The Real Estate Espresso Podcast

Anne Amagrande hails all the way from Pasadena California. She can be reached on LinkedIn or on her website at Amagrande.com.

On today’s show we are talking about how to speak to bureaucrats. This past week I attended a public consultation meeting with city officials. They are trying to gather community input on the question of housing quality, availability and affordability. Tenant advocacy groups showed up at the meeting in force. They had lots of stories of problems with their property that quite frankly should not have happened. I have a tremendous amount of empathy for the folks in the room who have endured hardships. It’s true that not all landlords are educated on how to run a quality rental business. People had stories of molds being hidden behind a coat of paint. They had stories of recurring pest infestations. They had stories of broken elements that had not been repaired despite numerous requests. The city has a mechanism for enforcing property standards. It involves a simple phone call to a 3 digit hotline and any resident can report a problem to city bylaw enforcement officials. The most common complaint at the meeting was that residents either didn’t know about the hotline or were too shy and intimidated to call. The proposed solution would be to institute a landlord licensing scheme that somehow would improve the quality of the rental properties. The cost of implementing such a system would inevitably be passed onto tenants, making housing even less affordable. One of the proposals is to levy an administrative charge against landlords that face repeated complaints requiring repeated visits to the property by bylaw enforcement officers. The funds collected from the administrative fees would funds proactive enforcement. Let’s unpack what this really means. I stood up at the meeting and made the case for properly addressing rental affordability. The root cause of affordability is that the underlying cost of properties in the city is high. When a basic commodity 3 bedroom townhouse costs $450,000 to purchase, the cost of owning that property is going to be somewhere in the region of $2,500 a month. It doesn’t matter who owns the property. If the property is owned by the landlord who rents it for zero profit, it’s still going to cost $2,500 a month. That’s out of reach for many in the community. We discussed many ideas for creating affordable housing. But at the end of that discussion city officials said they weren’t really trying to create affordable housing. They were simply trying to make sure that in the process of implementing any new rules, they didn’t make the situation any worse. So the study was really about what if any new rules would be implemented to govern rental housing. The city does maintain statistics on where they get complaints. Of the 133,000 units in the market, only a small number are the subject of property standards complaints to the bylaw enforcement hotline. In fact 233 units are responsible for 23% of the complaints in the city. We’re talking about some 233 units that represent 0.17% of the total inventory in the city. That’s less than 2 properties in 1,000. In my view, the city knows exactly where to focus its attention. It’s on those 233 properties. The second major question was on the topic of proactive enforcement. City staff mentioned the concept of proactive enforcement on several occasions. That’s a word that is code for going on a fishing expedition to find problems. You can't get the police to respond to reports of drug activity at a property, real criminal activity. City staff seemed to accept my argument that the bigger picture priorities needed to be examined. The point of today’s episode is that you absolutely can influence recommendations made by city staff to city council. You can absolutely influence decisions that are made by politicians. But you have to get out from behind your desk, you have get off your sofa on a Tuesday night and go down to city hall and engage in the dialog directly, face to face.

Entrepreneurship is a hot topic these days. The story of the startup founder turning a great idea into a thriving business is the raw material of modern urban legend. Then there’s the dark side. There’s the stories of greed, of jealousy, and of insecurity. These are all human traits that make up part of the human condition. Movies like the Big Short have documented the headwaters and the aftermath of these human characteristics. In the latest news, Business Insider is making a WeWork documentary with a hit Netflix producer about the unraveling of the world's most valuable startup. Since its inception in 2010, WeWork has amassed more than $12 billion in investment from some of the world's smartest business leaders and venture capitalists, including JPMorgan's Jamie Dimon and SoftBank's Masayoshi Son. At its peak, the coworking company commanded a $47 billion valuation and set its sights on a public offering of up to $100 billion. Today, Business Insider and Campfire announced they are making a documentary about the rise and fall of WeWork. The tagline for the documentary is that It's the story of what happens when Silicon Valley greed goes haywire and the idea of building a big business becomes more important than the fundamentals. I actually take exception to the Silicon Valley reference. WeWork tried to associate itself with Silicon Valley as if to imply that it could play by a different set of rules. The company was a real estate company and it clearly didn’t play by the rules of any sane real estate investment. It's really the story of a charismatic leader who both hoodwinked investors and was enabled by them as they tried to drive returns on their investments. Thousands of employees are now paying the price. The latest news from WeWork is that they intend to lay off thousands of employees in order to reduce their cash burn. But they had to delay the layoff notices because the company didn’t have enough cash on hand to pay the severance. The company’s board of directors had set a deadline of October 22 to review two proposals for taking the company forward. The first proposal is from Softbank who would take over the company with the injection of another $5B in cash over the next several years and ultimately steer the company to profitability. The company would be valued at $8B after the transaction and would leave Softbank deep underwater on its investment, but at least offer the possibility of a profitable outcome at some point in the distant future.  The second offer from JP Morgan is a $5B debt deal that would further leverage the company. That deal would offer up to $5 billion in secured and unsecured bonds that, unlike SoftBank’s proposal, wouldn’t dilute or devalue the stakes of WeWork’s existing investors. It all would have the effect of pushing WeWork’s equity investors further down the capital stack, standing in line behind bondholders whose high-interest debt positions would take priority. I don’t want to see a Netflix documentary on WeWork. We’ve already seen that movie before. It’s been playing out in the newspapers over the past month. In fact Business Insider has written over 255 pieces on WeWork in recent months. It’s been regular front page news in the Wall Street Journal for much of this year. What I want to see is Adam Neumann appear as a contestant on Shark Tank. That’s right. I want to see him sell his idea to Barbara Corcoran, the maven of NY Real estate where Wework has 53 locations. I want to see him sell Mark Cuban on a billion dollar investment in exchange for 3% of the company. I want to hear Kevin O’Leary’s eloquent signature sound bites. I want to hear Mr. Wonderful say “The purpose of being in business is to make money.” I can’t stand to watch people murder money. I want to hear the closing statement “and for that reason, I’m out”.

