DiscoverReal Estate EspressoSpecial Guest, Michael Flight
Special Guest, Michael Flight

Special Guest, Michael Flight

Update: 2019-03-09
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Michael Flight is a principal at Concordia Realty from the Chicago suburb of Oak Brook. He specializes in shopping center investing nationwide. Just because retail is going through major changes, doesn't mean there isn't opportunity. Join me for this immensely educational conversation about investing in shopping centers.


You can reach Mike at www.concordiarealty.com



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In Channel
Simulations Can Be Better Than Real
This weekend I spent a couple of hours in a flight simulator. My sister is the chief pilot for a major executive jet manufacturer.  Together we practiced take-offs, landings, ground taxi, instrument landings, avoiding thunder storms, low ceiling conditions, cross-winds, and engine fires.I’m talking one of those $20M machines that is cheaper than the $80 million dollar aircraft it imitates. It sits in one of those large bays with a 60 foot ceiling.Every aspect of the aircraft’s cockpit has been replicated. The outdoor view of the windscreen was incredibly realistic. The avionics, the seats, the power systems, the air vents, the communications systems, the landing gear. Everything was made to feel and sound like the real aircraft. When you lower the landing gear, the sound of the wind rushing past the the open wheel bay is clearly audible in the cockpit, just like on the real aircraft. The entire simulator is on 3 axis hydraulics and is capable of replicating most of the physical aircraft attitudes. When you taxi on the ground and the turn is too radical, you feel the forces and the skidding of the nose wheel. If there is a rut on the runway, you feel it in the shaking of the entire simulator. When you make mistakes, the systems on the aircraft. When my son simulated a landing with an engine failure, the hard landing was physically jarring, just like a hard landing on a real aircraft. Pilots use simulation to replicate test conditions that are not easily found in the real world. If you are training and practicing how to land with a nose gear failure, the simulator is the perfect tool. Using the real aircraft would be difficult, unsafe, and incredibly expensive.  The learning process requires us to make mistakes. That’s how we learn. I was on a final approach and my sister advised me to pull up. Her direction put me above the glide slope. It was her mistake, but it could have been mine. We reset the simulation about 4 miles back and re-ran the landing sequence. When I had control of the aircraft, I was routinely making small mistakes in controlling the aircraft. But I was able to correct them easily and the consequence of these mistakes was that I made fewer and fewer of them as I improved. Flying a plane is full of metaphors for real life. On the investor summit at sea, we had a group of about 40 people playing the game Cash Flow together, under the direction of Robert Kiyosaki, the inventor of the game. Cash Flow is a simulation. It gives you the chance to make offers on properties, to borrow funds, to sell assets, to spend money on luxuries, all the things that are present in real life. In the game, errors in accounting cause delays in the game, just like in real life. In the simulation, the increase in interest rates can cause financial hardship, just like in real life. In the game, some people thought the idea was to compete against the others, more like in the game monopoly. They were going to do it all by themselves. Others had the idea to collaborate and help each other. Just like in real life, whatever beliefs you have at home show up in the game as behaviours, and they show up in business.How often do we run simulations in our own business to train ourselves?I see rookie investors go out and randomly buy a property. There is little in the way of guidance. It reminds me a lot of jumping into the cockpit of a live aircraft with little to no instruction, and hoping for the best. 
Government As Your Home Ownership Partner
How would you like the government has your home ownership partner?This week the Canadian government announced a new program that as far as I know is the first of its kind in the world. The measure would make it easier for first time home buyers with household incomes less than $120,000 per year to buy a home. But in this case, the government would register a lien against the equity in the home, and not just the debt. Under the program, the buyer would bring a 5% downpayment in the form of equity. This is the same as the ratio loan currently offered by our federally owned mortgage insurer.The Incentive would allow eligible first-time home buyers who have the minimum down payment for an insured mortgage to apply to finance a portion of their home purchase through a shared equity mortgage with Canada Mortgage and Housing Corporation (CMHC).It is expected that approximately 100,000 first-time home buyers would be able to benefit from the Incentive over the next three years.Since no ongoing payments would be required with the Incentive, Canadian families would have lower monthly mortgage payments. For example, if a borrower purchases a new $400,000 home with a 5 per cent down payment and a 10 per cent CMHC shared equity mortgage ($40,000), the borrower’s total mortgage size would be reduced from $380,000 to $340,000, reducing the borrower’s monthly mortgage costs by as much as $228 per month. Terms and conditions for the First-Time Home Buyer Incentive would be released by CMHC.CMHC would offer qualified first-time home buyers a 10 per cent shared equity mortgage for a newly constructed home or a 5 per cent shared equity mortgage for an existing home. This larger shared equity mortgage for newly constructed homes could help encourage the home construction needed to address some of the housing supply shortages in Canada, particularly in our largest cities.The terms of the announcement are not completely clear. From what I understand, Functionally, it's more like an almost interest-free loan — one where the repayment plan doesn't require any payback until years in the future.The Government budget document is far from clear on how much the buyer would owe; is it the same dollar amount the CMHC provided up front, or does the bill go up based on how much the house has appreciated in value? Government officials say details of the plan will be hashed out in the coming months. I really don’t know how I would feel about having the government own a portion of my home. In my case, I am not eligible for this program because I’m not a first time home buyer. 
