The Real Estate Espresso Podcast

On today’s show we’re talking about how multiple layers of red tape can kill a project. Today’s show is a real-life story of a project where the additional layers of red tape literally killed an industrial project. This is a project that should have been able to be built by right. When we say by right, we mean that the zoning lists a number of permitted uses. If your intended use falls within the zoning rules, you don’t need to ask further permission, apart from a building permit. A building permit is required to make sure that any improvements to the land comply with the building code. The city provides a fairly clear list of what types of improvements require a building permit, and those that don’t. If you’re building a new structure such as a house, a garage, a warehouse. Any of those things would clearly require a building permit. In this case, the land in question has multiple zonings. Part of the land is zoned industrial and part of the land is zoned rural. On a portion of the rural land is an environmental protection overlay. Clearly, there are development restrictions in the environmentally protected zone. The industrial zone has a number of permitted uses which include: · animal hospital · auto dealer and service station · Cannabis Production Facility · kennel, · light industrial uses · parking lot · retail store · storage yard · truck transport terminal · warehouse Our initial plan for the property is to land bank the property and simply put a storage yard for equipment, boats, and RV’s. This seemed like the lowest possible investment that would allow the land to carry itself while waiting for potential future development opportunities. The city provide a sample list of items that don’t require a permit. They go onto say that if you’re not sure, to call the building department and to speak with a plans examiner. Projects that don’t require a permit include: New flooring Fences Painting and decorating Landscaping So we thought, great. We have a land that meets zoning. We have a project that doesn’t require a permit. We confirmed that with the city. We should be able to start construction of the fencing and bringing gravel onto the site. The seller of the land provided copies of old surveys, an old environmental impact study, the previous zoning applications and so on. There was nothing in those reports that gave us cause for concern.  We read the rules that we thought applied to our case. Everything was showing green lights for the project. We called the environmental consultant who wrote the original reports that the seller provided us. It was at this point that we were made aware of additional rules of which we were unaware. That phone call turned out to be a massive education. It turns out that the rules also say that if any portion of the land is environmentally protected, no matter how far away you are from the environmentally protected zone, the entire parcel of land is subject to site plan control by the conservation authority. That means that even half a mile away from the environmentally protected zone, you can’t erect a fence without going through the entire conservation authority process. This story is a lesson in due diligence. It means going a level deeper than just reading the reports. It means talking to the experts in the field to make sure you’re not missing something. I feel like we dodged a bullet on this project. We could have been tied up for a year or more in government bureaucracy just to erect a fence. Not only that, we would have been tied to that bureaucratic process for the entire life of the project. Doing anything on the property would involve going through that process each and every time.

