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Real Estate Espresso

Author: Victor Menasce

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Your morning shot of what's new in the world of real estate investing. Daily real estate investment outlook from investor, syndicator, developer and author Victor J. Menasce, so that you can compress timeframes as a real estate investor or developer. Weekday shows are 5 minutes of high energy, high impact awesomeness. The weekend edition consists of interviews with notable guests including Robert Kiyosaki, Robert Helms, Peter Schiff, Chris Martenson, Mark Victor Hansen, George Ross, Ed Griffin, Dr. Doug Duncan, and many more.
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The Fed Can't Stop It

The Fed Can't Stop It

2021-02-2606:05

On today’s show we’re looking at the trajectory of interest rates for the coming months. This is widely covered in the mainstream news. If we only repeated what you could read in the Wall Street Journal, or on CNBC then this show would not be adding any value. So we’re going to dig a bit deeper into the analysis of the Fed Chairman’s remarks to the Senate Finance Committee earlier this week to make sense of what it means for real estate investors. There were two major items of business at the Senate Finance Committee meeting this time around. #1 was to get the economic update and statement from the federal reserve chairman Jerome Powell. Second was to confirm Janet Yellen as Treasury Secretary. Janet Yellen was chair of the Fed before the appointment of Jerome Powell. So she is interacting with her counterpart in the Fed from the perspective of someone who used to occupy that chair. When Janet Yellen was chair of the fed, she was beating the drum about the need to print money to keep the economy healthy. Now as Treasury Secretary, she’s beating that drum even louder even before being formally confirmed in the position. Even before the Senate Finance Committee meeting, we have been seeing a lot of market activity. The low interest rate environment is driving demand for refinancing of debt into lower cost debt. I can tell you from conversations I’m having with lenders that their origination desks are over-flowing with demand for refinances. This is true a traditional banks, commercial lenders, and even the loan insurers like Fannie Mae, Freddie Mac and HUD. The department of housing and urban development divides the nation into regions and services loan requests out of their regional offices. I’m hearing that the HUD office in Fort Worth Texas has such a backlog that they will not even assign an analyst to look at a file for three weeks after receipt of an application. The delay in the San Francisco office is now more than 6 weeks before they will even look at a new file. Achieving inflation that averages 2 percent over time helps ensure that longer-term inflation expectations remain well anchored at the FOMC's longer-run 2 percent objective. Hence, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time. So this means that they’re going to hold interest rates low even once inflation is shown to be above the 2% target for a period of time. They reiterated the intention to continue the current stimulus until late into 2021 and likely into 2022. Fed Chairman Jerome Powell said strong demand is driving Treasury bill yields close to zero. “It’s a lot of demand for short-term,” said Powell. “There’s a lot of liquidity, and people want to store it” in Treasury bills. Powell said Treasury instruments are the concern of the Treasury Department, and the Fed is more concerned about keeping its target fed funds rate in its targeted range of zero to 0.25%. So he recognized where the extra cash is ending up, and basically said that it’s Janet Yellen’s problem to issue the treasury notes. Paradoxically, the yield on the longer term treasury notes has been rising in recent weeks. It’s an indication that the sentiment of inflation remaining low is not being widely accepted by the market. The dollar is losing value against major currencies and the yield for US Treasuries is going up. The reason we focus on the 10 year treasury is that most permanent financing interest rates are based on a rate lock that is tied to the yield on the 10 year treasury. The benchmark Treasury note jumped above 1.50% on Thursday afternoon after investors showed weak demand for $62 billion of 7-year notes. The 10-year note yield climbed 15 basis points to 1.54%.
On today’s show we’re talking about how to buy a business. We are in the middle of negotiating the purchase of a business. The seller’s accountant proposed that rather than purchase the assets of the business we should consider buying the shares of the company instead. So on today’s show we’re going to do a deeper dive on the merits of a share purchase versus an asset purchase. When you buy a business in its entirety, you’re buying everything within the business, all of its assets and all of its liabilities. This has some risk to the buyer because liabilities come in two different forms. There are actual known liabilities, and then there are contingent liabilities that can be hiding beneath the surface. I’ll give you a simple example to explain the difference between the two. Let’s say that you borrow $100 from the bank. Then you owe the bank $100 and that gets listed on the company’s balance sheet as a liability. But let’s say that you signed a contract and that contract has a clause which says you’ll defend the other party in the contract if they get sued for whatever reason. In legal terms, this is called an indemnity, in which you agree to indemnify or hold harmless the other party against a risk. For example it’s common to have an indemnity for the employees of a business in case they get sued in the course of doing their job. The employer would agree to defend the employee against a law suit that was brought against an employee if that suit was connected with the work they were doing for the company. Now let’s say that a so far, there are no lawsuits against the company, or its employees. Let’s say that a year later, one of the employees gets slapped with a lawsuit connected with their work for the company. That potential for a lawsuit would be considered a contingent liability. But in truth, not only is it a contingent liability, it’s also an unknown liability. Another form of contingent liability is a future tax liability. The tax owing is a function of a number of complex factors. Let’s say that the company has been claiming depreciation and that has the effect of lowering the cost basis of some of the inventory or equipment in the business. Let’s say that you then decide to sell that equipment and because it might have been depreciated for tax purposes faster than it actually depreciated in the open market, you now are facing a capital gain on the sale of a piece of used equipment. It could be a piece of equipment or a building. It doesn’t matter. The principle is the same. So when you buy a company bu purchasing the shares of the company, you’re buying all of the assets of the company and all of the liabilities. In practice, it’s almost impossible to know the liabilities of the company. When you purchase the assets of a business alone, you still have enough to continue the operation of the business. It’s a bit like saying I want to buy a deck of cards, but I only want hearts and spades because they’re an asset. You can keep the diamonds and clubs because they’re a liability. Oh and you can keep the joker as well because I don’t know what that is. I can operate the business just fine with just the hearts and spades. A share sale looks so simple on paper. An asset purchase may seem more complex at first. You need to dissect the business and list the parts of the business you want to buy. You will need an asset purchase agreement. If the business you’re buying is going to have some intellectual property, then you may want to govern that with an intellectual property agreement. If the seller is going to provide services to the buyer for a period of time, then you’ll need a transitional services agreement. The added cost and complexity of dissecting the business now is worth the benefit of knowing that the business cannot contain any landmines in the future.
Abuse of the Word