AMA - Gold Versus Real Estate
David from Seattle asks.Your recent episodes on the Fed and the worrying size of their balance sheet are timely but also quite unnerving. Given the potential strong inflationary pressure in the coming years, two popular hard assets come to mind: gold and real estate. In terms of cash flow, gold bars generally don't cash flow, whereas apartments can cashflow very well. Moreover, fixed rate mortgage carried by most real estate also works for the owner under high inflation. On the other hand, physical gold is free of counter party risk, whereas real estate might have some limited counter party risk (e.g. from the mortgage). Which one is "better" in hedging against inflation? How should investors think about their asset allocation between gold and real estate as we head into inflation or even stagflation? I like how you've addressed gold and real estate in depth separately in many other episodes. I know quite a few investors have this gold vs real estate debate, and hence the question.David, that’s a great question. I’m left feeling like it’s a little like asking which is better for you Broccoli or Tofu. The truth is you need both vegetables and protein. It’s not really a choice between one or the other. Rather it’s a question of proportion. You are correct in stating that gold has no counter party risk. For those who don’t know or don’t remember what counter party risk is. If I loan you money, that loan shows up as a liability on your balance sheet and as an asset on my balance sheet. However, it remains as an asset as long as you repay. That asset is said to carry counterparty risk. The reason the financial system nearly collapsed in 2008 was because of counter party risk. Holding the physical metal has no counterparty risk. If you hold gold certificates, you are holding a claim on gold. That claim is subject to counterparty risk. In terms of creating long term wealth, real estate is an effective hedge against inflation. As you pointed out in your question. I firmly believe that governments are under-reporting inflation. Not only are there multiple reasons for them to do so, there is ample evidence that they are in fact under-reporting inflation. We don’t typically leverage our ownership of precious metals. Whereas real estate is much better suited to leverage. Here too, the leverage must be responsible. Too much leverage would expose you to financial risk. But generally speaking, with income producing assets, leverage can be your friend. Inflation increases rents. Inflation pumps up asset prices.
Pop Tops
On today’s show we’re talking about a strategy for creating value in expensive markets.In some of the most expensive cities in North America, cities are increasingly charging development fees or impact fees for new construction. These fees pay for paving new roads, for the cost of expanding water, sewer and public transit infrastructure. The rationale is that urban expansion costs money long before the new properties are completed and contributing to the expanded property tax base. So development charges, levied against the developers makes sure that the cost of these expansions are covered by those who stand to profit the most from the growth. In these expensive markets it can sometime be difficult to make the numbers work for new construction. When you add the cost of the development charges, a new home can be extremely expensive compared with resale homes in the marketplace. This is particularly true for the smaller player who doesn’t have the economies of scale of a larger builder.The methods to make money in these conditions requires much more creativity than a simple flip project. The first strategy is the increase density with accessory dwelling units, sometimes called in-law suites. This might be a basement apartment, or sometimes a carriage house if your local zoning allows for a separate building on the property that takes its utilities from the main house.  But remember, the development charges only apply to an increase in density. If the property had a single family home on it, and the finished product is still a single family home, then no development charges apply. You haven’t increased the density. Some single story ranch bungalows simply don’t have the flexibility to be transformed into a modern home that the market would embrace.Many investors consider a complete tear-down and rebuild if the existing home is functionally obsolete.There is a middle ground solution that can save a lot of cost and still deliver a new home. That is the so-called pop-top. This is where you cut off the roof, demolish the interior and utilize the existing foundation and footprint of the home as a basis for a new two-story home. You get to re-use the foundation which saves about $40-50k off the cost of construction. By re-using the utilities coming to the home, you save about $20k-30k in utility servicing costs. Compared with new construction, the savings of the foundations and utilities can generate considerable profit for the home builder. The ground floor layout will be completely redesigned. You can create large open spaces that are consistent with a new home of today’s vintage. The structural supporting walls, columns and beams for the upper level can be easily incorporated at this time. The second level will house the bedrooms and bathrooms.