This is another AMA episode. Anders from Ottawa asks. You can now report rent payments and non-payment to the Landlord Credit Bureau and this will be reported on the tenants Equifax credit report. It sounds like a great incentive for tenants to pay rent on time. Do you see any drawbacks for landlords except the cost ($19.95/month) and some administration? The landlord credit bureau is a concept that was founded in Canada back in 2012 by a retired Royal Canadian Mounted Police officer who specialized in fraud prevention and a retired corporate lawyer turned technology entrepreneur. Both men were frustrated by their own experiences as landlords, LCB shines a spotlight on good and bad tenant behavior. Over time, the LCB has established a relationship with Equifax, one of the credit reporting agencies in order to have rental history become part of the overall credit report. The LCB suffers from a couple of problems in my opinion. The grand vision for LCB is a good one. The question is how to get from the startup phase to broad market adoption. Eight years since inception, the program is still in startup phase. In order for it to be useful for landlords, the landlord credit bureau needs wide-spread adoption. I could say the same thing about a number of new technology initiatives that suffer from being below critical mass. If 1% of tenants are members, then chances are high that when I get a vacancy in an apartment, the new prospective tenants won’t be in the system. Facebook by itself has no value. The biggest part of its value is based on the fact that it has 2.7B users. If the Facebook software existed in its current mature form with all kinds of features, but it had no adoption, it would be worthless. Think about other platforms that have achieved wide adoption. Think about Youtube, or Facebook. Both these platforms went several years with a free service in order to maximize market penetration before figuring out how to monetize the offering. If I’m a landlord, and I have a good tenant, I’m not going to pay $20 a month out of pocket to report on my good tenant. The value proposition for landlords having good existing tenant relationships is simply not there. The landlord credit bureau might be useful to me in 10 or 20 years time when enough people have adopted it that I get some real value from being a member. I’m not going to be a member for 20 years hoping that someday it might be useful. If I’m a large landlord with hundreds or thousands of units, maybe I will get more value. But the pricing goes up if you have more units in your portfolio. The concept is good, but the problem is in their business model. In my opinion, they should find another way to monetize the offering that eliminates the membership barrier. Think about it this way. If I have a vacancy as a landlord, I’m going to be thinking about solving that problem. I have two problems in fact. 1) When am I going to get a tenant? 2) Am I going to get a good tenant or a problem tenant? At that moment, I’m probably willing to spend money to solve that problem. I might be willing to spend $200 for a package of credit searches during that 30 or 60 day period of vacancy. But I might not be willing to spend $20 a month for the possibility that someday down the road I might get some intangible benefit. It’s the difference between vitamins and pain medication. When a landlord has the problem, they’re more likely to spend money to solve the problem. If they don’t have the problem, they probably won’t spend the money on the vitamins that have an uncertain benefit down the road. The landlord credit bureau is a business, and I fully respect that they need to make money to survive. . My personal opinion is that they need to refine the business model to better connect with a value proposition that both landlords and tenants will find compelling.

George is a repeat guest on the show. We are all so blessed to have access to a gentleman of such wisdom. He is distinguished by virtue of having represented some of the most iconic names in New York real estate. He worked for Sol Goldman, who was one of the pre-eminent landlords in New York for more than a decade. He worked for the Wilpons family who own the NY Mets baseball team. He taught negotiation at the law school at NYU for 20 years. He is best known for his role in the Trump Organization and as a judge on the TV show "The Apprentice".  On today's show we get George's thoughts on the Presidential Debate held earlier this week and a very important life question.  Enjoy today's discussion with George.

Zandiee Hurtado travels the world while managing her real estate portfolio. She built her business on the premise of owning seller financed loans which pushes the responsibility for the physical management of the properties on her clients. She has mastered the art of lifestyle design using real estate investing as the tool to accomplish her life goals. You can find her on Facebook by her name Zandiee Hurtado. 

Today is another AMA episode. Karla asks, My husband and I are renting out our old house. In the process of switching a homestead home to a rental home I am doing due diligence. What are your recommendations regarding requesting quotes for a rental home insurance? What are the often overlooked things we should pay attention to when deciding the insurance company? Thank you Karla, This is a great question. I’m not an insurance expert by any means, and I certainly don’t want you to make any insurance decisions based on something you heard on a podcast. I’m happy to share what I know so that you can ask some good questions of your insurance broker. Rental property insurance comes in a couple of different flavors. A single family home could fall under a residential policy and many insurance companies offer a consumer product that is geared towards this type of property. But understand that these policies resemble a residential policy much more than a commercial policy. Some residential insurance policies allow you to add a second rental property to your domestic policy. They can sometimes be bundled with the insurance policy of your primary residence. A proper commercial policy is focused on insuring not only the physical asset, in this case the home, but the breadth of the business. You’re in the rental business and you want to insure the business, not just the house. The policy might include a loss of rents clause, whereas a residential policy may or may not. Recognizing that this is a rental property means that if you had a fire or flood, and let’s say that the property could not be inhabited for 6 months during the repair process, you would still need to pay your mortgage and you would still need to pay your property taxes. Some companies sell mortgage insurance separately. The second thing to consider is the style of policy. Some policies are drafted as named peril policies. This type of policy insures against specific named risks. For example, there could be coverage for fire, flood, vandalism, and so on. But if that risk isn’t listed, you’re not insured.   The second type of policy is a broad form policy. In a broad form policy, you’re covered for everything except specific exclusions. For example, you might be insured for anything except say named storms. So if a storm is given a name like Hurricane Laura, or tropical storm Beta, you would not be covered in that instance. When I get a quote from an insurance company, I always ask to see a copy of the full policy. This request is usually met with surprise from the insurance broker. The rate sheet rarely lists the terms of the insurance policy. It sometimes provides a summary of coverage limits, but you can’t cover the full depth of the policy in just one or two pages. Insurance companies are good at selling you on fear. For example, I was recently offered a supplemental insurance to cover damage from riots. But this insurance would only kick in if the riot damage exceeded $110 billion dollars in national riot damage in aggregate during a single year. The first $110 billion in riot relief would come from government, and the insurance would kick in after that. How much would the insurance company charge for this amazing protection? $150. They would gladly take my $150. Most clients never bother to actually read what they would be getting for their $150. It’s a policy that would be virtually impossible to collect on, and if you did manage to collect, it would be years after the settlement. Again, my objective in this discussion isn’t to tell you what kind of insurance to get. It’s to let you know there are choices. Unfortunately, there is no shortcut to truly understanding what insurance coverage is being offered. Asking lots of questions of your broker and reading the policy is the path to understanding the best type of insurance to buy.

