The Real Estate Espresso Podcast

Carina Guzman hails from Ottawa Canada where she specializes in all forms of land development. This includes land assembly as well as raw land development. In particular she has specialized in transit oriented land plays. This is a very smart strategy that can work in any community that has a strong transportation infrastructure. 

Melanie Finnegan is based in Orem Utah where she specializes in tax lien investing, specifically on land. You can learn more at taxlienprocess.com or at taxlienwealthsolutions.com. Today's conversation was packed with valuable strategies on how to multiply your investment.

We’ve been saying it for a while. There is no such thing as returning to normal. What will emerge from this pandemic is a new normal. Exactly what that will look like is anybody’s guess. But there are some clues that the pandemic has amplified. If you are the Owner of Class A office space, that has become a hazardous occupation. Existing deals are getting undone on a weekly basis. Back in May, Shopify announced that all 5,000 of its staff would be working from home permanently. Last week, Pinterest Inc. announced it has terminated a 490,000-square-foot lease signed just last year. It’s a mixed-use development slated to replace the San Francisco Tennis Club near the company's headquarters campus. Pinterest's agreement involved a one-time payment of $89.5 million in the third quarter of 2020 to break the lease. The termination means that Pinterest will no longer be liable for future minimum lease payments of about $440 million. One of the largest law firms in Toronto made a decision which we don’t believe has been publicly announced to keep their lawyers working at home. They are planning to reduce their office space requirements by two floors in a Class A office building. The resulting savings are estimated at about $1.4M in leasing costs per year. Moody’s Analytics estimates that the value of office buildings across the U.S. will fall by 17.2% in 2020. A recent report from CBRE shows that on average, new leases are being signed with an average rent concession of 8.9 months of free rent in the second quarter of this year. That’s up from an average of 8.4 months of free rent prior to the pandemic. Facebook announced that they expect half of their workforce to work from home over the next decade. Suburban office parks have lost their luster for a variety of reasons, including a growing preference among younger workers for life in more dynamic urban centers than in sometimes staid and sleepy suburbs. And the rapid pace of technological advancement has made the need for many clerical and processing jobs and the real estate to house those workers increasingly obsolete. These buildings are about as useful as the fax machines that you can still find hidden in the closets of some of those buildings. Many companies chose to relocate their offices into the downtown core in order to attract a younger workforce that wanted to be located in an urban setting. So the trend was back into the urban core. But today, if you drive around NYC, you will see that nearly 90% of office workers are not coming into the office. WeWork has about 2M square feet of empty space in NYC. The folks at Twitter have told their workforce that they can work from home if they choose. When they do re-open, they expect to occupy only about 20% of their current office space. Google announced a month ago that they would keep nearly 200,000 employees and contractors working from home until at least next July. Is the office model dead? No. But the model for working is changing and companies are definitely going to reduce their footprint. They will reconfigure office space to include more meeting rooms, temporary offices and more configurable flex space for those times when collaboration is needed. What we’re seeing right now is an acceleration of a trend, and a significant downward shift in the value of office space, not only the suburban office space, but also prime office space in the urban core.

Today is another AMA episode. Carolyn asks. I’m not an expert in Excel and I paid to purchase an Excel based tool for analyzing multi-family apartment projects. I’m still learning about everything the tool can do. What is your recommendation for analyzing project? Carolyn, this is a great question. In my experience, there are several different types of analysis that need to be performed depending on the exit strategy for your project. It’s that exit strategy that fundamentally changes the type of analysis you’re going to do. If the project has a long term hold component, then you want to model the construction phase, the leasing phase, the steady state operation, and finally the exit. But the exit will be different depending whether you sell the building, or refinance it. We tend to break down the project into those individual phases. Each phase has to be analyzed separately and each phase has to work on a standalone basis. For example, it won’t help to have a great long term hold if you can’t get through the leasing phase. Leasing won’t matter if you can’t get through construction, and so on. I find that most of the pre-packaged software solutions assume a single model. They assume a straightforward purchase, improvements, and sale. But the truth is that most projects are really executed in phases. The financing of those phases will often vary. For example, you might purchase the land with a small amount of equity. You might raise additional financing to go through the zoning process with a small interest reserve for the debt during that phase. From there, you will raise additional equity and debt for the construction phase. Once construction is complete, you might have a short term bank financing, and then after a seasoning period you would re-appraise the property and replace the financing with permanent financing. For that reason, we create our own custom spreadsheet each time we undertake a project. Each of these phases look like a separate project with their own financial metrics and criteria. A separate financial model is needed for each phase of the project, and then they need to tie together. When you add the different types of financing terms, that affects how the project is modelled. I’ll give you a simple example. Let’s say that you have two classes of investors, the first class of investors are straight equity investors who have a share of the ownership of the project. The second class of investors might be preferred investors. They have a rate of interest calculation on their investment and perhaps a lower ownership. Maybe their interest rate only starts to accrue when you get the building permit and then becomes payable to the investor when you get your occupancy permit, and then the interest accrual terminates when the refinance into permanent financing is complete. What I’ve described is a perfectly normal situation. But I can guarantee you that very few of the canned software solutions out there will model this correctly. By the time you’ve figured out all the formulas in the spreadsheet you just purchased don’t model your specific situation properly, you have expended the same effort as if you would have created the spreadsheet yourself. When you’re dealing with investors, or even if it’s your own money, you need to understand the formulas in the spreadsheet and make sure they accurately reflect what is actually going to happen in your project. If the financial model is different from your assumptions, then you’re going to have a problem. It’s a problem that could have been avoided if you had an analyst who is an expert both in Excel and underwriting projects of your type. That analyst needs to audit the spreadsheet multiple times until they are no longer finding mistakes in it. I realize this is probably not what you wanted to hear. But it’s my best advice based on seeing many projects.

