The Real Estate Espresso Podcast

The City of San Francisco continues to be one of the most sought after places to live in the nation, and also boasts some of the least affordable places to live. San Francisco is a notoriously difficult place to have any project approved. The process allows for community input on virtually any application. San Francisco’s general plan makes new development difficult. Approximately 74% of the land is zoned for no more than three-unit homes, with the majority dedicated to one- or two-unit homes. Most of the city has a maximum 40-foot height limit for all new development. Unfortunately, even the city’s general plan downplays the difficulty of building in the city. The ever-proliferating bureaucratic documents underpinning this plan muddy whatever potential clarities developers could glean from the plan itself. A typical example is the Planning Department’s area East and South of Market Street. This has been a rough area for years. The city drafted a neighborhood plan back in 2008. The plan lays out 42 separate “objectives” the city wants to achieve through development in the area, with no ability to rank them in case they conflict, as many clearly do. Now somehow there has been some redevelopment, but it hasn’t been easy. Developers Prado Group and SKS Partners first submitted their proposal close to five years ago. The developers originally aimed for 558 homes and an office component that was since axed to make room for the senior housing, After years of planning — and battling neighborhood opposition — a proposal to build 744 homes on California St. in San Francisco is finally moving forward. Earlier this week, the city’s Board of Supervisors voted unanimously Tuesday evening to approve the project, which represents the largest new home development in the city’s northwest quadrant in decades. There are so many competing interests, that every project has to have features that will satisfy every special interest group that wants to have a voice at the table, even though they have no cash invested in the project. It’s amazing that people with no ownership get to dictate what happens on a property. The project includes 186 homes for low-income seniors, a childcare center, five acres of public open space and 35,000 square feet of retail. Even after the approval, the ground breaking is still more than a year away in 2021 and complete the first phases of homes two years later. Overall, the project will cost more than $600 million. During a three-and-a-half hour hearing on Tuesday, opponents said the project’s environmental impact report was flawed. Many speakers opposed a plan to cut down existing trees on the site and destroy what they called a swath of natural open space. The trees became a point of contention. One special interest group claimed that the city doesn’t have enough senior housing. So now the project includes a senior housing component. If you are contemplating undertaking a project that requires community input, make sure you understand the process that you might be subjected to. The process on paper might only be a few months. But the process in reality can stretch into years if the community opposes your project.

On today’s show we’re talking about one of the most important questions when evaluating a potential project. You’ve received the executive summary. The glossy pictures are great. The pro forma looks enticing. If the project is so amazing, then why would the seller be selling? If it’s so great, why would you ever let go of such an amazing asset? Or maybe its not an amazing story and the seller clearly has a problem that they need help solving. Whatever the reason, the answer to this question affects two things. Your potential interest in the project at all. You approach in negotiation So why are they selling? Are they selling because the owner is in their 80’s and the kids don’t want to own it, and the owner is tired of being an active business owner? Are they selling because the property is distressed and the owner doesn’t have the financial resources or resourcefulness to solve the problem on their own? Are they simply trying to take some profit off the table to reposition their portfolio for the next downturn? How motivated are they as a seller? Do they need to sell, or do they merely want to sell if the market delivers their price? Now of course the seller might not be 100% truthful in the reason they give for selling. But it gives a clue as to how you might negotiate the purchase. For example, if the seller is aging out of the market, but they still want the income from the property, there might be a case to be made for seller financing a portion of the asset. Seller financing, if properly structured can result in some tax deferral for the seller, and a continuing source of passive income for the seller without the hassle and responsibility of ownership. The seller may simply be tired of the active side of managing a business and want to spend some time on the beach with their grandchildren without having to check in on the property on a periodic basis. If the seller is in a distressed situation, you can be helping the seller solve a problem. Often times, the property can be a good asset, but the seller is dealing with a problem elsewhere in their business. The sale of a performing asset can bring much needed cash to strengthen the balance sheet of a seller and solve a problem they may be facing elsewhere. The seller may be on a fishing expedition and looking to see if they can get someone to offer them too much money. Maybe they’ve heard that properties are selling for high prices and want to use the opportunity to take some profit off the table on an opportunistic basis. If that’s the case, I can tell you that I won’t be the buyer, unless I see something in the property that the seller doesn’t. That would mean changing the property substantially to add significant value to it. Maybe it means demolishing what’s there and building something new. Perhaps it’s a land assembly with a property next door. There are so many different ways to add value to a property. I make sure to ask the broker for the seller why the seller is selling. I then ask the same question directly of the seller. It’s amazing that sometimes that fundamental question gets answered two different ways, by the broker and by the seller. There are so many answers to that simple question. Knowing the answer guides your interest in the property, and certainly guides the approach you’re going to take in the negotiation.