Our book this month is Be Present In This Moment, a Practical Guide to Mindfulness by Tessa Watt. The author Tessa Watt is based in London England where she has been practicing and teaching meditation for 20 years at the London Shambala Meditation Center. This book is not a new book. It was published in 2012. Mindfulness is growing in popularity as a technique which teaches us to appreciate our life. This Practical Guide explores how to listen to your body to reduce stress and anxiety in all areas of your life; how to focus better at work by becoming more aware of what is happening in the present, and how to enjoy life more by bringing mindfulness into everyday actions. Free of jargon but full of straightforward advice, case studies and step-by-step instructions, this book makes the practice of mindfulness accessible. Through mindfulness, you’re not trying to get calm, or relaxed or to become a better person. You are befriending the person you already are, and the place where you are, and you get to experience the present moment as it is. You’re not thinking about how you wish it would be, or how it could be, or how it was. You are simply experiencing the present moment as it is. Mindfulness is an exercise in slowing down the mind, letting go of the racing thoughts. It’s not a theory, or a science. It’s a practice. I think of it like doing push-ups. Push-ups are something that done regularly. You don’t just do 10 perfect push-ups and say OK, good. I’ve done it, and now I’m set for life. Push-ups are the development and strengthening of a muscle. Mindfulness is just like that. I’m a busy guy and my mind is full of projects. I find myself bouncing from the next initiative to be taken on a development project, to how I’m going to solve a staffing shortage, to how I’m going to solve a capital shortfall on another project, to the next topic for a podcast episode. One of the most powerful exercises in the book is surprisingly simple. It involves eating a single raisin. Most of the time when I eat a handful of raisings I grab a handful out of the bag, and slam it back barely paying attention to what I’m eating. I’m probably on the phone while I’m grabbing a snack and raisins are not crunchy so they won’t interfere with the phone call. But this exercise is different. It involves eating a single raisin. You want to look at it carefully first, examining the exterior texture, the wrinkles, the shininess of the skin, the softness. Is it soft and malleable or hard and dry? Mindfulness means paying attention in a particular way, on purpose, in the present moment and non-judgementally. The exercise involves exploring the raising with all the senses. When you put it to your mouth, first run it along your lips. Notice how you mouth reacts to the raisin. Maybe your mouth starts to salivate. When you put the raisin in your mouth, taste it with different taste receptors in the mouth, on the tongue, on the cheeks. Bite into it and observe how it squishes.  You probably never knew there was another way to eat a raisin. There is the usual way, and then there is a mindful way that involves being fully present. How did this raisin experience compare with your memory of eating raisins? I’ve spent a lot of time studying the habits of high achievers. Ray Dalio from Bridgewater Associates, the largest Hedge fund in the world credits his success to his mindfulness practices. So many of the members of the mastermind that I belong to say the same thing. I hear over and over again how the shift to mindfulness practices changed their lives. How it improved their relationships, how it lowered their stress level, and how it brought inner peace. This book is a workbook, designed to improve your mindfulness practices and create stronger habits.