Abuse of the Word

2021-02-2405:14

On today’s show, we’re going to dissect a word where you probably think you understand the meaning. That word is used often. It makes headlines. In fact it’s a highly abused word, especially in the news. That word is “Economy”. You’ve probably attended a talk on the state of the economy. I’m going to emphasize, “the economy” as if there is only one economy. Some economic indicators you’ve heard are things like gross domestic product, unemployment, workforce participation, consumer price index. All of these metrics are used to describe the state of the economy. Let’s run a little retrospective on the past 12 months. The past year has been among the most tumultuous in economic terms in recent memory. In the United States the economy experienced a loss of 22.36M jobs over an 8 week period from February to April. That amounts to 14.7% of the workforce lost their jobs. But these job losses were not uniform at all. The worst states were Michigan, Vermont, Nevada and Hawaii all having job losses exceeding 20% in a matter of weeks. Michigan was the worst at 23.8% of all jobs lost. At the other end of the spectrum Oklahoma, Wyoming, Nebraska and the District of Columbia all had job losses less than 10%. Oklahoma lost the feast jobs at 8.5% of jobs lost from February to the trough in April. Let’s look at the recovery from April to December. How many of the lost jobs were recovered? Well the results vary widely. Some states like New Mexico only recovered 31% of the lost jobs during the pandemic. Texas recovered 64.4% of the lost jobs and Idaho and Utah recovered 102 and 103.6% of the lost jobs respectively. In Utah and Idaho, the economic downturn has been erase like it never happened. So for the year ending December 31, 2020 Hawaii is down 13.8% for the year, and Utah and Idaho are up 0.6% for the year. There is no one single economy. For those who have lost their jobs, and exhausted their unemployment benefits, they’ve burned through their savings, maxed out their credit cards and probably dipped into their retirement savings in order to make ends meet. For them, the current conditions are among the hardest they’ve experienced in their life. For the vast majority, those who have jobs, who kept their jobs, they kept their incom e. They didn’t have much to spend it on. The personal savings rate across the US went from an average of 7% before the pandemic to a peak of 35% during the middle of the pandemic before settling out to an average savings rate of 18% for the year. Not surprisingly, with all that extra cash in the system, few places to spend it, credit card debt reduced by about 12% across the nation. You see there is not one single economy. There are a number of macro economic forces that are at play. They will disrupt the current situation. Imagine taking a chess board, throwing all the pieces up in the air and seeing where they land. Some of the chess pieces will land in a vulnerable spot. Others will land in a winning spot. That’s called luck. If we look to the random nature of that jump ball situation, we will be either winners or losers. But all of that neglects that we have agency, we have the power to change our own personal direction to adapt to the market conditions as they are on the ground. That agency means we can make conscious decisions to play defence and wait it out, or play offence and capitalize on the market conditions. So what does that mean? Business is nothing more than a sport of solving problems that people are willing to spend money to solve. If you can be seen in the market as a credible solution to a given problem, you can do good business. It’s not the market’s job to come to you. It’s your job to solve a business problem that people are willing to pay money to have solved. When you look at the world through that lens, the economy is irrelevant. In fact, there is no economy.
On today’s show we’re talking about the link between online and offline and the world of real estate in particular. When I look to see where real estate is going, I look to online innovators. That seems counter-intuitive. After all, we live in an offline world. When we think of the online world, your first thoughts might go to Facebook, or Instagram, or TikTok or ClubHouse. How could those technologies possibly disrupt the world of real estate? It makes no sense. In my view, the disruption to the physical world is going to come from the online world. The catalyst for disruption in real estate won’t come from a new building technology per se. Although there are a number of innovations in technology that are changing the way buildings are designed and constructed. I look to those companies that are upending business using technology. We’re talking about how Travis Kalanick, the founder of Uber, and most recently of Ghost Kitchen startup called Cloud Kitchens. This was merely an idea a year ago. Today, some top chefs in NYC have abandoned their expensive real estate and are serving the take-out market out of commercial kitchens located in less expensive industrial space, rather than the prime location kitchen with the fancy ground floor restaurant dining room attached. I attend a daily meeting with Glenn Sanford, CEO of EXP Realty. You might be wondering what I’m doing hanging out with the CEO of a real estate brokerage. I’m not a real estate agent and don’t want to be. Apart from the word of real estate, there’s no real connection. What sets Glenn apart from others in the space is that he speaks like a software designer. He uses language, terms and metaphors that came out of the world of software development. It’s not an act. He simply exudes it. As we’ve talked about recently, When I look at the systems he has used to build his business, there’s no doubt in my mind that he is thinking scalability, the kind of scalability that can only be matched in an online world. His company has experienced the kind of growth that only a software company can