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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. Weekday shows are 5 minutes of high energy, high impact awesomeness. The weekend edition consists of interview with notable guests including Robert Kiyosaki, Robert Helms, Chris Martenson, George Ross, Ed Griffin, Dr. Doug Duncan, and many more.
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On today’s show we’re talking about how Assumptions create the mother of all catastrophes.The latest case of this is in California where they just implemented rent cap legislation. It’s no secret that the tenant population in California is swelling. California is trending to the lowest levels of home ownership in the country.If you’ve been listening to the podcast for a while, you will know that I’m a believer in two of the fundamental laws of economics. The first is the law of supply and demand. The second is a close cousin to the law of supply and demand, and that is called the price elasticity of demand.Price elasticity affects both the supply and the demand side of the equation.The lack of affordable housing is not because greedy landlords are lining their pockets at the expense and exploitation of poor tenants. It’s because government has made it difficult to add new supply to the market. The excess demand has pushed purchase prices up to the point where the economics of buying or building new product and putting it in the rental market doesn’t work. So when the conditions are not conducive to investment, investment won’t happen.The latest ill-conceived policy from California is a statewide rent cap. The rent cap is in addition to any local rent controls that may have been implemented at the local level. So if a local ordinance is in place, the local ordinance takes precedence. If there is no local rule, the new statewide rule is there as a backstop.Why are economists so overwhelmingly against rent controls? One reason is that they mistake the symptom for the problem.We must ask ourselves why prices are high. They are high because the demand for housing in California is high relative to the supply of it. And why is that?California has a wonderful climate, lots of great cultural things happening. It has strong employment overall and is a vibrant place to live. People love the outdoors, the mountains, the sea.  They have also made it more difficult to build new construction. The poster child for that is the bizarre story of Bob Tillman’s five-year, $1.4 million legal battle to turn his coin-operated laundromat into an apartment building shows how regulations constraining supply coupled with rising demand have driven house prices ever higher. Bob wanted to redevelop his laundromat into residential housing. Opponents of development argued that new development was forcing lower income people out of their neighbourhoods in favour of high income earning people. Here’s the problem with that argument. Unless you increase the supply, you never have a chance of lowering prices. Moreover, nobody ever lived inside the laundromat.But, wacky as it might sound, the supply of housing is responsive to price changes—it is “price elastic,” in the jargon. As profit increases, so does the supply. When the supply increases, prices fall. If you want proof of that, just look at the explosion of properties for rent on AirBnB. If landlords can make more money in short term rentals, they will do so.Regarding the second problem, the “swelling homeless population,” rent control will do nothing whatsoever for these folks. The problem, remember, is too many people wanting to live in a given stock of housing. Capping the price of that housing by government decree will do nothing to solve that problem. What would help is getting rid of the government regulations that restrict the supply of housing.Prices are not problems; they are signals of problems. Trying to solve the problem by treating the signal is like trying to slow down your car by fiddling with the speedometer.
Today is another AMA episode.On today’s show Richard asks“I have a seller who is in their mid 80’s and has been a little difficult to work with. He has a development site that is zoned R3 and we can build a profitable project on it. We can get 5 units by right, and maybe 6 if we are granted a variance. The land is expensive and therefore that sixth unit really makes the project profitable. I’m wondering if I should try and negotiate seller financing so that the borrower contribution is fully funded by the seller financing. What are your thoughts on the strategy?”Rich, that’s a great question. Seller financing can be a great way to raise capital for a development project. It can also be the undoing of a development project. I’ve seen both happen. It all comes down to convincing yourself that you have a reliable partner in the development. Understand that the seller is going to be required to sign virtually every piece of paper that affects the title.The debt structure is going to look something like this. You will have your senior construction lender in first lien position, and the seller financing will be in second lien position. But if the construction financing isn’t secured prior to purchasing the property, the seller will actually be in first lien position. They will need to sign mortgage subordination agreement in order to allow the construction lender to assume first position.When you transition from your construction financing to your permanent financing, you will need to go through that process again. The seller’s signature will be required.Any time the seller’s signature is required in order for you to make progress on the project, it represents an opportunity for someone who is not in control of the project to exercise a full veto on your project. That’s a risk.You mentioned that the seller