Yesterday it was reported in the Wall Street Journal that JP Morgan Chase was going to pay $920 million to settle a market manipulation investigation DOJ, CFTC and SEC tied to manipulation of precious-metals and Treasury markets. These market manipulations were tied to a practice called spoofing. Spoofers typically send large orders to futures exchanges intended to change the appearance of supply and demand. If prices move in response, the spoofers may succeed at their goal—getting a smaller order filled. They then cancel the larger order as quickly as possible. The law was changed in 2010 and forbids the practice of sending misleading orders that traders don’t intend to have executed. The problem with spoof orders is that it leaves the counterparties with a loss on the cancelled orders. The practice which is illegal is alleged to have occurred hundreds of thousands of times. The Commodity Futures Trading Commission provides oversight over the commodities market for precious metals. Not only did JP Morgan pay a fine, they also admitted to misconduct. Three traders, two of whom still work for Chase and a third who left the bank in 2009 were charged criminally in the case. The charges were filed in Chicago Federal court about a week ago. In addition to spoofing and other federal offenses, the indictment charged all three men with racketeering, a claim that is more typically found in cases against organized crime entities. Authorities said it represents the first time that defendants accused of spoofing electronic derivatives markets have been charged with racketeering. While the government has been active in outlawing the practice in commodities trading, the practice is believed to be widespread and largely unmonitored in the market for federal treasury bills. Spoofing is closely linked to a form of market manipulation that we experience all the time. It’s rooted in a psychological concept called anchoring. Anchoring sets an arbitrary expectation by drawing an imaginary line in the sand. If you go to one of the department stores that’s not bankrupt and buy an Armani suit, you might find it on sale for, say $1,300, marked down from $2,000. It’s a bargain at $1,300 and so you decide to buy it. But wait a minute. Who said it was $2,000? Was the $2,000 real or was it a fabrication designed to manipulate the consumer? Would the buyer truly pay $1,300 for that same suit if they thought the retail price was $1,200, or $1,300 or $1,400? How often do we see manipulation in real estate markets? Have you ever seem multiple offers for the same property? One or two offers are substantially below the asking price and then one offer comes in at a more reasonable, but still low number? The seller, starts to get conditioned to the idea that their asking price is too high and feels compelled to take notice of the lower offers as being representative of what the market will bear. Acting out of fear, they accept the reasonable offer. The same buyer of course was behind all of the offers and they simply wanted their third offer to be accepted. The one thing that causes these manipulations to be effective is another human emotion, called FOMO, or fear of missing out. FOMO, combined with anchoring is at the root of most market and negotiation manipulations. Property managers often schedule multiple tenant appointments at a vacant apartment for the same time. If some of these prospective tenants are not real tenants, they can create the false perception of high market demand for the apartment. The property manager might say, there are many people interested in this apartment. You should apply in the next hour if you have any hope of getting the apartment. You can start to spot these manipulations with a bit of training.

Earlier this week, it was reported that UBS and Credit Suisse were in preliminary merger talks. These two banks are Switzerland’s largest banks and they are also longstanding competitors. If combined, they would become Europe’s largest bank. Both banks have major international interests including in the US. A few years ago, two of the banks I deal with were involved in a merger. To be fair, it was DNB First that acquired East River Bank. All of the East River Bank branches were converted to DNB First. You would think that the impact of this would be minimal since we were customers of both banks. Of the two banks, DNB First was much more aggressive in their lending practices and we definitely preferred DNB First over East River. But several of the senior executives from East River Bank were given responsibility for the loan committee at the parent company. The loan underwriting team from East River Bank was given responsibility for loan review reporting to their former bosses, now in charge of the loan committee. Needless to say, the loan underwriting practices at DNB First changed and became much more conservative. Nearly every middle-market bank in the industry is looking to either acquire another bank or be acquired, and it’s likely that yours is no exception. Many banks see an acquisition or merger as a chance to expand their reach or scale up operations quicker. Yet, a bank acquisition is not without its drawbacks as well – particularly for the unprepared banking customer. So why would banks be merging in today’s environment? Many banks were consolidated in the wake of 2008, not because they wanted to be acquired, but because the banking regulator forced the issue through their stress tests. If a bank’s balance sheet was suspected of being weak, the regulator required an increase in the bank’s equity in order to keep operating. There are numerous banks in Europe where we will see this kind of consolidation in the next 18 months. For the moment, in the US, the Federal Reserve has agreed to guarantee the debt of the banks on a large scale.  We don’t really know how this will play out in the long term. Integration risk is a major danger in bank mergers. In some cases, banking executives don’t commit enough time and resources into bringing the two banking platforms together – and the resulting impact on their customers causes the newly merged bank to fail completely. Sabadell bought TSB from Lloyds in 2015, the UK parent bank provided a £450-million “dowry” fund to facilitate the three-year integration project to move TSB’s customers onto Sabadell’s system. Once complete the integration was expected to save £160 million a year. But by 2018, following the migration of 1.3 billion records, its customers reported a host of major glitches. Online banking customers were locked out of accounts or even saw the accounts of other users. The ensuing problems cost the chief executive his job.