achieve. It would have been near impossible in a bricks and mortar business. It used to be the case that an impressive office with a sprawling lobby and layers of assistants made an impressive first impression for a prospective client, or an aspiring employment candidate. Today, that’s a distant memory. I’ve been using zoom for meetings for several years now. But my use of zoom has expanded dramatically. Even in the past week, I have spent no less than 6 hours a day in zoom meetings on some days. In December of 2019, zoom had about 10 million daily active participants. By March this had grown to 200 million and by April, over 300 million. How did zoom scale their enterprise by a factor of 30 in the span of months? The ease of use of zoom and the excellent performance made this possible. It turns out that Zoom uses Amazon’s web services data center. They’re one of the largest suppliers of third party data services. Amazon’s server farm was easily able to scale the service offering to meet the needs of zoom’s growth. None of these shifts individually represent a major change. But cumulatively, the compound effect of all these changes on the design of real estate is significant. I don’t need to dedicate as much wall space for book cases anymore. How many people used to have a video studio in their homes 20 years ago? Hardly any. Today, I know of dozens. If I was designing a home for this coming decade, I would be designing it differently compared with only a few years ago. Back in the day, homes and apartments used to have a built -in cabinet for the delivery of fresh milk. Today, nobody would even think of that. But a secure e-commerce locker makes a lot of sense. We know that technology is changing rapidly. We have no idea what building technologies will look like in 30 years from now.
On today’s show we’re talking about what happens when your local bureaucrats make a mistake. I’ve encountered the odd time when a plans examiner makes a mistake. These are relatively rare, but in retrospect they happen far more often than I care to think. We’ve experienced these problems from time to time. But I also keep hearing about problems like this. In fact, I’d go so far as to say this happens with alarming regularity. In the case of one of my consulting clients, the fire Marshall stamped a set of drawings and returned them as having been approved when in fact, the plans had never been examined at all. The property owner was under the impression that they had fire Marshall approval. About a month later, the building department admitted that the fire Marshall had indeed made a mistake and stamped the wrong drawings. These plans had never been looked at. Not only that, the fire marshall demanded a number of changes would be required to the plans in order to comply with the building code. Upon review of the requested changes, in the opinion of the architect, the fire Marshall had erred in their interpretation of the building code and that the installation of a complete fire suppression system was not required. This second story involves a problem with one of our projects currently under construction. The plumbing connection to the city was approved. However, the plans examiner who was supposed to review the plumbing design retired in the middle of the permit approval. The plumbing drawing was given a rubber stamp but never actually reviewed. The chosen water meter was inappropriate for the size of project and would not have given an accurate reading. Naturally the plans department was very apologetic. It was a mistake that never should have happened. Nevertheless, the problem needed to be fixed. As a result, the metering had to be redesigned with an added onsite cost of $18,000. The problem was only discovered in the field by the building inspector during the plumbing inspection. In another case, we had a plans examiner on a project who had trouble interpreting the rules for a property situated on the corner. The property was fronting on one street and had its side yard on the second street. This is normal on most corner lots. But the plans examiner was having a hard time figuring out where the front of the property was located. So they applied the rules for the front of the building at both the front and the side. They argued that the property essentially had two fronts, and therefore had to comply with the front yard setbacks for both. The plans examiner argued that the design did not comply with the zoning, even though the zoning department had approved the design. In another case, we had a building nearing completion and the on site building inspector argued that the plans examiner who approved the design did not allow sufficient sprinkler capacity on the top floor of the building. The inspector demanded that we run a 5” sprinkler pipe up the exterior of the building to supply additional water pressure to the top floor. Now, for those of you who have been following the news lately, you’ll know that water pipes should not be allowed to freeze. Running a sprinkler pipe up the exterior of a building means that no water will reach the top floor for about 4-5 months of the year. As you’re undertaking your projects, expect some surprises from your local building officials.
Mitzi Perdue Part 2

Mitzi Perdue Part 2

2021-02-2134:01

On today's show, we're back with Mitzi Perdue. Mitzi is known for being part of the founding family of Sheraton Hotels. Her husband was Frank Perdue of Perdue Farms. Today, Mitzi has dedicated her energy to combatting human trafficking. On today's show you will hear about how some leading technology could be effective in bringing an end to modern day human slavery. To learn more, connect with Mitzi at winthisfight.org.
Henry Daas

Henry Daas

2021-02-2020:41

Henry Daas is a serial entrepreneur and business coach from the NY area. On today's show we're talking about managing risk. To learn more, feel free to connect with Henry at henrydaas.com. 
The Roaring 20's