On today’s show we’re talking about another aspect of short term rentals. I’m in the short term rental business. My partners and I operate our units legally and at a very high level. The consistent 5-star reviews are not an accident. They’re the result of hard work by our team and our staff on a daily basis. Now, I don’t know about you, but my social media feed is filled with advertisements for training classes that advocate getting into the short term rental business. The headline reads “Everything you need to become a property investor without owning any properties” The ad goes on to say This Exclusive Webinar will Show you how to RENT Properties, Not Buy them, and List them on Airbnb™and other short terms Rental Platforms, Just Working Part-Time. Step by Step Blueprint, Easy to Follow Instructions on How to set up this Incredible Business with One Rental Property at a Time. So I clicked on the ad. The webpage invites you to an exclusive webinar. It’s amazing, the webinar starts in just 7 minutes from now. It’s my lucky day. The web page invites me to Join hundreds of people worldwide making money using other homes as short-term rentals. Many property owners earn up to five times the profit of traditional rental properties. Sign up to this exclusive FREE training webinar today! The company claims to have cracked the code on how to rent properties and make money with them by listing them on Airbnb and other short rental websites. In less than six months, Jimmy was earning 15,000 pounds per month (around $20,000 US Dollars) with just five rental properties and he was able to quit his job for now, Jimmy teaches other people how to do the exact same thing. The web page has a live chat window. So I clicked on the live chat window. Sarah in the chat windows asked me if I had any questions. I asked Sarah how their system works around one small issue. You see in many jurisdictions, not all, but many, there are laws that prohibit subletting a property for more than you rent it for. So I asked Sarah how they get around the law that prohibits subletting a property for more than it is rented for. The chat window confirmed that my question was delivered to Sarah. At that point, I’m guessing there must have been a technical issue, because I still have the chat window open and have not received any further correspondence with Sarah. I wonder what the problem might be. Now I know that subletting an apartment on a short term rental platform has been a common practice a few years ago. In fact, there was a rash of these units appearing on the market in New York City. There was one unit in particular, located near Union Station and close to NYU in lower Manhattan. That property is owned by someone who is from out of town. The tenant never occupied the property. They set themselves up as an AirBnB host and despite the monthly rent of $3,500 per month, they were able to get a monthly profit by using someone else’s asset. This particular host had done this with nearly a dozen properties in NYC. When NY instituted the new rules prohibiting short term rentals for an entire apartment, the host continued to operate. When the city went to enforce the new bylaw that prohibits rentals of entire homes, the unsuspecting owner of the property received very hefty fines for the violation. The key is for operators who want to get into the commercial end of the short term rental business to be aware of the marketplace they operate in. You need to understand the supply and demand dynamics of the market. What is the barrier to entry? And what are the regulations? Nobody ever built a sustainable business that operates outside the law. You might not like the law, and you might want to influence changes in the law. But the law still is the law.

