Andrew Murstein has an enviable business problem: He can't find any investment quite as good as the one his grandfather spotted more than 70 years ago.
Nothing, it seems, compares to the right to operate a New York taxicab.
"We're constantly trying to look for other niches and asset classes," Mr. Murstein said in an interview in his corner office high above midtown Manhattan. "We've never found an equal."
Mr. Murstein is president of Medallion Financial Corp., a publicly listed taxi-lending specialist with $1.2-billion in assets under management. Its roots go back to the 1930s, when New York first began issuing taxi medallions – metal plates fastened to the hoods of cabs – to put an end to the chaotic free-for-all on the city's streets.
Back then, they sold for $10 apiece. Today, they cost more than $1-million.
Medallions appear to be the stuff of investing fantasy. The supply has barely budged. The loans to buy them don't go sour. And their price has increased 2,200 per cent since 1980, far outpacing the Dow Jones Industrial Average (1,750 per cent) and gold (150 per cent).
Those gains have made some lucky taxi drivers millionaires and turned fleet owners into multimillionaires. Rising prices have spawned a specialized industry, complete with its own financiers, brokers, leasing agents, lawyers and lobbyists.
Lately, this strange little market has been on a tear. In April, the price of a medallion sold to an individual buyer crossed $1-million for the first time (medallions sold to corporations broke through that barrier in 2011). In the past 12 months, prices for individual medallions have soared more than 40 per cent.
The upward spiral comes even as technology – through taxi-hailing apps, for instance – promises to change the business in ways that are still unclear.
"It's almost like we're in a bubble," said Simon Greenbaum, a one-time driver turned taxi broker in Manhattan. "But we've been in it for 10 to 15 years, so who's to say it's a bubble?"
Several forces are behind the most recent surge in prices. The city enacted a rare hike in taxi fares last year, which makes medallions more valuable. A relatively robust local economy – especially in Manhattan, the heart of taxi territory – also helps. And interest rates are wallowing near all-time lows, providing an incentive to borrow and invest in higher-returning assets.
But the underpinning of the market is a tightly restricted supply of medallions paired with a large number of people – mostly immigrants – willing to do the difficult work of driving a taxi. "When the wheels turn, everyone makes money," said Nat Goldbetter, a longtime medallion broker in Queens.
Not everyone is a fan of the system, however. For every driver who manages to scrape together the funds to buy a medallion, there are many more who simply lease medallions from the owners, which could be a garage or a company with hundreds of taxis.
Drivers "become the sharecroppers," said Edward Rogoff, a management professor at the City University of New York who has studied the industry. "This is a way to push the risk on to the driver and away from the large company that owns the medallion."
Augustus Smyth, 43, is originally from Jamaica and has driven a cab for eight years. On a good day, he takes home $150 after paying for gas and the leasing fee of about $115. He drives six days a week and appreciates the independent nature of the work. "The average driver is not going to be able to buy a medallion," he said. But "this is not a bad job if you have the energy to do it."
Very few cities replicate New York's highly regulated medallion system and its compact metropolitan geography, said Mr. Murstein. (Medallion Financial is listed on the Nasdaq Stock Market, where its ticker symbol is TAXI.) His firm also makes medallion loans in Boston, Chicago and Philadelphia, and even explored expanding into Toronto a couple of years ago.
A look at Toronto's taxi rules revealed why that didn't pan out. Toronto has a two-tier system of taxi licences. One type of licence is bought and sold at market value, much like in New York. But the city stopped issuing such licences in 1999. And when the owner dies, such licences must be sold to another licensed driver, capping their value.
That such licences or medallions would have any value at all was the fundamental insight of Mr. Murstein's grandfather, an immigrant from Eastern Europe who bought a New York taxi medallion back when the system began in 1937. He drove a cab, kept buying medallions, and eventually opened his own garage.
For decades, there were only 11,787 medallions in the city. Since the 1990s, the city has held periodic auctions, bringing today's total to 13,237. To raise revenue, Mayor Michael Bloomberg has proposed selling another 2,000, but a lawsuit has put the plan on hold.
The market for taxi medallions has suffered reverses at times of economic stress (though not, surprisingly, during the most recent recession). Its last serious setback occurred after the Sept. 11, 2001 attacks, when prices dropped more than 15 per cent. Mr. Murstein said that as New York reeled in the wake of the tragedy, his lenders – large regional banks – refused to renew the firm's credit lines, convinced that medallions were no longer a good bet. The firm scrambled to replace the funding and later created its own consumer bank to finance its loan business.
In Mr. Murstein's experience, taxi drivers are an excellent credit risk. He said the firm had never had a loss on a medallion loan – ever. In the rare cases when a borrower falls behind on payments, the company sends somebody in the middle of the night to remove the medallion from the hood of the taxi (an operation known in the business as "popping the tin"). That means it's no longer legal to operate as a taxi. At that point, the borrower almost always pays up. If not, the company auctions off the medallion, fetching a price higher than the value of the loan.
"A diamond could be hidden in a jar," Mr. Murstein said. But taxis? "They are where people are. It's easy to find them."
For those who purchase medallions, it can prove hard to part with them. "It's like a drug when you buy your own medallion," said Mr. Greenbaum. "The work is hard but at least it's steady. You know if you work, you're going to cover your own expenses."
Mr. Greenbaum long ago paid back the loan he took out to buy his medallion for $35,000, back in the 1970s. Now, at 63, he leases it out to other drivers. He's wondering whether to sell it to finance his retirement. One big worry: finding an investment that would offer a similar return. "It's like any market," he said. "While it is going up, you don't want to sell."