The Real Estate Espresso Podcast

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.

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 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. 

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. 

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.

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.

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