On today’s show we have an update on a story that we’ve been following for some time. The topic is short term rentals. The staff at the City of Ottawa completed their public consultations on the short term rentals and have issued their recommendations to a committee of City Council which I will be speaking at this coming week. At the end of 2018 there were an estimated 6,278 listings. Listings include individual rooms and complete dwelling units. It’s estimated that the number of investor owned commercial short term rentals in the market is approximately 1,236 units. These properties have been put in the short term market and serve purely a commercial and no other purpose. This is an issue to which there are two sides and quite frankly I see both sides of the argument. As an investor, I fully support the notion of investors making an honest dollar by providing a product for which there is real demand. I live in a lovely home backing on park land and a lake. If my neighbour decided to move to the Caribbean and put their home into the short term rental market, I’d be pretty upset. The transient nature of the traffic next door would negatively affect the value of my property. So I fully understand the issue from the perspective of residents who bought residential property in a residential area, never expecting a hotel product to open up next door. I own several short term vacation rentals in an another community that is heavily tourism centric. The properties that I own are zoned for tourism and for short term rentals. There’s no conflict between the intended use and the actual use. In response to this shortage, the city is hoping that by regulating short term rentals, they will eliminate some of what they see as problems with short term rentals, and that these second homes will appear in the long term rental market to help address the shortage of properties in that segment, or sold outright in the open market to help address some of the shortage there. The new rules provide for residents to benefit from the sharing economy while attempting to establish appropriate regulations that minimize the negative consequences of short-term rental activities that impact the availability and affordability of housing, generate community nuisances, and disrupt community cohesion. Where the problem lies is with those investors who purchase properties for the sole purpose of entering the short term rental market and are now facing a dramatic drop in income as their properties will no longer be allowed to operate as a commercial short term rental. The city has been incredibly slow to act on this, compared with other communities around the world. Platforms like AirBnB have been around for more than a decade. The city has the right through their zoning policy to dictate what types of businesses are allowed in a given area. But the city hasn’t used the zoning code to guide the current proposed bylaw. My comments to the city will be to amend the zoning definitions to specifically include short term rentals within the zoning. That’s the mechanism that currently governs the use of properties in the city. If all of a sudden chicken farming became really popular, we don’t need a new set of special chicken farming regulations. The use is governed by zoning, and this is no different. I have no issue with the city charging hotel tax. That’s a level playing field. I’m going deep on this situation because it’s a dialog that is happening in cities around the world. If you’re an investor in your local market you definitely want to understand what is happening within your city’s government and their bureaucracy so that you can influence the

On today show we are talking about conversations with potential funding partners. If you are in the marketplace for capital, you will invariably meet new people and develop relationships that a long way down the road could become a source of capital for your future projects. The initial positioning of the person you meet might be unclear. Are they an individual investor who has capital to deploy? Are they a fund manager who places capital into projects using their funds? Are they a mortgage broker who simply wants to get another loan done? Are they an amateur who fancies themselves a connector of people? Are they a project sponsor who is out there in the market trying to raise capital just like you are and will never be a source of capital for your projects unless you join forces to work on a project together? In my conversations I’ve encountered all of these. It’s sometimes difficult to tell them apart. The problem is that people like to make a good first impression. They will talk about their recent projects with the same level of ownership as if they were the principal in the project. Sometimes they were a broker on the deal. Sometimes they were a partner. Sometimes they were a principal. And then there are those who merely have friends who are principals in the project, but were not directly involved themselves. I’ve even had situations where I’ve been talking to someone who is clearly not the money, but they tell you they are connected to the money. So after several lunch meetings and phone conversations an introduction is made, only to discover that the new player in the conversation is not the money either. They have some amazing relationships and can talk at length about the projects they have been involved with and how they placed $30 million in a project, or how they have continual deal flow. They’re a real player. So a few conference calls later it becomes clear that these folks don’t have the money either. If the deal meets their criteria, they might be willing to go out into the market and help you raise the money. If you are listening to this, perhaps you have encountered the same situation yourself. These types of daisy chains are incredibly common. I find that nothing happens in terms of a funding commitment until I’m speaking directly to the decision maker who has the funds and the authority to make the decision. Anyone else is just a connector. If they are not the decision maker or part of the core team that makes the decision, they are a connector. So the question is, if you are dealing with a connector and not the money directly are you wasting time?

Sterling White is based in Indianapolis, Indiana. He grew up in a tough part of town without the advantages of connections or capital. Sterling's story is highly inspirational.  You can reach out to Sterling at sterlingwhiteofficial.com.

