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05.03.2009 16:26

Using The Infinite Banking Concept to finance purchases without lending from banks

Trista Winnie

You probably don’t sit around calculating how much interest you pay to banks and other lenders each year, but chances are you have financed large purchases, such as homes, education, cars and major appliances.

The interest paid o­n these items can add up to hundreds of thousands of dollars, perhaps more, in the course of a lifetime. People often have to decide how much money to allocate for their retirement and how much to paying down current debt.

But what if it were possible for people to save for retirement in a vehicle that allowed them to finance their life in a way that provided advantages over borrowing from a bank or lender?

The Infinite Banking Concept
The interest you pay to banks can add up

That is exactly what R. Nelson Nash had in mind when he pioneered the Infinite Banking Concept. In essence, Infinite Banking, and other similar systems adapted from Nash’s original idea, involves paying into a whole life insurance policy with an insurance company that allows policy holders to take loans collateralized o­n their individual policies.

How the Infinite Banking Concept works

Infinite Banking and other individualized banking systems rely o­n participating whole life insurance policies, which build up equity and pay dividends. Policy holders pay premiums—which vary based o­n the amount of the death benefit chosen, along with other factors, such as the age and health of the policy holder—into a whole life insurance policy for a period of five to seven years and let the policy increase in value. This is known as the capitalization phase.

“Generally, we try to fund most of the money into it in the first five years,” Tom McDermott, president of Asset Protectors & Advisors Group, said. “The longer you can allow it to accumulate, obviously, the more you can pull out for retirement savings, the more you can pull out for larger items.”

After the capitalization phase, the policy becomes self-supporting; the returns o­n the policy at that point will be enough to cover the premiums. The annual dividends are based o­n how well the insurance company did that year. Insurance companies must invest the premiums received “in order to produce the benefits that are promised,” Nash wrote.

Through the use of a paid-up additions rider, policy holders benefit from having their dividends reinvested into their policy, thus increasing the value of their policy and subsequent death benefit.

Policy holders are able to borrow up to 100 percent of the cash value of their whole life policy at any time with no tax penalties. A policy holder “outranks every potential borrower in access to the money that must be lent,” Nash wrote.

With this structure in place, policy holders are able to essentially act as their own personal bankers. They can loan themselves money from their own life insurance policies, and the interest payments go back to their own accounts.

Concept of Infinite Banking

People who participate in individualized banking are able to borrow money from—and repay—themselves when financing major purchases, rather than relying o­n and paying interest to banks and other outside lenders.

“Your average American family is not saving money...at the same time, they’re spending approximately 34.5 cents o­n every dollar in interest to finance their lifestyle through banks and different finance companies,” David Kane, president of the benefits division at York International, said.

By depositing cash into a life insurance policy rather than using it for a major purchase, investors retain the ability to earn interest o­n that cash. Further, by borrowing from their own life insurance policy, they avoid having to spend that 34.5 cents per dollar o­n outside financing, and can instead pay that to their own policy.

The borrowed money can be used to finance any purchase, whether or not a lender would typically grant a loan for it. The policy holder, as banker, gets to set the loan requirements.

“You are totally and completely independent from all other sources of financing,” Rebecca Rice, owner of Rebecca Rice & Associates, said. “You have control of your own banking system and you’re able to control the amount of money that goes into your bank.”

Policy holders must make sure that they pay back any loans they take out. If they don’t, the system of growing the policy’s value will fail.

People who follow through o­n utilizing the insurance policy as a bank are able to supercharge the returns guaranteed by the policy while financing things they would have financed anyway. The difference is that all the interest payments go back to the policy, not to a bank or other lender.

“The Infinite Bank is really like a complete financial system. It will provide money for your lifestyle, for your retirement and for your heirs,” Kane said. “It works well in all phases of wealth.”

The advantages

Perhaps the most obvious advantage of the Infinite Banking Concept is that it offers life insurance coverage—something most people need anyway. Life insurance is a low risk investment; there are guaranteed returns, and life insurance companies are noted for their longevity.

There are also tax benefits. “In a properly structured life insurance program, if you borrow the money out of the policy, the proceeds are tax free,” McDermott said. “As long as you don’t lapse the policy, no taxes are due. When the death benefit is paid, it is paid income tax free, minus the withdrawals. We structure these programs so that the income stream is tax free through age 100 and the policy has a no lapse provision in it so as not to generate a taxable event.”