Pop Tops

2019-04-1700:05:04

The Shrinking Middle Class
Today’s show is focused on the consequences of the shrinking middle class. If you go back to the 1960’s and 1970’s it was possible for a single income family with blue collar employment to join the ranks of the middle class. Today, the number of two income families has grown and families are finding it harder than ever to make ends meet. The shrinking middle class has enormous economic and social consequences. It’s has given rise to a new wave of socialism as the average person feels like they’re getting the short end of the stick. The Organization for Economic Cooperation and Development defines the middle class as comprising households with incomes between 75% and 200% of the median.Across member nations, the proportion of the population who are in the category has fallen over the last 30 years, from 64% to 61%. Today the middle class makes up 50% of the population. That definition of middle class doesn’t really tell the full story. It neglects family size and local cost of living. The fact is there has been an continual erosion of our purchasing power over the years. Those on fixed incomes are the ones who are losing the most.We can learn a lot from history. We are facing a growing class warfare where those with less blame those with more for their situation and for exploitation. I don’t believe that entrepreneurs are to blame for the plight of those who are struggling. Entrepreneurs and business owners struggle too. The vast majority of them suffer setbacks on a regular basis. Only a few manage to rise above water to build sustainable businesses and sustained wealth.The problem with the tax the rich approach is that it works to a point. Once you reach a threshold of pain, the ultra-rich have the financial means and the incentive to organize their affairs in a manner that legally minimizes their tax liability. Many will simply relocate to a lower tax jurisdiction. There is no question that people who have succeeded in business have attracted envy, admiration, and most importantly jealousy. It’s that jealousy, combined with the genuine hardship that many families are experiencing that has fuelled the latest round of anti-rich sentiment.Increasingly, newly elected left leaning politicians want wealth taxes, dramatically higher income taxes, corporate taxes, surtaxes, and so on. The amount of economic activity has been a larger contributor to tax revenue than the actual tax rate. As individual investors we don’t control the political climate, nor do we control the tax rules.  Entrepreneurs generate economic activity, they give people employment, they create better living spaces for families to grow and thrive, and they should be rewarded for taking those risks along the way. The tax code does not tax you on your income, it taxes you on the manner in which you receive your income. Pay close attention to not only your income, but how it comes to you. Be prepared for lots of changes to the tax rules in the coming years as governments become increasingly desperate and creative for ways to pull more revenue.