Joseph from Boulder Co asks: My question is about the viability of shipping containers as building material. I have seen amazing things being done with them and I'm wondering if it would work for our current project. We have the intention of creating a glamping vacation rental getaway (620 - 1240/sf) for parties of 4-8 people gearing towards millennials and tiny home fans. (Attached is a typical 2/1 draft design) Concerns we have are: - refinancing after project is up and running to get initial investment money back to investors. - construction cost with containers vs standard building materials. Our partner builder has done builds in CA for $110-130/SF hard cost. - city/county planner objections to use of material I appreciate any thoughts you have. Thank you again for all your work and content. Joseph this is a great question: In my experience shipping containers make for a robust structure. I love the idea from the perspective of re-using materials that might otherwise go to the scrap heap for recycling. But here’s the problem with shipping containers. They’re 8 feet wide. When your building block for your room is too small to fit basic furniture, the resulting finished product has extremely awkward room sizes. For example, if you’re making a bedroom, you need a minimum of 11.5 feet to fit a bed, a walking space and a dresser in that dimension. If you want a queen sized bed with two bedside tables, you need a minimum of 9 feet just for the furniture to fit in the room.  If you want a bit of breathing room it needs to be larger. In both cases, the minimum room dimension is above 8 feet. So you’re going to be cutting out a wall, a thick steel wall. That’s an expensive cut. Now your room is 16 feet wide. That’s a nice dimension, but it can lead to a larger footprint than you’re after. Wood framed construction is not that expensive. I’m building apartments and single family homes all day long for about $120-130 per SF. So there is no savings in the overall cost of construction by using shipping containers compared with conventional stick built. Let’s look at a standard 8 x 20 foot container. They can be purchased for $2,500 each plus delivery. I just took delivery of one of these and paid $300 delivery. If you look at the cost per square foot for a structural box, you’re looking at $17.50 per SF. Most of the cost of construction is embedded in the infrastructure and the finishes. The total cost of framing is about 15% of the total project cost in a regular stick built home. But even when you’re building with containers, you need some framing for the interior walls. This might be wooden strapping which is less expensive than structural framing. But it’s not zero. When you’re building with shipping containers, the insulation becomes key. Metal containers are highly conductive. You need channels to route the utilities like water, sewer, electricity, and HVAC. In order to get sufficient insulation, you end up with thick walls, or expensive insulation. If you have thick walls, now your interior room dimensions shrink and you end up with a smaller room below the 8 foot dimension. Framing makes up a small percentage of the overall construction schedule. Most of the time is consumed during the rough-in and interior finishing stage. Even if you set the framing portion of the schedule to zero, you would not save more than about 20% of the overall schedule, with virtually no savings in investment. I want to thank you Joseph for a great question. It’s one of those ideas that intuitively looks like it should be a benefit, that doesn’t get realized in real world practice.

Jorge is a multi-family investor, developer, and property manager based in Dallas. He manages a portfolio of over 2,000 units in multiple markets including Houston, and most recently South Dakota,. To learn more, you can visit elevatecig.com.