Today is another AMA episode (ask me anything).  Kristi from Dayton Ohio asks: I had to let my most trusted foreman go. I was really sick for 3 months last March and this man became my right hand man. I let him have more control of my job sites than I normally give any employee because I trusted him. He also became our friend and would frequently send food and candy home for me and my husband. I stopped talking directly to my employees and only communicated with my foreman. We went through 38 employees since January. I had multiple complaints from my employees that my foreman would yell at them, have unrealistic expectations, and wasn't doing any work on any of the job sites, he was only giving orders. My first mistake is that I thought the job my foreman was doing for me was more important than listening to my employees who had reached out to me. I let my foreman fire the people who weren't working out. I decided to watch the work he did during a course of a week. During this week of observation, hardly anything got done, the work he did was shotty, and he tried to take credit for others work. There was no one else to blame for the short comings. He had to go. Where did we go wrong?

Our book this month is Dream Big by Bob Goff. Bob is someone who lives his own life out loud. After graduating law School, Bob decides to take a 3 month vacation with his family and visits a remote part of British Columbia. He has taken the personal initiative to build a lodge in a remote ares of British Columbia. He buys a 2500 acre parcel of land and spends 5 years building the lodge. On a visit to Uganda, he witnesses the atrocities being committed by so-called “witch doctors” against young children. He influences the Ugandan parliament to enact legislation to outlaw these practices and then undertakes to prosecute one of the witch doctors under that new law. He then realizes that prosecution is not the answer, so he starts a school for Witch doctors so that by educating them to be better witch doctors, they will no longer commit atrocities against children. He started a school in Afghanistan for girls. He has brought warring heads of state to his lodge in BC and negotiated peace treaties with zero authority to do so. A short time later, he was appointed as the Ugandan ambassador from Uganda to the United States. He is a US citizen, an non-Ugandan, and is representing the Ugandan nation as Ambassador to the US. Bob has truly done the impossible, simply by daring to dream big. But when he talks about dreaming big, this is not the idle dreamer he’s talking about. He’s talking about becoming clear on your life’s purpose and then aligning your actions to be congruent with your life’s purpose. This book is not a typical formula based self help book, even though it might sound like it from the outset. Before you can awaken to your life’s purpose, you have to get clear on who you are, and who you want to be. This is a deep exercise in introspection and self awareness. Knowing where you are is an essential part of developing that self awareness. But we’re not talking about where you are geographically, we’re talking biographically. Once you know that, you want to get clear on what you want, what you really want out of life. No we’re not talking about a new Porsche. That’s a distraction. There’s nothing wrong with wanting a Porsche. But if that’s your driving ambition, then you’re not awake to your life’s purpose. We’re not talking about what you want to do either. Some people wrap up their purpose in doing. A better approach is to determine who you want to be and use that to inform what you want to do. Now Bob, is a person of Christian faith. He does make references to that faith in the book. I’m not of the same religion as Bob, and his references to his faith might be problematic for some. They were not for me. Regardless what you believe, his exercise in clearing your life of everything and putting back only the things that truly matter is critical to fulfilling your life’s purpose. You can’t accomplish anything of significance if your life if cluttered with too many distractions. Bob Goff personifies the word Audacity. He takes the time to get clear and do the unconventional if it furthers his dream. But these are not just idle dreams. You see if Bob had done just one extraordinary thing, like opened a school in Afghanistan, that would be cool. But he’s a serial dreamer who has figured out how to execute one audacious idea after another. Has he failed? Sure. He’s failed plenty. But no different than the best baseball players in the world are batting less than 500. Michael Jordan, one of the best basketball players of all time, has lost more games and missed more shots than anyone. But then he’s probably taken more shots than anyone. The size of your ambitions don’t necessarily indicate the difficulty of achieving them. Think instead of the magnitude of the impact they’ll have on your life and the lives of the people around you.