The Roaring 20's

2021-02-1906:00

During the period from 1914-1918, the first world war gripped Europe. It was the war to end all wars. Wars are inflationary. The first world war was no exception. The US entered the War in 1917. The consumer price index was first developed in 1919, to track to the big inflation of the previous several years, an artifact of wartime, under which the prices of ordinary things available in 1913 had more than doubled. In the 1920s, prices settled a little, to about 170% of the pre-Great War 1913 level. The permanent erosion of the dollar, the reality of which first became clear in the 1920s, forced savers to find some instrument that would pay them back in the old way, in money that held its value. The choice was made to capture, via stocks, the forthcoming profits of businesses. During the 1920s, the booming stock market roped in millions of new investors, many of whom bought stock on margin. If a new offering came into the market, investors would pile into the stock causing it to shoot up in value. At the height of the 1920’s, there were so many initial public offerings that some of the companies didn’t even have an operating business underneath them. Nevertheless, investors piled in and their newfound paper wealth was cause for celebration. Those company founders who initiated the offering got to cash in on the wave of capital being thrown at the company. Of course we all know from the history books how this turned out. On October 29, 1929 it all came crashing down. At the time, only about 1/3 of the banks were part of the Federal Reserve system. Thousands of banks that were not part of the Fed became insolvent. Investors who had margin accounts had to cough up the cash to cover their margin calls. Most didn’t have the liquidity to do so. Banks and brokerage houses called in loans on a massive scale. We know that investing in companies that don’t have any income, nor any underlying operations is craziness. We know that high rates of leverage to purchase items that have high price volatility makes no sense. So here we are in the year 2021. There have been a number of high pinitial public offerings this past year, despite the pandemic. Some of these IPO’s have been different than the traditional IPO. A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an IPO for the purpose of acquiring an existing company. In 2020, as of the beginning of August, more than 50 SPACs have been formed in the U.S. which have raised some $21.5 billion. So investors are being told to put up their cash to invest in a business that will complete acquisitions of come unknown companies in the future. You won’t know if the underlying company is a good buy at the time you make the investment. Just trust that the folks making these acquisitions know what they’re doing. The securities and exchange commission created the securities act of 1933 for the purpose of protecting the investing public. There are stricter rules around how offerings can be made than existed in 1929. At the start of the 1920’s there was a global pandemic that killed more people than the preceding war. Am I the only one who is seeing a parallel between the environment today versus the 1920’s? I realize that a blank check company isn’t exactly the same thing as a shell company with no business, but it sure looks the same from a distance. History may not repeat itself exactly, but perhaps it rhymes.
Today's show is a reading of an article written by Simon Black on his Sovereign Man newsletter. It was so well written that I just had to share it with you. To learn more about Simon, visit sovereignman.com. 
AMA - No New Gas Pipes