The Shrinking Middle Class

2019-04-1600:05:24

AMA - Developing High Net Worth Relationships
Today is another Ask Me Anything episode. Robin from Ottawa asks.“How do you build relationships with high net worth individuals? In your book Magnetic Capital, this is one of the primary factors you touch upon. Let's say you meet an individual at an event and exchanged cards/contact information, what are the next steps?“Robin,This is a great question. It’s one that I get frequently. In fact, if I do an updated edition of Magnetic Capital, I will certainly dedicate an entire chapter to answering that question. Let’s go back to the fundamentals of raising capital that are clearly outlined in my book Magnetic Capital.RelationshipTrustResultsCompelling OpportunityAlignment If you don’t have a perfect fit between the goals for the money and the goals for your project, it’s not going to work. The main thing to remember about high net worth people is that they are people too. They have different perspectives and different values because of their circumstances.They recognize that their most valuable resource is not money, but time. As a result, high net worth people tend to be much more time conscious than the average person. They don’t want to develop relationships with people who want them just for their money. They don’t want to be used. They also don’t want to waste time with people who can’t help them with their mission.  High net worth people are slow to develop relationships. High net worth people know how to make money. They know how hard it is, and they don’t want to have to go back and do the hard work to make it back. As a result, they are much more focused on safety and preservation of capital. You will face a lot of scrutiny and due diligence from high net worth people. These relationships take time to develop and do not happen quickly. In terms of how I build these relationships, it comes down to one simple characteristic. I approach high net worth people as peers. I approach them with confidence and with humility. I work quickly to establish rapport with them by showing them that I understand their world, but not in a presumptive way. That’s a subtle but important distinction. One thing that helps me in that regard is that I’m incredibly well traveled. I’ve been to a lot of places in the world and chances are good that I can start up a conversation about somewhere we’ve both explored. That’s a pretty safe bet.I do my research and find out as much as I can about a person before I meet them. We probably know some people in common. People who don’t have money look at the ultra-wealthy as having it made, as if they don’t have a single care in the world. Nothing could be further from the truth. They too are constantly learning, evolving, developing, figuring things out. The ultra-wealthy circulate in a community that spills opportunity at every turn. These people are inundated with opportunity. If they don’t focus, they will become time and energy bankrupt due to 1000 inquiries. They have to become very good at saying no. It’s a matter of survival. The key to breaking through that barrier is to show that you’re mindful of their time and energy management challenge. If you have a phone call with them, keep it to 10-15 minutes, no more. Communicate in a way that pierces through the noise and gets to the heart of the matter. It won’t be rude. They will respect you for it. You’re speaking their language. That doesn’t mean skipping steps in the relationship building process. That’s creepy. It means communicating in a concise and insightful way. 
What Is A Real Education Anyway?
Today’s show is my perspective on the college admission scandal that has been grabbing headlines across the US. At the center of the scandal is a Rick Singer, a former Canadian football League player who has more recently been in the speaking circuit and working as a college admissions consultant.Fifty people, including 33 parents, were charged last month for their alleged roles in a scam by which California college-admissions consultant William “Rick” Singer said he helped get their children into selective schools either by creating fake athletic profiles and bribing coaches to list the students as recruited athletes, or boosting their ACT or SAT scores by having someone fix their wrong answers. Here’s the problem with the whole story. Who was really harmed by all of this? Some people say that the students who legitimately should have been accepted to these elite schools are the ones who were harmed. I have a different view. The parents who engaged in this deceit have hurt their own children. I believe that children learn by modelling the behaviour they witness. Rather than teach their kids to work for their accomplishments, the parents are leaving the field open for their kids to create several unhelpful interpretations.You can take a shortcut in life when things don’t work out the way you want them to.The parents don’t have faith in their child to succeed on their own. The kids could spend their entire lives thinking they’re a screw up and will never measure up.The optics of graduating from an elite school is more important to the parent’s ego than the substance of living a happy and fulfilled life. At that point the kids stop being human. They become an object for the purpose of satisfying the parent’s ego. There is so much about this story that is screwed up on so many levels. A university education is a valuable step in many people’s lives. But it’s not everything. In fact, numerous studies have shown that graduating near the top of the class from a smaller lesser known school results in better life outcomes than graduating in the bottom half of the class from an elite school. It comes down to reinforcing beliefs. If you are doing well in high-school, you might represent the top few percent in your class. When you get accepted at Harvard, you might be at the bottom of your class and still represent the top 0.1% of the global student population in terms of academic achievement. But if you spend 4 or 6 or 9 years at the bottom of your class, the message is you’re a screwup. When kids are in their formative years, developing self reinforcing patterns of high self esteem is incredibly important to constructive life outcomes. Let’s frame this story in a larger context. In 2017, Kessler international published a study based on a survey of 300 students.The survey found:86 percent claimed they cheated in school.54 percent indicated that cheating was OK. Some said it it is necessary to stay competitive.97 percent of admitted cheaters say they have never been caught.76 percent copied word for word someone else's assignments..12 percent indicated they would never cheat because of ethics.42 percent said they purchased custom term papers, essays and thesis online.There is something wrong with our culture that places more emphasis on the appearance of credentials than the substance of actual education. The education is the real knowledge, wisdom, perspective, and resilience that comes from integrating experience gained on the journey of life. 