Today is another AMA episode - “Ask Me Anything”. David asks, I know that every year you have a goal setting workshop. You most likely established some very detailed short and long term goals. How have these goals been impacted with the current change in world events? David, That’s a great question. 2020 is emerging for many as one of the most uncertain years in recent memory. It started with the Covid-19 back at the end of January. Last week, it was Hurricane Laura, decimating one of the communities that I have several projects underway. I would not have predicted that I would spend days with my mental energy consumed by hurricane and its aftermath. As you rightly pointed out, I’m a huge believer in goal setting. In fact, one of my goals this year is to hold my annual goal setting workshop in the first week of December. We plan to hold it in the beautiful Banff National Park area where we have a portfolio of properties and we can minimize the risk of disease transmission. But from where things stand right now, I’m not sure if we will get to even hold a face to face event. I can tell you that it is difficult to hold an effective event that requires deep introspection when done over a virtual environment. There are simply too many distractions in the home office. We will see if we hold the goal setting workshop this year, and if so, how we will do it. So back to your question. In the last week of November of 2019 I spent three days on the beach in Mexico with a small group of like minded entrepreneurs setting goals. It’s a deep exercise in which you focus on getting alignment of your values. There are two types of goals that you can set. You can set attainment goals. These goals are things that have a tangible outcome. You might set a goal of buying a new house or buying your first investment property in 2020. That would be an attainment goal. The second type of goal is a habit goal. This is where you might set a goal of meditating daily, or running two miles each day, or getting 8 hours sleep daily. That’s a habit goal. So when we talk about goal setting in 2020, we need to look at both attainment goals and habit goals. In my case, most of my attainment goals for 2020 are progressing but are delayed. The truth is, we are still on track to accomplish those goals on a later timeline. One thing that many people struggle with is abandoning a goal when the original objective can no longer be met. In our culture we have a highly competitive social conditioning on ideas like success and failure. So much of that definition is based on comparison culture. Did you meet your objectives for the quarter? Did you win the basketball game? Did you meet your sales quota for the month? On July 1 we reviewed the book “The Infinite Game” by Simon Sinek as our book of the month. In that book, Simon distinguishes between the finite mindset and the infinite mindset. In the infinite mindset, you are not playing the win-lose game. You’re playing the game of continuous improvement. You’re focused on how you’re using your most precious resource, that is time. The fact is, much as we would like to be in control of our lives, that are some things we can control, and other things we can’t. Getting clear on what we can control is essential to making those choices. It’s easy to get into a mindset that says your hands are tied. The truth is, you have a lot more choice than you might think. Surprises can invert your priorities in the short term. In an uncertain environment, my focus is on my habit goals.

Chris Arnold is a real estate investor based in Tulum Mexico. He's a specialist in using old fashioned radio to market his real estate business. Today's conversation on using radio is packed with wisdom on how to market effectively. You can learn more or reach Chris at wholesalinginc.com/reiradio

David Holman is based in Portland Maine where he runs Holman Homes and Katahdin Property Management. On today's show we're talking about the experience of renting to new immigrant families.  You can reach David at KatahdinManagement.com. Such a great conversation.  

In June of 2019, the Securities and Exchange Commission issued a draft working paper in which they solicited feedback on a possible change to the definition of an accredited investor. The idea was to increase the number of investors who would be eligible for making main street investments. Over the span of several months, the SEC collected input from the investment community. Thousands of people send comments on the proposal, including yours truly. Yesterday, the SEC announced the new definitions. I’m going to quote directly from their press release. You can read the full press release here.  "The Securities and Exchange Commission today adopted amendments to the “accredited investor” definition, one of the principal tests for determining who is eligible to participate in our private capital markets.  Historically, individual investors who do not meet specific income or net worth tests, regardless of their financial sophistication, have been denied the opportunity to invest in our multifaceted and vast private markets.  The amendments update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in those markets." The details of the new definitions are contained in the accredited investor definition in Rule 501(a): add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order.  In conjunction with the adoption of the amendments, the Commission designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons.  This approach provides the Commission with flexibility to reevaluate or add certifications, designations, or credentials in the future.  Members of the public may wish to propose for the Commission’s consideration additional certifications, designations or credentials that satisfy the attributes set out in the new rule; include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund; clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) to the list of entities that may qualify; add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered; add “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act; and add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors. So what does this mean for syndicators? It’s too early to say exactly. We are waiting on guidance from our own securities lawyers on how to interpret the new changes. We’ll do another episode in the near future once we have some legal opinions to share on the topic. From my perspective, this is a welcome change that will become effective 60 days from now.