In addition to providing capital for borrowing, policies can also provide a stream of retirement income for policy holders. There are no age limits o­n policy withdrawals.

“This is the front of the wave for retirement planning,” McDermott said. “Setting up something like an Infinite Banking plan...allows you to save for retirement planning and [know] exactly what your tax exposure is going to be when you start pulling the money out. And if you pull it out correctly, you’re going to have zero tax exposure.”

Insurance policies are also safe from exposure to litigation and creditors. “Insurance policies are protected from...taxes, creditors, litigation, things like that,” Steve Sappington, co-founder and registered principal of TWM Group, LLC, said. “We have, for example, a lot of doctors who use this Infinite Banking Concept...because it shelters assets.”

In addition to being safe, individualized banking is flexible. Policy holders can borrow money and use it for purchases for which financing is usually hard to come by, such as foreign real estate. Policy holders can even become lenders themselves, borrowing money to lend it to other people in order to earn further interest.

People who use the Infinite Banking Concept can use their policy in a variety of ways without turning any money over to a bank or other lender at any time. “It’s really phenomenal,” Rice said.

The disadvantages

Still, it is by no means a perfect system. It typically takes several years for policies to grow to the point that the returns equal the costs of the premium, and for there to be a significant enough value in the policy to warrant borrowing from it.

The initial stages of individualized banking are analogous to starting a small business; there are a few years where money is spent before any money comes in. In addition, policy holders must be dedicated to building up the value of their policies.

“Just plan o­n really funding that policy well for seven years, then you’re going to be able to do some really nice things as a result from that,” Sappington said. He compared the initial stages to a jet taking off. A jet uses a lot of fuel to take off but becomes much more efficient after the initial surge of fuel use.


In addition to building up their policies, policy holders must be dedicated to paying back loans, though there is certainly more flexibility involved, since policy holders are paying themselves back. If unforeseen circumstances arise, policy holders can change their repayment schedule as necessary, rather than worrying about foreclosure, repossession or damaged credit. However, failing to pay back loans will diminish the effectiveness and efficiency of the system.

People who want to use the Infinite Banking Concept will need someone familiar with it to help them set it up, and not all insurance brokers are aware of the system.

Those interested in Infinite Banking will need to do research to make informed decisions. Fees, commissions and the percentage of the premium that goes toward building the account’s value vary by company, and there are many ways to structure whole life policies. 

Nash offers a six-week class to insurance brokers in which he teaches them how to properly set up the system. A list of people who have taken his class and are certified to set up Infinite Banking is available here: http://www.infinitebanking.org/links/usagents.php.

The experts quoted in this article have participated in Nash’s Infinite Banking Concept training.

In Montreal, please contact Mr. Van Tan Ngo, financial planner 514 866 5812x2202
van.tan.ngo@sunlife.com

History of insurance

Insurance began as a way of reducing the risk of traders, as early as 5000 BC in China and 4500 BC in Babylon. Life insurance dates o­nly to ancient Rome; "burial clubs" covered the cost of members' funeral expenses and helped survivors monetarily. Modern life insurance started in late 17th century England, originally as insurance for traders: merchants, ship owners and underwriters met to discuss deals at Lloyd's Coffee House, predecessor to the famous Lloyd's of London.

The first insurance company in the United States was formed in Charleston, South Carolina in 1732, but it provided o­nly fire insurance. The sale of life insurance in the U.S. began in the late 1760s. The Presbyterian Synods in Philadelphia and New York created the Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers in 1759; Episcopalian priests organized a similar fund in 1769. Between 1787 and 1837 more than two dozen life insurance companies were started, but fewer than half a dozen survived.

Prior to the American Civil War, many insurance companies in the United States insured the lives of slaves for their owners. In response to bills passed in California in 2001 and in Illinois in 2003, the companies have been required to search their records for such policies. New York Life for example reported that Nautilus sold 485 slaveholder life insurance policies during a two-year period in the 1840s; they added that their trustees voted to end the sale of such policies 15 years before the Emancipation Proclamation.


Life insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the insured individual's or individuals' death or other event, such as terminal illness or critical illness. In return, the policy owner agrees to pay a stipulated amount called a premium at regular intervals or in lump sums. There may be designs in some countries where bills and death expenses plus catering for after funeral expenses should be included in Policy Premium. In the United States, the predominant form simply specifies a lump sum to be paid o­n the insured's demise.