AMA - No New Gas Pipes

2021-02-1705:20

This question comes from Meg in New Canaan NY. Hi Victor Hope all is well with you and your family.  I have a question with regard to sustainable building practices in real estate investment projects. We have been designing our homes using more sustainable building practices for the past several years. Here in NY, the requirements for clean energy are set to get even stricter and, on top of that, we have a moratorium on new natural gas lines in our area that I don’t envision the state lifting in full. For residential, natural gas is not supplied  to a development unless there is already gas on site and upgrades to the existing meter are not allowed. For commercial projects it is similar although I don’t know all the specifics. I was wondering how you are handling the call for clean energy, energy reduction, and sustainability in your projects.  As well, are you seeing any appreciation from the buyers/renters/investors for your efforts to provide cleaner energy and more sustainable, energy efficient buildings?  Are people willing to pay more rent in these types of projects or willing to purchase for more of a premium?  Do you have more or less investors interested in these types of projects? Thank you for your time.   I always appreciate your perspective. Meg, This is a great question. There are two ways to answer this question. Don’t develop in NY State. There are so many easier places to develop with less overhead, less bureaucracy, lower taxes, stronger demand, better profit margins, and on and on. But that’s not a very good answer to your question. 2) If natural gas is no longer permitted for new installations, you could comply by putting in an electric system and simply pushing the environmental problem onto the electric utility. The old resistive systems are very inefficient and among the most costly to operate. Still, NY has access to relatively cheap power. New York State gets 44% of its electricity from burning natural gas. 30% comes from nuclear, and tt buys 18% of its electricity from the James Bay hydroelectric project in Northern Quebec and Labrador. This environmentally friendly alternative to burning fossil fuels flooded 4,500 square miles of forest causing incalculable ecological damage to this ancient boreal forest. But since there were only about 5,000 native indigenous people living in the area, the impact was deemed acceptable and the project got pushed through and built with no environmental assessment. NY state still has four coal fired electric power plants in operation. Natural gas is among the cleanest burning fuels in existence. It’s a bit hypocritical that they’re converting coal fired plants to natural gas at the same time as they’re telling homeowners they can’t use it. We have not found a meaningful metric that would make the benefit of a low emissions system attractive to tenants. We have found that achieving energy efficiency requires a number of changes to the design. In fact, it has more to do with choice of materials than anything else. This includes more expensive, more highly insulated windows. Naturally, each of these choices increases the cost. Closed cell foam insulation is more effective than other forms of insulation. But again, it costs more. By far the most effective and cost effect method of providing heat to a property is by using a geothermal system. This is like a heat pump, except that the heat source is the thermal mass of the ground rather than trying to extract heat from the winter air that is potentially very cold. These systems require a fair bit of land or a deep well in order to gain access to a meaningful heat source.
On today’s show we are taking a closer look at the macro economy. A trifecta of forces are amplifying the trade deficit which will ultimately cause price inflation in the West. A critical shortage of containers is driving up shipping costs and delays for goods purchased from China. The pandemic and uneven global economic recovery has led to this problem cropping up in Asia, although other parts of the world have also been hit. Many desperate companies wait weeks for containers and pay premium rates to get them, causing shipping costs to skyrocket. This affects everyone who needs to ship goods from China, but particularly e-commerce companies and consumers, who may bear the brunt of higher costs. Containers from Asia would normally be returned full with exports from the US or Canada or Europe. But there is such a shortage of containers that the owners of these containers are not willing to keep them in the west for even a few days. These containers are being turned around empty. We already are facing a massive trade deficit with China that is now being amplified by the container shortage. But it begs the question, if the world had enough containers in the past, why is there a shortage now? Where did all the containers go? Many of the containers are stranded in the west. Oddly enough, I’ve seen prices for used shipping containers in Canada drop to about $1,400. They still exist, but they are in the wrong place and somehow they don’t know how to get them back to Asia. Manufacturing of new containers slowed during the pandemic, which has further amplified the problem. So shipping costs have tripled in a very short time. We have oil prices now up at nearly $60 per barrel. US oil production is down by 1/3 compared with this time last year, making the US far more dependent on imports of expensive foreign oil. This will widen the already large trade deficit even further. I predict that oil prices are heading even higher this year. $80 is easily within sight and $90-$100 a barrel is not out of the question. The rising price of oil will widen the trade deficit once again. There can only be one outcome from such a large trade deficit, and that is a fall in the value of the US dollar against the other currencies including the Canadian dollar, the Euro and the Japanese Yen. When that happens, the direct impact to consumers is an increase in price for all these imported goods. I’m not talking about one or two percentage points. I’m expecting a 10-15% drop in the value of the dollar compared with the major trading currencies of the US. Eventually the supply chain returns to normal and the extra inventory is going to be reduced. When it’s time to reduce inventory, the orders drop to zero for a period of time. This is the natural cyclical nature of many supply chains. In the meantime, the government is busy claiming victory on the economic recovery that has been artificially created through the printing of Monopoly money. As soon as the stimulus stops, so too does the illusion. The economy is like a hardcore drug addict, completely dependent on the next hit. Expect higher prices for just about everything this year. What a mess.
Digital Surveillance

Digital Surveillance

2021-02-1505:18

On today’s show we’re talking about how easy it is to purchase and configure a remote security camera system that can be monitored from anywhere in the world for the cost of not much more than an internet connection and a couple of hundred dollars per camera. Security is one of those expenses that will rarely make you money. It can only cost you money, and on the rare occasion, save you from experiencing financial loss. The most expensive form of security involves having a live person on site, either on a continual, or rotating basis. The problem with live patrols is that you can’t be everywhere all the time. You never know when an incident will occur. Traditionally, security systems have been proprietary and costly. But the technology has improved significantly and it’s now possible to design systems that deliver campus wide coverage for a reasonable cost. The traditional criticism of security cameras is that they don’t capture enough detail to clearly identify the people involved in an incident, especially in low light conditions. The technology has advanced in several ways that have made security cameras a compelling choice for security. One of the other criticisms is that crooks will intentionally disable cameras if they’re about to commit a crime. But here too, there are advances in technology that can make these tactics easier to catch. Cameras are offering much higher resolution these days. This is critical when it comes to zeroing in on details in an image. Today, the images are incredibly clear. More importantly, the software that controls the cameras is becoming smarter. Some software systems will use motion detection to zoom into the area of an image that is changing from one frame to the next. The static portions of an image rarely contain the relevant information about a crime in progress. The software can trigger alarms based on a variety of events. The newest systems can detect the loss of signal at a camera and signal an alarm based on this. If you design your system so that a given area is covered by more than one camera, then it becomes difficult for a crook to disable a camera without being detected. The latest software systems incorporate license plate recognition that is as good as the systems used by law enforcement. When a crime is committed, unless you happened to be observing the cameras at that instant in time, you don’t know what video footage to review. The longer time has passed from the time of the crime to the notification, the harder and more time consuming it is to review the camera footage to deduce what happened. Motion detection allows all those times when nothing is happening, which is the vast majority of the time to virtually disappear from your review process. The amount of time saved by eliminating the dead time is huge. Many real estate investors live at a distance from their properties. These systems can remotely monitored over the internet. They have apps for both iPhone and Android that make remote surveillance easy. We sometimes encounter situations involving employees that require investigation. It might be an employee claiming overtime when in fact they were not on site. It might be a harassment claim by an employee, or perhaps a resident. These camera systems also record audio. If an assertion is made about an employee or a resident, the audio recording can often resolve the dispute. Finally, some residents make false claims about a property manager. If there is a recording of everything that happens in the leasing office, the audio and video evidence can often be useful in arguing a claim in front of the landlord tenant board.
Mitzi Perdue