Is Flipping Considered Investing?
On today’s show we are asking the question is flipping a legitimate form of real estate investing?A lot of people enter the world of real estate investing because they are drawn by the lure of mailbox money. They are drawn by this thing called passive income. Well folks, money comes in one of three ways.Earned incomeResidual IncomeCapital GainsMost of the wealth in the world has been created through a combination of #2 or #3. The simple test of whether what you’re doing is earned income is to ask a simple question:"If you took two months vacation, would the business come to a stop?" If the answer is yes, then you’ve just purchased a job. It might be a job with greater freedom than being chained to a desk. But it’s a job nevertheless. It gets confusing because sometimes a job requires investment of capital to do the job. Just because it requires investment doesn’t make it the same as investing. It’s the presence of that active component that makes it more like a job. I know a number of professional volume flippers. They perform anywhere from 20 to 1,000 homes per year. Once you put some scale behind it and it becomes a self sustaining business, there is dedicated staff in each of the key roles. You have acquisitions specialists, construction managers, sales people, a legal team. At that point the business owner can step away from the business and the business will continue to run itself. The cash generated by that business falls into the category of residual income. But it’s business income, not passive investment income. The properties are held for as short a time period as possible. The profits are unlikely to be considered capital gains. So is flipping investing? My answer to that question is no. It’s a business, like any other active business that produces a product. It’s the same as a bakery, or a business that manufactures children’s toys. It takes in raw materials and manufactures a new product which gets sold. That product happens to involve real estate and buildings. The raw materials consist of an existing property that is in some level of distress. You add new materials, some design sensibility and transform as property that was less desirable into one that the market really wants. You need money to fund the inventory for the manufacturing business. If you’re baking muffins, you need to buy flour and yeast and all the other ingredients. If you’re product is toys, you may need to invest in the manufacturing capacity, and purchase the raw materials. Flipping houses is exactly the same. It’s more like a manufacturing business than an investing business. Yes, the numbers are bigger because the sale price is not under $10, the sale price is in the hundreds of thousands. It’s a high price low volume business. An effective bakery would probably be a low price high volume business. 
Data Confusion
On today’s show we’re talking about how to make sense of confusing market trends. These days there is no shortage of contradictory data. I’m continually reminded that real estate is hyper-local. The news media reports the averages, the macro trends across the nation, across a continent, and even globally. Somehow the news media is attempting to connect the dots and warn you that a slower growth in manufacturing in China will translate into a loss of jobs in your home town, or that a higher price of oil will mean fewer home sales in Some local real estate markets are bucking the trends. It is completely possible to have cities that are at different stages in the cycle. In Silicon Valley, we’ve seen inventory of homes on the market increase 132% in a very short time period. The main factor is that the number of buyers entering the market in silicon valley seem to have vanished. There simply aren’t as many buyers. We’re seeing the same in Dallas, Seattle, Portland. We’re seeing dramatically higher inventory and homes are taking a lot longer to sell. Prices have levelled off and are either flat or slightly down in many major US cities.In my home city of Ottawa Canada, we’re seeing the opposite. Inventories have dropped to the lowest level I can remember. We have just over 2 months of inventory on the market for both single family homes and condominiums. I can remember just two years ago when we had 10 months of inventory in the condo market. In some areas of the city, the inventory is even lower. The number of days on market has fallen by 24% for single family homes and by 48% for condos. Prices increased 7.7% year over year and inventory is down 25%. When I talk with friends who are brokers, they speak about how difficult it is for a buyer agent to close a deal under $500,000. There are multiple offers and homes often sell above asking price. Some buyer agents are getting burnt out. Some agents are worried about the traditional uptick in market volume in the spring. The current market inventory is at 2.2 months. But when you consider the traditional increase in sales during the Spring, we can expect an even more acute shortage.  So when a market diverges from the norm, there can be two explanations.The market is truly a market unto itself and is not influenced that much by outside forces.The market follows the macro market trends but is merely delayed. Some secondary markets attract investment when the primary markets get overheated.We often see a lag between a hot submarket and a neighbouring submarket. Buyers say, well, if I can’t afford to live here, why don’t I look another 5 minutes down the road. If I can’t afford to live in NY, why don’t I look at New Jersey, or Philadelphia. If I can’t afford to live in Palo Alto, why don’t I look in Freemont. Some cities like Ottawa and Washington DC as capital cities tend to live in an economic bubble. So much of the local economy is dominated by government spending that they’re somewhat insulated from broader market forces. In the last downturn in the wake of the 2008 financial crisis, real estate prices in Washington DC only fell 19% from the top of the market in 2007 to the bottom of the market in July 2010 before rebounding by 14% in only a few months later that year.By comparison, prices in Phoenix Arizona fell by 67% in the last downturn and took almost a decade to rebound to prior levels. So please folks, stop listening to the macro housing data and using that infer meaning to your real estate decisions. Real Estate is hyper local. Prices changes are highly linked to mobility of people. If people don’t move very much, prices don’t change much. If people move in or out of the market easily, you can expect prices to move a lot.