On today's show I'm talking with Billy Keels from Barcelona about the specifics of the Buy on The Line, Move The Line Strategy. 

On today’s show we’re talking about the predicted extinction of realtors and mortgage brokers. It used to be the case that in the old days, knowledge was power. In many ways it was perceived that in order to complete a real estate transaction, or a real estate financing, you needed access to someone with inside knowledge of the process in order to navigate the complexities of a transaction. It used to be the case that information about a specific property was hidden in a database that only the brokers had access to. Today, almost any information can be searched online. Some of it requires paying a small fee in some areas, but most is freely accessible. So if the real estate broker or the mortgage broker isn’t required for your to get information, why do you need them? Information falls into two categories. Information about a property that is either timeless or has happened in the past Information about what people intend to do in the future. Info in the first category doesn’t require a realtor. You can find the legal description, the assessed value, a property’s dimensions, any liens on title all using online resources. If there’s lots of choice out there, investors can often do the research themselves using online tools. But if you’re looking for something specific, the proverbial need in a haystack, that information is unlikely to be contained in searchable form online. The goal of a broker is compress timeframes, to lubricate the relationship building process between buyers and sellers, between landlords and tenants. Many people approach these types of business transactions with a healthy degree of skepticism and mistrust. But if the seller has a relationship of trust with their broker, and the buyer has a relationship of trust with their broker, the amount of time spent in due diligence can be reduced significantly. Some people think that what is being brokered is the property. But in many ways, what is being brokered is trust, and the relationships. The same is true on the lending side. Lenders can easily waste lots of time with borrowers who won’t qualify. By requiring the broker to qualify the borrower before bringing the file to the lender, the lender can save lots of time. The borrower too saves a lot of time by increasing their chances of having a successful financing. Lenders often decline a loan that for reasons that have nothing to do with the borrower. They may be facing other constraints in their business that cause a loan to be declined. Simply having a business card that lists a license to operate in an area isn’t enough. The true value of a broker is the relationships that they have developed over time. This takes the broker a long time to develop and doesn’t happen overnight. That’s why the more established brokers get the lion’s share of the business. They have the strongest relationships, and they’ve established the longest track record in the marketplace. After all, that’s what is really being brokered, not the property. So when you go out into the marketplace and look for a broker, whether you’re looking to transact real estate or complete a financing, the track record and reputation of the broker in the community and the quality of the relationships are the first two things I believe you should be evaluating.

On today’s show we are talking about the meaning of investing versus speculating. In 2017 the global value of all bitcoin in existence soared from $20B to about $320. Bitcoin was making headlines all over the world and it seemed like crypto currency had transitioned from the technology world into the mainstream. One of the benefits of cryptocurrency is that the transaction history is fully contained in each transaction. Theoretically someone could analyze the transaction history and perform an audit of all transactions. Practically speaking, nobody’s ever done it because it is a huge amount of work. That is, until recently. But before we dig into that, a little more background is needed. There’s another cryptocurrency called Tether. Tether’s main feature is that it is tied to the US dollar. For every Tether coin in existence, there is supposed to be a US dollar in a bank account backing that coin. Since most cryptocurrency at that time were quite volatile, cryptocurrency investors overwhelmingly would purchase Tether with US dollars and then buy another cryptocurrency with Tether, whether it was bitcoin or Etherium or another currency. The makers of Tether insist that new tether are created by demand with the backing of purchases in US dollars from end users. Researchers at the University of Texas conducted deep research on the influence of Tether on the price of bitcoin. They loaded all of the bitcoin transactions and all of the Tether transactions into a single database and started looking for patterns in the data. They developed a thesis that Tethers had a regular pattern of coming into the market whenever the price of bitcoin dropped. They also noted that the pattern of buying was much more orderly and consistent than other market activity. They also found that after this surge in Tether buying, the price of bitcoin went up. All of these market moving transactions went through a single exchange called Bitfinex. It turns out that Bitfinex is owned by the same three people who own Tether. Bitfinex is an exchange that offers its users complete anonymity. You don’t need to provide any identification to open a Bitfinex account. The researchers found that almost half of the $300 billion of price increase in bitcoin was linked to these suspicious transactions involving Tether , Bitfinex and bitcoin. That’s a $150 billion dollars of profits that have a cloud of suspicion over them. The NY attorney general has started investigating these transactions as well. The folks at Tether have been asked to prove that there is in fact a paper trail showing 1 US dollar backing every token that was minted. Now I want to be clear. Whenever money is involved, you will find fraud lurking in the shadows. The financial world has seen fraud in banking, price fixing in Libor, fraud in construction, the list goes on and on. Cryptocurrency is not the problem per se. But it takes a deep investigation to uncover fraud in cryptocurrency especially when it is an inside job. There is no way that a single individual could manipulate the price and value of hard assets like gold or real estate. There is no single marketplace for trading in those assets. Moreover, the intrinsic value of hard assets is based on broad market fundamentals and not minute to minute or second to second price arbitrage. The underlying problem of course is that bitcoin has no intrinsic value. There are no market fundamentals that make bitcoin or any cryptocurrency more valuable a minute from now, or a week from now compared with today. So the arbitrary assignment of value is pure speculation which in my mind is very distinct from investing. In order to be considered money it has to perform two things It has to be a store of value It has to be a means of exchange Today bitcoin is neither a store of value nor a means of exchange.