is in their 80’s. You are probably not 100% up to speed on their health. They could have a health condition and may be unable to sign when you need them to. They may have granted a power of attorney to a family member, and now all of a sudden you’re dealing with a family member who you’ve never met and who knows nothing about the project. They might be unwilling to take the risk of signing anything. If the seller dies, you have the same issue.The alternate approach is to raise the capital to make a clean purchase of the land. Yes, when you raise money, that often means giving up an equity share to your investors. But here too, you may be better off than dealing with someone who you said could be difficult.When you raise money you have a few choices.The first is equity. You’ll need to decide how much equity you will need to give up in order for the project to make sense for you and for your investors.If you can secure a loan from the seller in second lien position, you could secure a loan from someone else in second lien position. The source of funds will be different, but the security would be the same. It won’t be as lucrative as the 100% financing you’re contemplating with the seller financing.Understand that your risk with the seller is higher that if you bring in investor funds. The construction loan will have a finite time period. This is usually less than 2 years. If the second lien mortgage holder delays you for whatever reason, you could face the problem of running out of time on your construction loan. The construction loan is in first lien position, but most construction lenders require the sponsors to sign a personal guarantee, or as a minimum they would require a completion guarantee.  A default on a construction loan with personal guarantees could effectively end your career as a developer. So in my opinion, it’s not worth the risk.Your description of the relationship sets off some flags for me that suggest you look elsewhere for the money in this instance.
Lee from Michigan writes. Hello, I really enjoy your podcast.  Met you briefly at the Real Estate Guys Syndication conference in Sept. 2018.Here's my question:My real estate partners and I have the opportunity to purchase a great 14-acre parcel of vacant land in the best demographic area of our community.  The land borders a freeway on the south, a highly-traveled secondary road to the east, and single family subdivisions on the north and west.There are existing roads that dead-end into the land from the north and west.  The city would like us to develop the land and connect these two roads, which would be a benefit to the community in the sense that community services (school buses, garbage trucks) could navigate within the community more efficiently.To make this project economically feasible, we would have to develop some multi-family properties.  Currently, the entire 14 acres is zoned R-1, or single family residential.Our group is proposing that we rezone only part of the property, the part that is contiguous with the freeway and the highly traveled secondary road, to R-3 to allow multi-family construction.  Of note, 4-plexes would be our largest footprint.  Further, ALL the land that borders existing single family homes, we would propose to leave R-1 single family zoning.We have a preliminary meeting with the local planning commission in the next couple weeks to discuss our intentions.  The mayor informs me that there are already 1 or more NIMBYs that plan to show up to discourage our proposal.Previously, a production builder wanted to purchase the land and put up 200 low income housing units.  The city basically laughed at the idea.In the 14 acres, we propose 19 single family building sites and only 8, 4-plex sites along the designated roads. If multi-family development is impractical, our interest in the land will plummet.With all this in mind, how would you proceed at the planning meeting?Lee this is a great question.There are generally three types of approvals that could apply. I don’t know the rules for your specific community. What I’m describing is what I see most often. The first is a minor application. In the case of a minor application, you don’t require community input. The second is a major application, and in this case, residents within a radius of the property (usually 500 feet of the property) are given the opportunity to comment on the application. This is a very public process. The third involves a change to the zoning.The first thing I would do is get my hands on the minutes of the planning commission or the city council meeting minutes. In almost all communities, these are a matter of public record. In some towns, you can listen to an audio recording of the meetings, or in some cases watch a video recording of the meeting.In your case, you’re talking about 19 single family homes and 32 units of multifamily. This is pretty low density for 14 acres. A general rule of thumb is that you can get about 8 single family homes per acre and perhaps 12 units per acre if you build town houses. Apartments could be much higher density of course.If you built the 19 homes on half acre parcels, that would consume 9.5 acres. That would leave 4.5 acres for the higher density product.I would actually advise against building 4-plexes and suggest you consider townhouses that might fit the R1 designation better. Since all the homes are co-located at the same site, they’re no more or less difficult to manage if they were apartments, townhouses or single family homes. But before going into a public meeting, you want to make sure you’re really well informed of what each of the planning commission members feelings are. There may be consultants such as an urban planner, or an architect who knows the decision makers and can predict what will be accepted.
Special Guest Ali Boone