Data Confusion

2019-04-1000:04:41

AMA - Fund Versus Project
David from Seattle asks.  Within the realm of private placements, how should investors think about investing in a fund vs in a project? Funds pool money and share the risk across multiples projects. However, funds further separate investors from the actual assets and deals. For example, a passive investor can't choose which individual project the fund may take on down the road, and it may be overburdensome for the investor to review the financial details of each project, if the fund shares those information at all.  Given these complexities and layers of abstraction in a fund, it seems to me that one should generally only invest in funds managed by people they are most comfortable with (such as by seeing them perform in a single project before). Would love to hear your thought on this.David, this is a great question. It’s one that we grapple with ourselves. There can be multiple reasons to form a fund. One idea is diversification. The second is scale. Both could bring you greater safety. Diversification would span multiple asset classes and multiple geographies. I believe that sophisticated investors don’t want a fund manager to manage their diversification for them. It becomes incredibly difficult to figure out how a fund is going to perform if its diversified. An exchange traded fund is an example of a fund that embraces diversification. By tracking the S&P 500 index, you are by definition embracing diversity. You have zero ability to perform due diligence on the underlying assets. They’re all in the fund whether you like it or not. Not only that, they’ve put the whole thing in a blender and made a pureed soup out of it. I do not embrace this approach. I believe that investors want a fund manager to be the best at what they’re good at within a narrow field of specialty. You still want your fund to be resilient. If you’re in a medical office building fund, you only want medical office buildings, and you want them to follow a proven formula. If you’re in a self storage fund, then you want only self storage and you want that fund to invest in a manner that follows a proven formula. The resilience can come from scale. A single family home as a rental property is less resilient than a multi-family apartment building. If you have a vacancy in the home, you go from 100% occupancy to 100% vacancy in an instant. If you’re in a 100 unit building, then a single vacancy produces a very manageable 1% vacancy. There is resilience in scale.A lot of investors who invest in funds believe that you should not invest in fund #1 with a company. They would rather you invest in fund 2, 3 or 4. That creates a startup problem.   Rather than starting with a brand new fund from a blank sheet of paper, we’re considering forming the fund out of existing investments in the portfolio. The fund unit holders would come largely from the existing investors in individual projects. The advantage for investors in this scenario is to create a bit of diversification compared with just a single project. Even if you design all of your projects to offer a similar rate of return, there will be variation. A fund helps bring greater scale and more stability to the overall financial picture.From the sponsor’s perspective, a fund can be beneficial because it puts the resources at your fingertips to go and get some great deals. There’s no delay in raising funds for a project. The downside is that the fund comes with an expectation of a rate of return. If you are holding onto money that hasn’t been put to work yet, it is earning zero, and the investors still have an expectation of a rate of return. Funds that are too large run into the problem of having to deploy funds simply to put the money to work. I believe the same criteria should apply when you consider investing in a fund versus a single project. A fund is more difficult to evaluate.