 

As with most insurance policies, life insurance is a contract between the insurer and the policy owner whereby a benefit is paid to the designated beneficiaries if an insured event occurs which is covered by the policy.

 

The value for the policyholder is derived, not from an actual claim event, rather it is the value derived from the 'peace of mind' experienced by the policyholder, due to the negating of adverse financial consequences caused by the death of the Life Assured.

 

To be a life policy the insured event must be based upon the lives of the people named in the policy.

 

Insured events that may be covered include:

 

Serious illness

Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; for example claims relating to suicide, fraud, war, riot and civil commotion.

 

Life-based contracts tend to fall into two major categories:

 

Protection policies - designed to provide a benefit in the event of specified event, typically a lump sum payment. A common form of this design is term insurance.

Investment policies - where the main objective is to facilitate the growth of capital by regular or single premiums. Common forms (in the US anyway) are whole life, universal life and variable life policies.



Parties to contract

There is a difference between the insured and the policy owner (policy holder), although the owner and the insured are often the same person. For example, if Joe buys a policy o­n his own life, he is both the owner and the insured. But if Jane, his wife, buys a policy o­n Joe's life, she is the owner and he is the insured. The policy owner is the guarantee and he or she will be the person who will pay for the policy. The insured is a participant in the contract, but not necessarily a party to it.

 

The beneficiary receives policy proceeds upon the insured's death. The owner designates the beneficiary, but the beneficiary is not a party to the policy. The owner can change the beneficiary unless the policy has an irrevocable beneficiary designation. With an irrevocable beneficiary, that beneficiary must agree to any beneficiary changes, policy assignments, or cash value borrowing.

 

In cases where the policy owner is not the insured (also referred to as the celui qui vit or CQV), insurance companies have sought to limit policy purchases to those with an "insurable interest" in the CQV. For life insurance policies, close family members and business partners will usually be found to have an insurable interest. The "insurable interest" requirement usually demonstrates that the purchaser will actually suffer some kind of loss if the CQV dies. Such a requirement prevents people from benefiting from the purchase of purely speculative policies o­n people they expect to die. With no insurable interest requirement, the risk that a purchaser would murder the CQV for insurance proceeds would be great. In at least o­ne case, an insurance company which sold a policy to a purchaser with no insurable interest (who later murdered the CQV for the proceeds), was found liable in court for contributing to the wrongful death of the victim (Liberty National Life v. Weldon, 267 Ala.171 (1957)).

 

 

Contract terms

Special provisions may apply, such as suicide clauses wherein the policy becomes null if the insured commits suicide within a specified time (usually two years after the purchase date; some states provide a statutory o­ne-year suicide clause). Any misrepresentations by the insured o­n the application is also grounds for nullification. Most US states specify that the contestability period cannot be longer than two years; o­nly if the insured dies within this period will the insurer have a legal right to contest the claim o­n the basis of misrepresentation and request additional information before deciding to pay or deny the claim.

The face amount o­n the policy is the initial amount that the policy will pay at the death of the insured or when the policy matures, although the actual death benefit can provide for greater or lesser than the face amount. The policy matures when the insured dies or reaches a specified age (such as 100 years old).

 

 

Costs, insurability, and underwriting

The insurer (the life insurance company) calculates the policy prices with intent to fund claims to be paid and administrative costs, and to make a profit. The cost of insurance is determined using mortality tables calculated by actuaries. Actuaries are professionals who employ actuarial science, which is based in mathematics (primarily probability and statistics). Mortality tables are statistically-based tables showing expected annual mortality rates. It is possible to derive life expectancy estimates from these mortality assumptions. Such estimates can be important in taxation regulation.[1] [2]

 

The three main variables in a mortality table have been age, gender, and use of tobacco. More recently in the US, preferred class specific tables were introduced. The mortality tables provide a baseline for the cost of insurance. In practice, these mortality tables are used in conjunction with the health and family history of the individual applying for a policy in order to determine premiums and insurability. Mortality tables currently in use by life insurance companies in the United States are individually modified by each company using pooled industry experience studies as a starting point. In the 1980s and 90's the SOA 1975-80 Basic Select & Ultimate tables were the typical reference points, while the 2001 VBT and 2001 CSO tables were published more recently. The newer tables include separate mortality tables for smokers and non-smokers and the CSO tables include separate tables for preferred classes. [3]

 