Special Guest Ali Boone

2019-09-1500:19:30

Ali Boone is the CEO of Hipster Investments. She got her start as an aerospace engineer and a pilot and quickly discovered that she was an entrepreneur at heart. Loved this conversation with Ali. 
Special Guest Omar Kahn

Special Guest Omar Kahn

2019-09-1400:13:36

Dallas based Omar Kahn got his start in Investment Banking in Canada. Today he puts together large projects around the nation. We had a wide ranging conversation on the skills needed to make the transition from corporate life to being an entrepreneur.
Have you ever wondered how the hard core drinker can pound back a six pack of beers and not seem the least bit intoxicated? In the meantime, your tea toddling aunt gets silly after half a glass of wine?It’s because the addict becomes resistant to the drug.On today’s show we are talking about the latest mainline injection of hard core drugs into the economy. I’m not talking about actual drugs of course.The drug in this case is cash. The European Central bank announced its most aggressive stimulus package in a while: interest rate cuts, money printing, quantitative easing, the whole nine yards.It’s pretty amazing when you think about it: interest rates in Europe are already NEGATIVE. They’ve been cutting rates for years, and it hasn’t worked.Back in July 2008, the European Central Bank’s main interest rate was 3.25%.By the end of 2008, it was clear the global economy was slowing down, and the central bank had slashed interest rates to just 1%. But they kept going. By 2013, the ECB had reduced its primary interest rate all the way to zero. And in 2014, they took the unprecedented step of cutting rates even further into negative territory.European rates have been negative now for FIVE YEARS. Yet Europe’s economies are still a mess. These results completely defy prevailing economic wisdom. According to the playbook that nearly all central bankers use, cutting interest rates is supposed to stimulate economic growth.It’s not working. Why? Because another six pack of beers won’t work for the addict. Another trillion Euros won’t work either.So if it’s not going to work, why would they do it? After all, these economists have a lot of university degrees. They’re pretty smart men and women. If I can see it, then surely they can see it.So why? It doesn’t make any sense. Or does it?What if the lower interest rates made the Euro even less attractive to bond investors than it is today. We could see a flight of capital from the Euro to the US dollar, or to Japanese Yen. That would cause the price of the Euro to fall against the US dollar. When that happens, the exports from Europe all of a sudden look like a better deal. They’re less expensive and all of a sudden Europe looks a lot more competitive.A fall in the price of the Euro would definitely have a stimulative effect on the European economy. Those Mercedes, Fiats, BMW and Porche’s will be more attractively priced than ever before. Vacationing in Europe would be less expensive. Perhaps planeloads of Americans will line the cafes in the south of France.Here’s the scary part.The US is going to feel like they need to respond to this silly financial arms race. You can bet that with an election looming in Washington, there will be tremendous pressure to stimulate the American economy. After all, this White House ran on a platform of economic boom, and to a large extent they’ve managed to ride the wave of economic expansion and declare victory. But if that economic success story shows signs of weakness, and by the way it is showing signs of weakness, you can bet that the printing presses in Washington will be warming up for the biggest stimulus package we’ve ever seen.The President is already pushing the Fed to lower interest rates and to weaken the US dollar.We live in a funny world right now. It’s a place where good is bad, and bad is good. Where weak is strong and strong is weak.You can bet that if the natural market forces don’t work, then that new Mercedes will probably come with a tariff in addition to the alloy wheels and a sun roof.
Making An Apartment A Home