AMA - Fund Versus Project

2019-04-0900:05:56

When Things Go Wrong
On a public show such as this, there is a tendency to focus on the positive, to highlight successes, to inspire you the listener to greater heights. On today’s show we’re talking about one of the darker sides of being in business. But as Jim Collins, the author of Good to Great says, you must confront the brutal facts. That’s what we’re going to do today.Earlier today I got a phone call from another investor. He's a good friend and we’ve known each other many years. He’s a good person with strong values and strong ethics. The story he told was so sad. Sad because it happened to him. Sad because it’s happened to me. Sad because nearly everyone I know who has been in business for a while has a similar story. On today’s show we’re talking about what to do when you face a theft in your business. Often the victim is a high profile individual. A few weeks ago I was speaking with a high profile author and he was describing the times when he was a victim of theft. A month ago I was speaking with a high profile jeweller. The jeweller was the victim of employee theft. When the employee was confronted, their response was “You didn’t seem like you needed the money, and I did, so I took it.”My friend had hired a general contractor. The contractor asked for draws on the construction in advance of the work being done. The contractor had lots of good reasons why the funds should be advanced before the schedule said they were needed. Inconsistencies started to appear between the story being told by the contractor and the facts on the ground. When everything was eventually laid bare, it was clear that the contractor had in his words “borrowed funds” and in the end far more than the borrowed funds were missing.  The subcontractors had not been paid, and the jobs had been under-bid. The net result is a project with a contractual commitment that cannot be fulfilled and then there are stolen funds on top of the situation. I’ve encountered a very similar situation several years ago. The crooks who do this are very adept at establishing trust and using a fabricated web of evidence to create that trust and support their stories. I’m sorry for my friend. I feel for what he is going through. While what happened is not his fault, he still is responsible. That’s where the painful part hits home. You can do everything right, and if someone on your team does something wrong, you’re still responsible, even if you’re not at fault. Every employee at Boeing is sharing responsibility for two jets that crashed, even though the actual fault probably lies with only a handful of people who made a hasty decision.  When you put diligence in the context of approving an aircraft’s control software, the standards are pretty clear. But what about hiring a general contractor? The stakes aren’t as high. Or are they?You don’t need a crook in your midst. Innocent mistakes can be as dangerous. We all make mistakes. I certainly do. They’re embarrassing. They’re painful, and they’re a necessary part of learning. Mistakes are not to be avoided altogether. The only true way to avoid mistakes is to do nothing at all. Mistakes are to be expected. They are there to learn from and to be caught and corrected before the consequences are catastrophic. 

When Things Go Wrong

2019-04-0800:05:15

Senior Housing Industry Update
On today’s show we’re talking about demographics and the senior housing market. The baby boomers began turning 65 years of age in 2011. Today the oldest baby boomer is 72 years old. By 2029 the remainder will also reach age 65 and account for more than 20% of the total population. By 2050 the population of senior citizens is estimated to equal 88 million people nearly double the current population of 49 million. Much of the new capacity in senior housing has been billed in anticipation of this massive future growth. But that growth will not hit assisted living and skilled nursing for at least another decade. The near term growth area is in independent living. One of the primary drivers for senior housing the aging population is longer life expectancy. in the 1970s the average life expectancy was 80.2 years of age buy 2018-expectancy hey Snell 85 1/2 years of age. It’s also estimated that one in 4 will live to be 90 years of age and one in 10 will live past 95 years of ageA report issued last week by Fannie Mae’s research team takes a broad summary view of the senior housing across the nation. Generally speaking, nationwide occupancy in assisted living peaked back in 2015 at 89% occupancy. Since that time, there has been a lot of new product injected into the market causing average occupancies to fall to about 85%. In spite of the low occupancies, we continue to see year over year rent increases of about 3% per year. The report notes that occupancy is falling marginally across the nation, driven largely by the amount of new product that entered the market last year. Thankfully, the amount of new supply is also slowing. The number of new starts this year declined by 21% in Q4. This shows that the market has gotten a little ahead of itself. Much of the new capacity has been built in anticipation of our aging population.The silver lining in this is the absorption rates have reached record levels in 2018 with nearly 14,000 units being absorbed during the year. That’s a 34% increase in absorption compared with the prior quarter. So if absorption rates hold steady or continue their upward trend, we can expect occupancies in AL to increase into the high 80’s and eventually into the 90’s, depending on the rate of new construction in the future. The most troubled segment in senior housing is the skilled nursing sector. One of the nations largest operators is Five Star based in Newton Mass. The company operates with 213 senior living communities it owns or leases and 70 it manages across 32 states. Skilled nursing occupancy dropped again this year and rests at 78%. The skilled nursing segment has lost market share to the newer assisted living and memory care model, which offers a lower cost alternative for many clients who have enough of the basic human functions to qualify for assisted living. We know that demand is going to double over the next 15 years. So operators are clearly trying to position themselves to win, even if it means suffering a little bit of short term pain with lower occupancies.  
Brexit Desperation
The UK is past the deadline for leaving the EU with no deal that has been accepted by the British parliament. The entire Brexit situation is incredibly complex. Prime minister may has set a new deadline for leaving the European Union by May 22. If the departure is delayed beyond that date, Britain would need to participate in the upcoming elections for the European Parliament. The prime ministers proposal in front of the British Parliament have defeated three times. However she survived a vote of non-confidence. Her latest effort to negotiate a new deal involves a coalition with the opposition Labour Party which favours a stronger customs and economic union with the European continent.It’s a pretty high risk move by the prime minister. She is essentially looking to form a consensus that ignores her own conservative political party.The entire question period in parliament was a loud raucous chaotic experience punctuated by numerous interruptions by the speaker of the house calling for order.Members of the house would stand as a way of requesting to speak, waiting to be recognized by the speaker of the house. Some of the comments and questions for the prime minister were directly related to the matter at hand.Other matters seemed to drop into the middle of the discussion out of left field. One member of the house of commons asked for the prime minister’s support in furthering recognition and training for members of parliament regarding autism. Another member of Parliament requested the prime minister support for improved handicap accessibility at a local train station. The entire process seems like one where everybody’s talking all at once, but nobody’s listening. I very much doubt that anyone‘s opinions were swayed by anything that was said in Parliament today. When we talk about Brexit there are five principal areas that we can examine Single marketCourts of justice Customs unionImmigration and border protection Financial benefits, financial support and funding for EU institutions Proponents of a hard Brexit would see all of those areas severed from the eu. Proponents of a soft break want a continued customs union, and a single market, but full autonomous control over justice, borders and funding. It’s as if they want all of the benefits but none of the responsibilities of being part of the European Union. While it may be possible to gain a new consensus among the parties in the UK, it’s not obvious that the rest of Europe would agree to such an arrangement. Agreeing to a proposal like this would be synonymous with the death of the European Union. You would see other countries demanding the benefits but not the obligations of being part of the union. The current deadline to leave the EU is April 12. Any extension requires unanimous agreement by all 27 member nations. That’s not assured. If the April 12 deadline passes with no deal and no extension, then the prospect exists that the UK leaves with no transition period and get treated just like any other country that’s outside the EU. It would be the same as Vietnam or Thailand. There would be tariffs in place on goods, there would be restrictions on the movement of people. Licenses that were valid across the EU would cease to be valid. The level of economic and social disruption that could result is staggering. You might be thinking that the UK is a distant land. You might have visited the UK and strolled through the grounds of Windsor Castle, but if there are problems there, they really do affect you.Think again. We live in a single global village. No country is an island unto itself. No country is fully self sufficient.  