Recent US select mortality tables predict that roughly 0.35 in 1,000 non-smoking males aged 25 will die during the first year of coverage after underwriting.[2] Mortality approximately doubles for every extra ten years of age so that the mortality rate in the first year for underwritten non-smoking men is about 2.5 in 1,000 people at age 65.[3] Compare this with the US population male mortality rates of 1.3 per 1,000 at age 25 and 19.3 at age 65 (without regard to health or smoking status).[4]

 

The mortality of underwritten persons rises much more quickly than the general population. At the end of 10 years the mortality of that 25 year-old, non-smoking male is 0.66/1000/year. Consequently, in a group of o­ne thousand 25 year old males with a $100,000 policy, all of average health, a life insurance company would have to collect approximately $50 a year from each of a large group to cover the relatively few expected claims. (0.35 to 0.66 expected deaths in each year x $100,000 payout per death = $35 per policy). Administrative and sales commissions need to be accounted for in order for this to make business sense. A 10 year policy for a 25 year old non-smoking male person with preferred medical history may get offers as low as $90 per year for a $100,000 policy in the competitive US life insurance market.

 

The insurance company receives the premiums from the policy owner and invests them to create a pool of money from which it can pay claims and finance the insurance company's operations. Contrary to popular belief, the majority of the money that insurance companies make comes directly from premiums paid, as money gained through investment of premiums can never, in even the most ideal market conditions, vest enough money per year to pay out claims.[citation needed] Rates charged for life insurance increase with the insurer's age because, statistically, people are more likely to die as they get older.

 

Given that adverse selection can have a negative impact o­n the insurer's financial situation, the insurer investigates each proposed insured individual unless the policy is below a company-established minimum amount, beginning with the application process. Group Insurance policies are an exception.

 

This investigation and resulting evaluation of the risk is termed underwriting. Health and lifestyle questions are asked. Certain responses or information received may merit further investigation. Life insurance companies in the United States support the Medical Information Bureau (MIB) [4], which is a clearinghouse of information o­n persons who have applied for life insurance with participating companies in the last seven years. As part of the application, the insurer receives permission to obtain information from the proposed insured's physicians.[5]

 

Underwriters will determine the purpose of insurance. The most common is to protect the owner's family or financial interests in the event of the insurer's demise. Other purposes include estate planning or, in the case of cash-value contracts, investment for retirement planning. Bank loans or buy-sell provisions of business agreements are another acceptable purpose.

 

Life insurance companies are never required by law to underwrite or to provide coverage to anyone, with the exception of Civil Rights Act compliance requirements. Insurance companies alone determine insurability, and some people, for their own health or lifestyle reasons, are deemed uninsurable. The policy can be declined (turned down) or rated.[citation needed] Rating increases the premiums to provide for additional risks relative to the particular insured.[citation needed]

 

Many companies use four general health categories for those evaluated for a life insurance policy. These categories are Preferred Best, Preferred, Standard, and Tobacco.[citation needed] Preferred Best is reserved o­nly for the healthiest individuals in the general population. This means, for instance, that the proposed insured has no adverse medical history, is not under medication for any condition, and his family (immediate and extended) have no history of early cancer, diabetes, or other conditions.[5] Preferred means that the proposed insured is currently under medication for a medical condition and has a family history of particular illnesses.[citation needed] Most people are in the Standard category.[citation needed] Profession, travel, and lifestyle factor into whether the proposed insured will be granted a policy, and which category the insured falls. For example, a person who would otherwise be classified as Preferred Best may be denied a policy if he or she travels to a high risk country.[citation needed] Underwriting practices can vary from insurer to insurer which provide for more competitive offers in certain circumstances.

 

Life insurance contracts are written o­n the basis of utmost good faith. That is, the proposer and the insurer both accept that the other is acting in good faith. This means that the proposer can assume the contract offers what it represents without having to fine comb the small print and the insurer assumes the proposer is being honest when providing details to underwriter

  

Death proceeds

Upon the insured's death, the insurer requires acceptable proof of death before it pays the claim. The normal minimum proof required is a death certificate and the insurer's claim form completed, signed (and typically notarized).[citation needed] If the insured's death is suspicious and the policy amount is large, the insurer may investigate the circumstances surrounding the death before deciding whether it has an obligation to pay the claim.

 

Proceeds from the policy may be paid as a lump sum or as an annuity, which is paid over time in regular recurring payments for either a specified period or for a beneficiary's lifetime.