Mitzi Perdue

2021-02-1426:13

I’d like to introduce Mitzi Perdue (Perdue Chicken fame). Her husband was Frank Perdue. We start with the story of her romance with Frank, fitting for the Valentine's Day edition.  Mitzi’s maiden name was Henderson and her father was the founder of Sheraton Hotels. I’ve spent considerable time getting to know Mitzi in recent months. So many powerful lessons in the creation and growth of the Sheraton brand. Mitzi is a member of the NSA. She’s a Methodist. She’s a philanthropist. She’s a teacher of life skills. The Henderson family is a fifth-generation family business. She’s a steward of priceless artifacts with the singular purpose of stopping human trafficking. Today's episode is filled with powerful lessons.  Enjoy...
Denver Colorado based NineDotArts.com is a curator of art for installations of all kinds. Our guest Martha Weidmann is the CEO of the company. They access a network of over 10,000 artists to design the art experience for all kinds of projects ranging from hotels, multi-family residential properties, and offices to large-scale, mixed use developments and interactive public art installations. On today's show we're talking about how thoughtful art selection can create a unique user experience that bare walls cannot by themselves. To learn more, reach out to Martha at NineDotArts.com
On today’s show we’re talking about migration. Migration happens within the country for a variety of reasons. People have been slowly leaving the rust belt in favor of the sun belt. The trend has been alive and well for a couple of decades now. Today we’re going to take a deep look at Florida and what migration can tell us about real estate demand. There are a lot of NY accents in the state of Florida and former New Yorkers make up 7.5% of Florida residents, more than any other state. Florida has a very low proportion of native born residents, making up only 35% of the population. About 22.3% of Florida’s residents were born outside the US.  This makes sense. Florida has long been a favored destination for people coming from Latin America. Spanish is widely spoken and I’ve had more than one Uber driver who only spoke Spanish and no English. Over the past decade, Florida has averaged a net influx of population totaling 297,000 people a year. 2016 was a banner year for migration with nearly 2% population growth in a single year. That year 408,000 people moved into the state. It’s projected that migration is going to average 305,000 a year over the next five years, a little above the average for the past decade. That amounts to 835 people a day moving into the state. That translates into significant demand for new housing. We’re talking about adding a city the equivalent size of Orlando each year. That’s a big number. In contrast, NY State lost 123,000 people in the past year. Illinois experienced a loss of 79,000 residents in the past year. The fastest losing state is California which lost nearly 200,000 to migration last year. Michigan lost 18,000 in the same time period. So where are people moving in Florida? Where are they going? The top growth market in Florida over the past decade has been the southwest cities of Fort Myers and Cape Coral. Jacksonville, Miami, and Port St. Lucie round out the top 5 cities in terms of growth. The two largest home builders in Florida are Lennar and DR Horton. They consistently lead with the largest number of new building permits across all 5 of the major regions in the state. In the realm of multi-family, South Florida lead the way with 12,000 units of new supply added to the market. The largest growth markets were Fort Lauderdale with 2,634 units of new capacity added to the market, and Downtown Miami and South Beach with 2,000 units and South Miami / Coral Gables with 1,700 units. The greater Miami area picked up the lion’s share of the new growth. But as always, real estate is hyper local. Northeast Miami has earned a reputation of being a bit of a rough area. NE Miami experienced a net absorption loss of 683 units at the same time that south Miami absorbed 762 units. Some investors, particularly out of state investors tend to get into trouble by simply looking at the macro migration numbers. I’ve noticed that the number one factor influencing local population growth is the quality of air service. The further you get from a major airport in Florida, the lower the property values, and the lower the percentage of population growth. You have two major airports along the Gulf Coast. You have Tampa, and Fort Myers. Property values are at their lowest in Englewood which is about the midway point between the two airports. There are still waterfront properties In Englewood and Venice that can be purchased a surprisingly affordable prices. But with 800 people a day moving into the state, low cost of borrowing, low cost of living compared with the major NE cities, there’s continual upward pressure on prices.
The discussion of housing affordability is at the forefront of many community meetings. Three things stand in the way of affordable housing. 1) High cost of land 2) High cost of construction 3) Cost of servicing the land with the infrastructure Unless you can dramatically reduce the cost of these three items, the cost of housing will continue to be high for those who are on fixed incomes and those who are lower on the income ladder. It doesn’t matter who builds the house. It’s not the fault of the builder. If materials and labor dictate that new construction costs $130 per SF in many areas of the US, and if land contributes another $50 per SF of finished floor area, someone buying a 1500 SF house is going to need an income of $36,000 minimum in order to afford such a really small house. If a household is close to that income level, housing affordability is going to be a challenge. Two people in a household earning minimum wage will roughly afford to live in a mobile home and not much else. At $10 an hour, you’re looking at $18,000 a year in income per person. Very hard to make ends meet at such a low income level. We’re not talking about a teenager living at home, working at McDonalds part-time for a bit of pocket change. When you have independent adults in minimum wage jobs, they will quickly become the working poor. On today’s show we’re taking a look a mobile home parks. Today about 10% of US households live in mobile home parks. They represent about 20 million home sites. Most of these parks started out as mom and pop owned projects. Today, they’re a corporate affair with big business and family offices investing in them. Mobile homes provide the largest inventory of unsubsidized, affordable housing in the nation, but many began as RV parks in the 1960s and 1970s and are now