Making An Apartment A Home

2019-09-1200:05:021

On today’s show we’re talking about the difference between a commodity and a home.From an executive summary, or an Excel spreadsheet, multi-family offerings look pretty much the same. They have lovely photos, and the numbers look compelling. I find that newer investors are consumed with making sure they have a profitable project. It captures almost all their attention. But there is a level above that primitive profit motive.When you have truly mastered the game of real estate development, you realize that creating a profitable project is simply part of the process. The true differentiator is community building. When you create an experience for residents where they truly love to come “home” at the end of each day, then you’ve mastered community building.It’s not just one thing that accomplishes that. It the sum of a whole bunch of details. It means paying attention to the experience of living in a space. It requires forethought.Now you might be saying, Victor I’m not a developer. I simply buy existing assets, reposition them and create value for investors that way. I’m stuck with the hand I’ve been dealt on a given property.I’d like to challenge that way of thinking.Whether you are building new from scratch or repositioning an existing asset, the development I’m talking about it the delivery of a finished product. That finished product has a specification that you can achieve with a new building, and in most cases within the envelope of an existing asset. But it requires you to think about it.It’s small details like, what is the assignment of parking spaces? Does it make sense for your tenants? What is the experience of coming home with 4 bags of groceries and walking the path from the car to your front door?What is the work-flow in the kitchen? Does it make sense? Is there a spot on the counter for the blender, within reach of the outlet and is there space for a cutting board and a bowl.Have you designed the balcony so that a morning coffee on the balcony is a great experience. Perhaps a glass panel on one side would provide a bit of wind shelter and make the space usable.Do the front office staff make it their business to know every resident by name and greet them in a warm and welcoming way?The Excel spreadsheet doesn’t capture any of what I’m talking about.Now if your investment is in workforce housing and C-class apartments, you might be thinking, Victor you are so out of touch with the reality of our tenant population. That means that some amenities are out of the question at some of the lower price points, and I get that. But thoughtful design doesn’t cost more than thoughtless design. Simply giving thought to flow and the end customer experience can result in design changes that cost nothing more. Does the refrigerator door swing in the best direction for flow in the kitchen? That decision is free. It costs nothing to get it right. But when things are awkward and cumbersome, those irritants contribute to a feeling that this place isn’t home. It’s not enough to complain about. They might not even be able to articulate the awkwardness, but they can feel it subconsciously. Your tenant might be staying there for now, but it’s not home.Is the thermostat placed in a location that makes sense? Or does it get influenced by a local temperature shift so some of the apartment is too hot and the rest is too cold?These decisions cost nothing to implement correctly, but they require thought, they require attention to detail, and they require that someone in your organization feels a strong sense of ownerships and responsibility for the customer experience. When they walk into the property for the first time, is there something that you’ve intentionally designed to create a spontaneous “Wow” reaction. It doesn’t have to be huge.Think about how you transform the end customer experience.
Mobile home parks have long been a part of the senior living landscape, and they have emerged as one of the most in-demand product types in recent years. They offer investors stability and steady returns, and they provide older adults amenities found at other senior housing communities at more reasonable price points.In fact, senior mobile home communities can be an affordable alternative to the ongoing trend of luxury active adult construction, and offer amenities and a sense of community on par with — and in some cases exceeding some of the new age-restricted housing offerings.My friends at 4-Peaks Capital Partners have been investing in mobile home parks over the past several years. Today they own about 2000 pads. Mike Ayala from FourPeaks Capital Partners was a guest on episode 149, on June 16 of 2018.In spite of the many misconceptions associated with mobile homes, the housing type has a long and rich history in the U.S. The first mobile homes in the country were built in the 1870s, and mobile home construction saw a boom period after World War II.Today, 22 million people live in mobile homes in the U.S., according to data from the Manufactured Housing Institute. In 2017, 93,000 mobile homes were built in the U.S., accounting for 10% of new single-family home starts.As more baby boomers enter retirement failing to fully recover the wealth they lost during the Great Recession, well-managed senior mobile home communities are viable options to extend quality of life and financial nest eggs.Investors and major brokerage houses have taken notice. For example, I’m on a mailing list from Colliers International that is focused only on mobile home park and manufactured housing opportunities across North America. We just completed our own new RV Park last year. When the original purpose of that park reaches its end of life for workforce housing. It has been designed to convert to a mobile home park with the full infrastructure already in place for that conversion.Demand for senior mobile home communities is also driven by how few opportunities there are in the market to acquire a quality community. There are some value add deals, and in my opinion a property should be somewhere near 50% occupancy to offer an effective value add opportunity.A lot of investor interest is being driven by real estate investment trusts and private equity money seeking to build large portfolios, from which long-term value can be created via solid management and economies of scale.Equity Lifestyle Properties is real estate mogul Sam Zell’s publicly traded mobile home REIT. It is the largest owner of U.S. mobile home communities in the country. Equity Lifestyle is also Zell’s best performing REIT in recent years, increasing in value from just over $40 per share in 2015 to a current 52-week high of $128.43 per share.Like their brick-and-mortar counterparts, senior mobile home communities often offer extensive amenities packages to attract residents. Some of the more common amenities include swimming pools, fitness centers, softball fields, and golf courses and boat docks at more upscale communities.Some of the communities are keeping current on trends for amenities. Shuffleboard courts, once common and prevalent, are being repurposed in favor of other sports such as bocce and newer trends like pickleball. For those of you who don’t know, Pickle ball is an extremely popular form of tennis that is played on a much smaller court. It involves less running, but still requires great racket skills.Supply and demand dynamics also favor the investor. Sun Communities has wait lists across its portfolio; its internal data revealed that the REIT accepted 50,000 applications for housing last year, for 5,000 available homes.When seniors do eventually age out, they hold the values of their homes, as long as they’re well maintained.
Coop Senior Housing