 

 

INSURANCE VS ASSURANCE

 

The specific uses of the terms "insurance" and "assurance" are sometimes confused. In general, in these jurisdictions "insurance" refers to providing cover for an event that might happen (fire, theft, flood, etc.), while "assurance" is the provision of cover for an event that is certain to happen. "insurance" is the generally accepted term, however, people using this description are liable to be corrected. In the United States both forms of coverage are called "insurance", principally due to many companies offering both types of policy, and rather than refer to themselves using both insurance and assurance titles, they instead use just o­ne.

 

 

Types of life insurance

Life insurance may be divided into two basic classes – temporary and permanent or following subclasses - term, universal, whole life and endowment life insurance.

 

TEMPORARY TERM

 

Term assurance: provides for life insurance coverage for a specified term of years for a specified premium. The policy does not accumulate cash value. Term is generally considered "pure" insurance, where the premium buys protection in the event of death and nothing else.

 

The three key factors to be considered in term insurance are: face amount (protection or death benefit), premium to be paid (cost to the insured), and length of coverage (term).

 

Various insurance companies sell term insurance with many different combinations of these three parameters. The face amount can remain constant or decline. The term can be for o­ne or more years. The premium can remain level or increase. A common type of term is called annual renewable term. It is a o­ne year policy but the insurance company guarantees it will issue a policy of equal or lesser amount without regard to the insurability of the insured and with a premium set for the insured's age at that time. Another common type of term insurance is mortgage insurance, which is usually a level premium, declining face value policy. The face amount is intended to equal the amount of the mortgage o­n the policy owner’s residence so the mortgage will be paid if the insured dies.

 

A policy holder insures his life for a specified term. If he dies before that specified term is up, his estate or named beneficiary receives a payout. If he does not die before the term is up, he receives nothing. In the past these policies would almost always exclude suicide. However, after a number of court judgments against the industry, payouts do occur o­n death by suicide (presumably except for in the unlikely case that it can be shown that the suicide was just to benefit from the policy). Generally, if an insured person commits suicide within the first two policy years, the insurer will return the premiums paid. However, a death benefit will usually be paid if the suicide occurs after the two year period.

 

 

PERMANENT LIFE INSURANCE

Permanent life insurance is life insurance that remains in force (in-line) until the policy matures (pays out), unless the owner fails to pay the premium when due (the policy expires OR policies lapse). The policy cannot be canceled by the insurer for any reason except fraud in the application, and that cancellation must occur within a period of time defined by law (usually two years). Permanent insurance builds a cash value that reduces the amount at risk to the insurance company and thus the insurance expense over time. This means that a policy with a million dollar face value can be relatively expensive to a 70 year old. The owner can access the money in the cash value by withdrawing money, borrowing the cash value, or surrendering the policy and receiving the surrender value.

 

The four basic types of permanent insurance are whole life, universal life, limited pay and endowment.

 

 

Whole life coverage

Whole life insurance provides for a level premium, and a cash value table included in the policy guaranteed by the company. The primary advantages of whole life are guaranteed death benefits, guaranteed cash values, fixed and known annual premiums, and mortality and expense charges will not reduce the cash value shown in the policy. The primary disadvantages of whole life are premium inflexibility, and the internal rate of return in the policy may not be competitive with other savings alternatives. Riders are available that can allow o­ne to increase the death benefit by paying additional premium. The death benefit can also be increased through the use of policy dividends. Dividends cannot be guaranteed and may be higher or lower than historical rates over time. Premiums are much higher than term insurance in the short-term, but cumulative premiums are roughly equal if policies are kept in force until average life expectancy.

 

Cash value can be accessed at any time through policy "loans". Since these loans decrease the death benefit if not paid back, payback is optional. Cash values are not paid to the beneficiary upon the death of the insured; the beneficiary receives the death benefit o­nly. If the dividend option: Paid up additions is elected, dividend cash values will purchase additional death benefit which will increase the death benefit of the policy to the named beneficiary.

 

 

[edit] Universal life coverage

Universal life insurance (UL) is a relatively new insurance product intended to provide permanent insurance coverage with greater flexibility in premium payment and the potential for a higher internal rate of return. There are several types of universal life insurance policies which include "interest sensitive" (also known as "traditional fixed universal life insurance"), variable universal life insurance, and equity indexed universal life insurance.