Brexit Desperation

2019-04-0400:05:11

Seeing Over The Horizon
On today’s show we’re examining the idea of seeing over the horizon. The horizon is the distance that you can see before the curvature of the earth obscures what is just a bit further away. Generally speaking For an observer standing on the ground with h = 2 metres (6 ft 7 in), the horizon is at a distance of 5 kilometres (3.1 mi). You can’t see over the horizon. But that’s not the only horizon that exists. We as humans construct many artificial horizons. There are horizons in time. There are financial horizons. There are career horizons. There are horizons in the game of chess. Some chess players only think one move ahead.  World class grandmasters can see anywhere from 15-20 moves ahead.  It is said that Garry Kasparov knew he had lost a game 11 moves before he was ultimately defeated. The horizon for Garry Kasparov is substantially further than for most other chess players. You may know some people who only plan a few days ahead. That is their planning horizon.The real horizon is what is within our line of sight. If you’re lying on the beach you may be able to see only a few hundred yards or meters. Someone standing upright at a height of 6 feet or a couple of meters, they can see about 3 miles or 5 km. But for an observer standing on a hill or tower 100 feet (30 m) above sea level, the horizon is at a distance of 12.2 miles (19.6 km). How hard is it to find that higher vantage point so you can see further? Often all it takes is a conscious decision to seek out that higher vantage point so you can see further. Often all it takes is a decision to plan further into the future. There is no real obstacle. Yes, you may have to make some assumptions about how the future will unfold, but these can often be reasonable assumptions. But then there are people who seem to have the ability to see around corners. Do they have supernatural powers? Not really. What they have is experience. They can draw upon a history book of past projects that have similar metrics in terms of cost, schedule, resource requirements, and risks. They have relationships with experts, mentors and consultants that they can draw upon to help double check their assumptions. Each one of these steps creates a higher vantage point enabling you to see further, to extend the horizon, and to ultimately see past the horizon. 

Seeing Over The Horizon

2019-04-0200:04:32

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Special Guest, Michael Flight

Special Guest, Michael Flight