old, with rundown water and electric systems and trailers that have been long past “mobile” for decades. As a park owner, the profit is in the lot rent, not the structures. Their prevalence varies widely by state. Some states like Colorado have a lot of them. More than 100,000 people live in more than 900 parks across Colorado. Many started as RV parks and then were converted to mobile home parks. But the infrastructure requirements for RV’s and mobile homes are different. Rv’s require 30A and 50A electrical service. But the building code treats a mobile home the same as a detached home and requires 200A service. The reality is that a mobile home will draw almost the same amount of electricity as an RV. The biggest demand for electricity comes from heating or air conditioning. Lights and kitchen appliances are insignificant consumers of energy by comparison. Nevertheless you will need to completely redesign the electrical system for a park in order to handle mobile homes if the park was not designed for it. The next major areas that can be costly to upgrade for the long term are the water and sewer infrastructure. Most of these parks are outside the dense urban environment and rely on well water and septic systems rather than municipal services. So why are these types of assets attractive to institutional investors? The largest cost of operating a park like this is the staff. If the park is small at say 50 units, there is not enough income from the park to pay for the staff required to operate it. These only work as owner operated parks. The cap rates for a well run, large sized park can be easily 14-15%, provided they are purchased at a good price. The specialists in operating these parks have developed strong systems for owning and operating them.
On today’s show we’re going to be talking about a proverb that you’ve probably heard you parents, or maybe your grandparents say. There are several different versions of it. But it goes something like this. They will only help you if you don’t need it. Strangely, banks have more cash on hand than ever. Consumers have been using stimulus checks to pay down credit card balances. The new loans from the SBA disappear from bank balance sheets once they’re forgiven. The residential mortgages that have been written in the past year, a record year for originations and refinance activity are usually securitized and sold into the secondary bond market. Businesses are not borrowing to expand. They’re accessing lines of credit to hang on, but they’re not really investing. As many as 8% of homeowners in the United States have accessed some form of forbearance agreement with their lender on their residential property. A forbearance agreement is when the lender says, OK. I can see you’re having temporary financial trouble. Let’s postpone a portion of your loan payments. Maybe let’s have you pay only the interest payment, you can defer the principal portion of the loan payment for six months and we’ll extend the loan by six months. That would be an example of a forbearance agreement. Today, less than 5% of the homes in the country are still in a forbearance agreement. Many have managed to exit the forbearance. The banks were encouraged to extend these types of terms to borrowers and at the same time, the Federal government issued a moratorium on foreclosures, in addition to the moratorium on evictions that protect tenants from eviction during the pandemic. Those forbearance agreements have a term of 12 months. Over the coming 90 days, many of those forbearance agreements are going to be coming to a an end. So the question is, what happens at the end of the 12 month term? There is still a moratorium on foreclosures. The foreclosure process is not fast at all. But still it’s not clear what will happen to these millions of homes? Will the lender extend the forbearance agreement? Will the lender modify the loan and extend the term of the loan, or lower the interest rate? Or will the lender move to put these loans in default? It turns out that in order for the lender to approve the modification, they will need to re-underwrite the loan. If you don’t have a steady income stream you won’t qualify. If you are receiving an unemployment check and you’re going to have trouble making payments on your home loan, you won’t qualify for a loan modification. You have to not need the help in order to qualify for the help. Now the contradiction in terms should not be lost on you. About a quarter of the forbearance agreements in existence will expire in the next 6 weeks. I can tell you know from first hand experience that the permanent economic damage is starting to appear in a big way. I’m seeing first hand businesses closing down, and I’m seeing these business assets being sold. I’m now seeing asset sales from businesses that are closing cross my desk about once a week. My team is conducting due diligence on multiple businesses right now as we speak. I speak regularly with a specialist in asset disposal. These are the folks that will come into a business or a restaurant that is closing and remove all the equipment and cart it away to a warehouse to be sold at auction. They’re running out of warehouse space. They’re busier than they’ve ever been. So the impending housing crisis of foreclosures on the scale of 2008 seems to be a distance away. Governments are trying hard to prevent the carnage in the housing market that was experienced following the 2008 financial crisis. All we can say right now is that government will continue to shovel cash into the system. Where this cash will ultimately end up nobody knows.
We have a great listener question today.  What are your Key Performance Indicators for underwriting a rental building (100m+) on Park Avenue NY in the current market conditions (decrease in occupancy and increase in concessions). There is also few sales comps in the last decade. Thanks in advance This is a great question. This is an area of NYC that I know well. My father had his dental practice on the corner of Park Avenue and 73rd Street. My mother was an architect on the Pan Am building, now called the Met Life building on Park Avenue and 43rd Street. Park Avenue luxury rentals are complex buildings to own. Most of the land underneath those buildings, North of Grande Central Station is owned by the Pennsylvania Railway and leased to the buildings.  