 

A universal life insurance policy includes a cash account. Premiums increase the cash account. Interest is paid within the policy (credited) o­n the account at a rate specified by the company. Mortality charges and administrative costs are then charged against (reduce) the cash account. The surrender value of the policy is the amount remaining in the cash account less applicable surrender charges, if any.

 

With all life insurance, there are basically two functions that make it work. There's a mortality function and a cash function. The mortality function would be the classical notion of pooling risk where the premiums paid by everybody else would cover the death benefit for the o­ne or two who will die for a given period of time. The cash function inherent in all life insurance says that if a person is to reach age 95 to 100 (the age varies depending o­n state and company), then the policy matures and endows the face value of the policy.

 

Actuarially, it is reasoned that out of a group of 1000 people, if even 10 of them live to age 95, then the mortality function alone will not be able to cover the cash function. So in order to cover the cash function, a minimum rate of investment return o­n the premiums will be required in the event that a policy matures.

 

Universal life insurance addresses the perceived disadvantages of whole life. Premiums are flexible. Depending o­n how interest is credited, the internal rate of return can be higher because it moves with prevailing interest rates (interest-sensitive) or the financial markets (Equity Indexed Universal Life and Variable Universal Life). Mortality costs and administrative charges are known. And cash value may be considered more easily attainable because the owner can discontinue premiums if the cash value allows it. And universal life has a more flexible death benefit because the owner can select o­ne of two death benefit options, Option A and Option B.

 

Option A pays the face amount at death as it's designed to have the cash value equal the death benefit at maturity (usually at age 95 or 100). With each premium payment, the policy owner is reducing the cost of insurance until the cash value reaches the face amount upon maturity.

 

Option B pays the face amount plus the cash value, as it's designed to increase the net death benefit as cash values accumulate. Option B offers the benefit of an increasing death benefit every year that the policy stays in force. The drawback to option B is that because the cash value is accumulated "on top of" the death benefit, the cost of insurance never decreases as premium payments are made. Thus, as the insured gets older, the policy owner is faced with an ever increasing cost of insurance (it costs more money to provide the same initial face amount of insurance as the insured gets older).

 

 

Limited-pay

Another type of permanent insurance is Limited-pay life insurance, in which all the premiums are paid over a specified period after which no additional premiums are due to keep the policy in force. Common limited pay periods include 10-year, 20-year, and paid-up at age 65.




http://www.youtube.com/watch?v=lljivVqC-5M



Beijing's Olympic building boom becomes a bust

Beijing bust

Michael Reynold / EPA

A construction worker walks o­n an overpass in front of high-rise commercial buildings in the Central Business District of Beijing. Some experts estimate that more than 100 million square feet of office space is vacant in the city.

Many buildings in the city's impressive skyline are empty.

By Barbara Demick
February 22, 2009

Reporting from Beijing -- "Empty," says Jack Rodman, an expert in distressed real estate, as he points from the window of his 40th-floor office toward a silver-skinned prism rising out of the Beijing skyline.

"Beautiful building, but not a single tenant.

Beijing's building boom, driven by the...

  • Ethics' place in China's building boom 

    "Completely empty.

    "Empty."

    So goes the refrain as his finger skips from building to building, each flashier than the next, and few of them more than barely occupied.
    Beijing went through a building boom before the 2008 Summer Olympics that filled a staid communist capital with angular architectural feats that grace the covers of glossy design magazines.

    Now, six months after the Games ended, the city continues to dazzle by night, with neon and floodlights dancing across the skyline. By day, though, it is obvious that many are "see-through" buildings, to use the term coined during the Texas real estate bust of the 1980s.

    By Rodman's calculations, 500 million square feet of commercial real estate has been developed in Beijing since 2006, more than all the office space in Manhattan. And that doesn't include huge projects developed by the government. He says 100 million square feet of office space is vacant -- a 14-year supply if it filled up at the same rate as in the best years, 2004 through '06, when about 7 million square feet a year was leased.

    "The scale of development was unprecedented anywhere in the world," said Rodman, a Los Angeles native who lives in Beijing, running a firm called Global Distressed Solutions. "It defied logic. It just doesn't make sense."

    Construction cranes jut into the skyline, but increasingly they are fixed in place, awaiting fresh financing before work resumes.

    Boarded fences advertise coming attractions -- "an iconic landmark" or "international wonderland" -- that are in varying states of half-completion. A retail strip in o­ne development advertised as "La Vibrant shopping street" is empty.

    In a country where protests are rare, migrant workers stand in front of several construction projects, voicing their grievances.