Conclusions based on flawed assumptions are ultimately flawed conclusions. That makes sense. But when governments are involved, they don’t seem to adhere to that basic law of nature. Real estate developers will soon have to create or fund social and affordable housing if they want to build in Montreal. Projet Montreal passed a new housing bylaw in June of this year, following through on a campaign promise to give Montrealers more affordable housing. The new bylaw aims to regulate the real estate market and improve upon its current vacancy rate of 1.9 per cent, the lowest in years. Developers would have to enter into an agreement with the city to build affordable and social housing units, and family housing units, or give land to the city or make a financial contribution in lieu of building the finished units. The Mayor is hoping to get land for free out of the new rules. On a big project for example in downtown Montreal, The Mayor hopes it's going to be more interesting financially for developers to give the city land so the city can develop social and affordable housing. The number of units required to be social, affordable or family will depend on how many are being built overall and the location in the city. For example, for a building with 50 or more units downtown, a developer would have to build: - social housing equal to 20 per cent of the project -  affordable housing equal to 10-15 per cent of the project -  family housing equal to 5 per cent of the project The city expects condo prices to rise by 2 to 4 per cent because of the bylaw. I have to tell you that as a developer, it’s increasingly difficult to make the numbers work in today’s environment. This is simply based on the rising cost of construction, increased taxes and levies from government. For example, the development charges from the city have been steadily increasing and growing much faster than the rate of inflation. Only a few years ago, the federal government significantly reduced the value added tax rebate on new construction. This means that a developer needs to charge a 13% sales tax on the sale price of a new property. There is a small rebate, but most of the tax gets passed onto the end-buyer. Since the resale market has not gone up by 13% to compensate for this, it has had the impact of reducing or outright eliminating the profit margin for developers who build new housing. The industry still has not fully absorbed the additional tax. Many builders have exited the business entirely because the numbers no longer make sense. The smaller number of builders has created increased competition for fewer resources in the construction industry, which in turn has increased labor costs for construction. If we now have to build a significant proportion of the project that will introduce a loss and negative cash flow, the number of viable projects will decline. What government officials fail to recognize is that investment money has no geographic restriction. People who live in a geographic area don’t want to move. They are often anchored in their community. Money has no such restriction. The greater Montreal area is made up of several municipalities. If prices in the downtown are going to go up by 5% to accommodate this new bylaw, some will simply choose to live in one of the neighbouring communities. The truth is that if you take 1/4 of a project and make it unprofitable, you need to compensate for that in other parts of the project. My financial models show that the real impact to maintain parity would require a price increase of 10% on the remaining units in order to make a project viable with the loss of profit from the affordable units. This is yet another example of government using flawed math to justify their position. Conclusions based on flawed assumptions are ultimately flawed conclusions.