Coop Senior Housing

2019-09-1000:04:55

On today’s show we’re talking about a niche within senior living, and that is coop housing. It’s a small and slowly growing segment. For some, it has become a competitive option in some markets, and may gain further traction by addressing several pressures facing the industry.Co-ops account for a fraction of senior housing inventory, but there are signs that they are growing in popularity.The number of senior co-ops has grown from 103 in 2013 to 125 in 2019 totaling 7,700 units and about 10,500 residents nationwide. So their penetration of the market is still quite small.But first, let’s define what coop housing is in the context of senior housing.Buying into a cooperative is a cost-effective way to enter senior housing, and can be an alternative to independent living and active adult communities. In coop housing, residents purchase “shares” in a corporation that owns the building. These shares entitle stakeholders to lease a specific unit within a building and utilize common areas. Additionally, there is a monthly charge for assessments, maintenance and repairs.Co-op living also gives residents a stake in how a community is managed, similar to a traditional homeowners association. Each co-operative has an elected executive board and members have a vote in how buildings are managed and operated.Co-op shares appreciate in value incrementally — usually 1% to 2% annually. This maintains affordability and marketability for new residents, and because members are responsible for the monthly fees on empty units until they are occupied.Due to the financial structure of co-ops, they tend to be overlooked by profit-driven investors, but they do offer consumers a more affordable living option.Members looking to exit a co-op can see a small return on their investment, or they can hold on to their shares and rent out their unit to another tenant.Residents who buy into a community can pay anywhere from 20% to 95% of their 40-year mortgage upfront. Now a 40 year financing can mean low monthly payments, and is a reflection of the kind of favourable financing that is possible in this asset class. There are also monthly fees to cover building maintenance and basic operations. The payment plans are designed to be flexible for seniors with more equity or higher personal income.Where are they?Minnesota, where the first senior co-op opened in 1978, is home to 82 communities, and the Twin Cities area is a competitive market. Ebenezer, the largest senior housing provider in the state, manages 38 co-ops, most of them under the Applewood Pointe and Realife Cooperative brands.Last year, Ecumen launched a senior cooperative brand, Zvago, with the opening of a $20 million, 54-unit community in Minnetonka, Minnesota. Ecumen has also opened 5 more Zvago co-ops.At Zvago, buy-in payments can range from more than $31,000 to nearly $500,000. Monthly fees can range from more than $500 to almost $3,300.Another developer — Real Estate Equities Development of Eagan, Minnesota — focuses on building and managing senior co-ops under the Village Cooperative brand, and has a pipeline of 34 cooperatives completed or under construction in Colorado, Iowa, Kansas, Minnesota, Missouri, South Dakota, Wisconsin and Washington.
Late last week, The White House released its long-awaited plan to reform the nation’s housing finance system and privatize Fannie Mae and Freddie Mac, calling it the "last unfinished business of the financial crisis.” In the report, they call these mortgage insurers who are currently under government conservatorship, government sponsored enterprises or GSE for short. In the good old days, Fannie and Freddie operated with different models. Freddie would sell its loans on the open market using mortgage backed securities as the vehicle. Fannie on the other hand kept the loans on its balance sheet. The really high interest rates of the early 1980’s pushed Fannie Mae to the brink of insolvency, after which they adopted the same approach as Freddie Mac.In the middle of the credit crisis of 2007-2008, the Government stepped in and bailed out both Fannie and Freddie in the middle of 2008, although it was apparent by early 2008, that some drastic steps would be required to save the financial system.I’m quoting from the report issued by the Treasury Department to the White House late last week. “The housing finance system is in serious need of reform. The GSEs remain in conservatorship more than 10 years after the financial crisis, and they continue to be the dominant participants in the housing finance system. Although they remain critical to the functioning of that system, they are not yet subject to capital and other regulatory requirements tailored to the risks they pose to financial stability. This lack of reform has left taxpayers exposed to future bailouts. The lack of reform has also prolonged the Federal Housing Finance Agency’s (“FHFA”) management of the GSEs through the conservatorships, perpetuating far-reaching Government influence over the housing finance system.The idea is that a conservatorship is temporary and therefore there should be a timetable and a framework for returning these enterprises to the private sector.Most of the recommendations in the 53-page plan, released to the public on the eve of Friday's 11th anniversary of the government takeover of Fannie Mae and Freddie Mac, don’t require input from Congress.Predictably, the Democratic Congress members were quick to denounce the plan.The largest impact of the privatization is likely to be on the underwriting rules which would affect loan eligibility for borrowers. The second would be the cost of the mortgage insurance premium. Today in the multi-family market, that insurance premium varies according to the ratio and the risk factors calculated by the underwriters. It’s possible that under the new regime, once these enterprises are privatized, that insurance premiums increase. However, I personally don’t see these premiums being much higher than the actual government backed guarantees under the HUD and FHA programs. I expect the newly privatized offerings to be price competitive. They are, after all offering the same service.While I do expect that privatizing these entities will reduce the taxpayer exposure to future bailouts, it won’t eliminate the exposure. Since the offering will need to be price competitive with the government offerings, I don’t anticipate major changes to the cost of these offerings.
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