    "Our boss ran away with the money and he is nowhere to be found," said Li Zirong, a migrant worker from Shaanxi province, who was a supervisor o­n a stunning building with windows shaped like portholes.

    What makes this boom-and-bust cycle different from those in the West is that there is no private ownership of land in China, making local governments de facto partners in the real estate industry, which earn huge fees from leasing and transferring land.

    Huang Yasheng, an economist at the Massachusetts Institute of Technology, traces the blame for the bust to the Chinese Communist Party and its reluctance to allow a true market economy.

    "The lack of land reform fed into the real estate bubble and now it's coming back to haunt them," said Huang, author of "Capitalism With Chinese Characteristics," published last year. "There should have been more checks and balances o­n the ability of the government to acquire land."

    The government spent $43 billion for the Olympics, nearly three times as much as any other host city. But many of the venues proved too big, too expensive and more photogenic than practical.

    The National Stadium, known as the Bird's Nest, has o­nly o­ne event scheduled for this year: a performance of the opera "Turandot" o­n Aug. 8, the o­ne-year anniversary of the Olympic opening ceremony. China's leading soccer club backed out of a deal to play there, saying it would be an embarrassment to use a 91,000-seat stadium for games that ordinarily attract o­nly 10,000 spectators.

    The venue, which costs $9 million a year to maintain, is expected to be turned into a shopping mall in several years, its owners announced last month.

    A baseball stadium that opened last spring with an exhibition game between the Dodgers and the San Diego Padres, is being demolished. Its owner says it also will use the land for a shopping mall.

Among the major Olympic venues, o­nly the National Aquatics Center, nicknamed the Water Cube, has had a productive afterlife. It's used for sound-and-light shows, with dancing fountains in the swimming lanes where Michael Phelps won his gold medals.

All around the Olympic complex, there are cavernous empty buildings, such as the main press center for the Games, that still await tenants.

 
A shopping arcade that stretches for a quarter of a mile across the street from the complex is empty, the storefronts papered over with signs reading "famous stores corridor."

"They wanted to build 'the world's biggest this' and 'the world's biggest that,' but these buildings have almost zero long-term economic benefit," economist Huang said.

Moreover, the makeover of Beijing for the Olympics led to an estimated 1.5 million residents being evicted from their homes, according to the Geneva-based Center o­n Housing Rights and Evictions.

In this vibrant capital city of 17 million, there is an insatiable demand for housing, yet prices remain far out of reach of most residents. American-style free-standing homes are being advertised for more than $1 million in gated communities with names like Versailles, Provence, Arcadia and Riviera. Within the Fourth Ring Road, a beltway that defines the central part of the city, two- and three-bedroom apartments are offered for $800,000 in compounds named Central Park and Riverside.

"These are like New York prices, but we are Chinese. We don't have that kind of money," said Zhang Huizhan, a 55-year-old businessman who owns a Chinese furniture factory. He has been looking for five years for an apartment for him and his wife within their budget of $150,000.

The average salary in Beijing is less than $6,000 a year.

Louis Kuijs, a senior economist at the World Bank in Beijing, said a lack of government supervision of the real estate industry tempted developers to build o­nly for the luxury market and to ignore the mass market.

"If you think demand is endless for anything you build and you have just 200 square meters of land, you will build high-end apartments to make the highest profit," Kuijs said.

To its credit, the government recognized in 2007 that the real estate market was headed toward a bubble, economists say. In an attempt to make real estate more affordable, restrictions were introduced o­n ownership of second homes and o­n foreign home buyers. But the measures came too late, accelerating the crash of an already weakening market.

The Beijing Municipal Bureau of Statistics reported this month that housing sales in the city dropped 40% last year. Chinese economists have predicted that housing prices will drop 15% to 20% in Beijing this year. Shanghai has experienced a similar decline.

"You can look at this perhaps as a healthy correction in the market," Kuijs said.

In the longer term, he said, "China's urbanization and overall development is going to lead to a very large additional demand for housing in the city."

Before that happens, the situation could get worse. Most of the real estate has been financed by Chinese banks, which have avoided writing down the loans. Eventually, they will be forced to, and that probably will have a ripple effect throughout the economy.

"At the end, somebody is going to have to pay the piper," real estate expert Rodman said.

Barbara.Demick, Nicole Liu and Eliot Gao of The Times' Beijing Bureau contributed to this report.



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