephants. For example, suppose a company builds a factory to meet anticipated demand for its new product line. If the product fails to sell, that new factory becomes an expensive property that does not help the company generate enough revenue to cover the cost of its maintenance.
Over the years, the term white elephant has also been linked to various government-funded construction projects. Governments look to these endeavors to generate rapid economic growth by funneling lots of money into subsidized building and infrastructure projects.
In countries like the United States, funding for these projects sometimes comes in the form of controversial earmarks, which refers to spending provisions slipped into legislation that allocates money for a project favored by a particular politician or government official. Critics of these white elephant projects point out they are frequently ill-conceived, poorly planned, and a waste of taxpayer money.
History of White Elephants
The term “white elephant” derives from Asia. The white elephant is an icon with roots in Siam, now commonly known as Thailand. These rare animals were regarded as holy in ancient times and automatically gifted to the reigning monarch.
The story goes that the monarch would give the white elephant as a gift of either good or bad fortune. If he liked the recipient, he would gift land along with the elephant to help pay for the cost of the elephant. If he did not like you, he would not include land, turning the gift into a money pit.
Examples of White Elephants
White elephants are common in real estate, as the following examples illustrate:
The Empire State Building
The Empire State Building initially seemed destined to stay a white elephant despite eventually becoming a source of positive cash flow and growth. The property did not become profitable until the 1950s, more than 20 years after it was completed. Built against the backdrop of the Great Depression, the building struggled to function as an office building despite being planned for that purpose.
Now owned by a real estate investment trust (REIT), the building provides multiple sources of revenue. In 2019, the building’s observation deck generated approximately $128.8 million, equal to about 39% of the building’s total revenue. The building generates additional sources of revenue from leases of office and retail space along with fees generated from third-party television and radio broadcasters for the use of its broadcasting mast.
The T-Mobile Center
Another example is the T-Mobile Center (formerly known as the Sprint Center) owned by the city of Kansas City, MO. The multi-purpose arena opened in 2007, hosting a concert by Elton John as its first event.
At a cost of roughly $276 million, the T-Mobile Center was supposed to house a major sports anchor team. Kansas City did enter discussions with the National Basketball Association and National Hockey League teams. However, neither league has agreed to relocate to the arena.
The Ryugyong Hotel
Finally, there’s the Ryugyong Hotel. Originally intended to hold five revolving restaurants and over 3,000 hotel rooms, the Ryugyong Hotel stands 105 stories tall as a pyramid-shaped skyscraper in Pyongyang, North Korea.
Developers began construction on the tallest structure in North Korea in 1987, but plans were later halted in 1992 due to a lack of funds. Eventually, in 2008, work on the building resumed, with a view to unveiling its grand opening in 2012, the centenary of Kim Il-Sung’s birth.
As of today, the building still remains unfinished, earning it the nickname the “hotel of doom” and the dubious distinction as the tallest unfinished building in the world.
Related Terms: Asset, Profit, Illiquid Asset, Economic Growth, Real Estate Investment.
References
- Empire State Realty Trust. “2019 Annual Report”. Page 16.
- Sprint Center. “Sprint Center Facts”.