Those ground leases are expensive which is part of what contributes to the high rent needed to merely break even on those assets. Eventually those buildings could be turned into condo buildings, or rebuilt to even higher density. You are correct that these buildings don’t change hands very often. Most of the luxury apartment buildings that are rentals along Park Avenue have not experienced a large increase in vacancy. Many of these older buildings date back to the early 1900’s. These buildings along Park Avenue are not a commodity. Those who are renting in those buildings are paying $5,000-$7,000 per month. They’re paying that because they want to be in that location. At the purchase price of several million dollars, even a rent of $7,000 a month is a relative bargain. So these tenants are not moving out in search of something cheaper. The turnover in these buildings is extremely low. Some have been updated and converted into condominiums in the process. Those that have been converted to condo are pricing around $6,000 per square foot. However, given the excess of supply that has opened up in Manhattan in the past two years, it’s going to take several years for this market to recover. I don’t believe we’re anywhere near the bottom of the market in NYC. Even before the pandemic hit, there was a lot of new supply having entered the market. There was an estimated inventory of about 9,000 vacant brand new construction condos in the market. That represents about 7 years of inventory at 2019 absorption rates. So who would be buying buildings like this at such inflated prices? Buildings like this are considered to be trophy assets. The buyer of such a building is someone with a lot of cash to put to work. They’re looking for an asset where it’s more important to tie up a large amount of cash to protect it for the long term, rather than simply maximizing the rate of return. Some international wealthy families have their money in places like Brazil or Argentina where they face considerable ongoing currency risk. More important than earning a high rate of return, is protection from 10-15% annual foreign exchange loss. These families sometimes like to park cash in a stable asset that is safe by virtue of being in a high demand location in a global gateway city like NY. Some of these buildings are being valued at cap rates in the mid 3’s. That means the cash on cash return would be approximately 3.5%, with zero leverage. At that price the property won’t generate enough free cash flow to service any debt. It all comes down to being clear on your investment criteria. We would not buy a building at a 3.5% cap rate. That’s not for us. We prefer to build new construction at a 6.5-7% cap rate and then refinance the property at a lower cap rate that is consistent with the market valuations around 5%. Remember, the difference in price between 3.5% cap rate and 7% cap rate is double the price. One of the key metrics is price and the ability to use debt to finance these buildings. But we’re comfortable building new construction. That’s not for everyone.
What is old is new again. On today’s show, we’re taking a deeper look at digital marketing. Why? Because every successful business needs to be known by its customers and real estate businesses are no different. Some of you may be wondering why there is not a lot of advertising on the real estate espresso podcast. We have had advertisements in the past on the show. At most they were 30 seconds long. These days, the show is free of advertising. Back in the good old days, marketers would spend money on advertising. They would run an ad on Television. We just finished watching the latest crop of advertisements during the Super Bowl broadcast. The ads that make their debut at the Super Bowl are aimed at a broad audience. The advertisement for Doritos corn chips can’t directly be measured. We don’t know who will go out and buy corn chips as a result of the commercial. Google had a very simple business model when it got into the paid search business. It charged $0.05 for the opportunity to be placed above the organic search results. Then some businesses realized that their competitors were buying that ad space. Every time someone searched for Home Depot, an ad for Lowes would appear. So Home Depot would offer to pay a higher price for that same ad. Eventually it became an auction environment. The advertising auction price would rise to the point where the equilibrium would be reached. Google rose to becoming one of the most valuable companies on the planet with zero sales force. Think about it. They had zero sales force to achieve that market position. Yet, they managed to siphon almost all of the marketing value out of the system with zero sales force. Business is changing. It used to be that commerce was sold through platforms. If you wanted your product to get to the consumer, you needed a platform. In some cases, you needed a company like Walmart to choose you. Or maybe a national supermarket chain needed to choose you. The business model was rarely direct to consumer. Google enabled companies to cut out the middle man and made it possible for smaller companies to go direct to consumer. But there was still a large percentage of commerce that was not using search in order to reach the end customer. Nobody uses google to search for Coca Cola, or Pepsi. With pay per click, the ROI is easily measured. The advertising is direct to consumer. There is no middle layer obscuring your view of the transaction. But some businesses are starting to experience a loss of return on these platforms. Competitors are hiring services to covertly click on your ads to waste your ad budget. Some behind the scenes I’m hearing that Google plans to change the emphasis on new forms of advertising that are tailor made for the kinds of businesses that today are advertising on television, or on billboards. The world of television has not changed its format in 50 years. They still subject the viewer to 5 minutes of advertising every hour. Google on the other hand has figured out that viewer attention span is much shorter than 5 minutes. Most viewers will not tolerate 5 minutes of advertising without changing channel. Google ads on the other hand are no longer than 15 seconds. Many are under 10 seconds. What does this mean for you, as a business owner? It means that the already saturated online world is about to get even noisier. In my view, the world of interruption marketing is becoming less and less effective. Those who master the art of building a relationship with their customers and with their audience are those who ultimately win.
Wes Hill

Wes Hill

2021-02-0711:25

Wes Hill hails from Chico, California (about 100 miles North of Sacramento). Wes and his partners own about 1,400 apartment units across several states. On today's show we're trying to gain insight on rent collection statistics across multiple geographic areas. Today's discussion highlights the plight of landlords across the country.  You can connect with Wes at MultiFamilyAssetAdvisors.com.
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