On today’s show we’re going to run a small experiment. Let’s imagine that you went into the casino in Vegas wearing a baseball cap that says Federal Reserve. You sit down at one of the card tables and start playing. But one player, the one with the baseball cap has some special powers. They can print cards at will. Moreover, they don’t exactly deal out the newly minted cards uniformly at the table. What do you suppose would happen? They’d be hauled out into a back alley behind the casino and some thugs would probably break their knees. But that’s just a hypothetical situation. Let’s get back to the real world. The year was 2008, there was a real banking crisis underway. Some of the largest financial institutions in the US and in fact around the globe were at risk of collapsing. President George W. Bush signed the $700 billion bank bailout bill on October 3, 2008. ... $700 billion was a shockingly large number. It made headlines around the world for weeks. It was the subject of books and movies. The situation was truly a crisis and it called for desperate measures. By implementing these emergency measures, Treasury Secretary Henry Paulson wanted to take these debts off the books of the banks, hedge funds, and pension funds that held them. His goal was to renew confidence in the functioning of the global banking system and end the financial crisis. The economy was in uncharted territory. Government was in uncharted territory. It needed a new vocabulary. The term quantitative easing was brought into the financial lexicon. This fancy term was much more palatable than the crass synonym of printing money. Thankfully, today the economy is healthy. Unemployment is near 50 year lows. Inflation is low, worryingly low according to some government officials. We have a US federal election coming in a little over a year. So then why would the Federal Reserve be printing, um, I mean quantitative, no that’s not it, Why would the Federal Reserve be buying US Treasuries? The Federal Reserve began buying short-term Treasury debt Tuesday at an initial pace of $60 billion a month, but officials say these purchases are nothing like the bond-buying stimulus campaigns unleashed by the central bank between 2008 and 2014 to support the economy. When private investors buy bonds, they use cash, borrow funds or sell assets to raise money to fund those purchases. The Fed is different. It doesn’t have to do any of that because it can electronically credit money to the bank accounts of bond dealers that sell mortgage and Treasury securities. The Fed gets the bonds, and the sellers’ bank account increases by the same amount as the bonds’ value. Banks keep deposits at the Fed, known as reserves, and when the Fed buys bonds from banks, their reserves rise by an equal amount. They’re like that special player at the card table. The Fed bought bonds to stimulate the economy between 2008 and 2014. Isn’t this the same thing? Not according to the Fed. The central bank has taken pains to emphasize that these purchases don’t represent a return to what is known as quantitative easing. We’re not allowed to call these purchases QE, but they look exactly like the QE bond purchases of 2008. Now at $60 billion a month, that comes to $720 billion a year. But wait a minute, the Fed printed $700 billion in the middle of the biggest crisis in decades. Now 10 years later, with no crisis, they’re going to print $720 billion a year.

Yesterday was the Federal Election in Canada. The incumbent Liberal Party under Justin Trudeau had a majority prior to the election with 177 out of the total 338 seats in Parliament. At total of 170 seats are required to form a majority. There were 6 parties vying for position in the election. The two major parties are the Conservative party which is a little right of center, and the Liberal party which sits left of center. The third party is the New Democratic Party is decidedly left wing in their policies. There are a few wild cards. The Bloque Quebecois, is a party based in the province of Quebec and they are exclusively focused on furthering the interests of Quebec, Canada’s only French speaking province. Historically, the Bloque was furthering the agenda of Quebec independence. These days they don’t talk about separatism and are focused on protecting Quebec’s interests at the Federal level. The Bloque Quebecois could hold the balance of power in a coalition government with either the Liberals or the Conservatives. The Green Party, the People’s Party, the independents, and a few other fringe parties make up the balance. When you look at what each party is proposing on their election platform, there are supposedly about a dozen election issues, at least according to the media. Then there’s the big issue that really decides the votes. Do voters like the candidate who is was elected as leader of the party who would ultimately be named Prime Minister. Do they conslder the politician to communicate in an authentic way, or do they find them manipulative? Justin Trudeau who has held the role of Prime Minister for the past mandate narrowly won enough votes to form a minority government. That means that any major legislation will require a coalition with at least one other party and possibly more. The popular vote separating the Liberal and conservative parties was less than 2% different. Neither party managed to secure more than 33% of the popular vote. So it’s really surprising that any party was able to form a government with such a low percentage of the popular vote. The US has a decidedly 2 party system. You either get a democratic congress, a democratic senate and a democratic white house, or a republican congress, a republican senate or a republican white house. But in Canada, there are multiple parties. There are two major parties that seem to capture the majority of the votes, but there’s nothing enshrined in the system that limits the number of parties. Minority governments are traditionally unstable. They also tend to gridlock and don’t get much done. Countries that have an electoral system based on proportional representation have a very hard time forming a majority governments. You only need to look at Italy and Israel for examples of the pitfalls of a proportional representation electoral system. After several weeks since the last general election in Israel, Prime Minister Benjamin Netanyahu came forward today to concede that despite having the most votes, he has not been able to put together the democratic coalition needed to from the government. Minority governments have a history of not lasting very long in Canada. They often fall within 18-24 months and the country goes back to the polls. This particular election was one of the most divisive in recent memory. There were numerous personal attacks and issues where the candidates themselves became the issue. Much like in the US, the political division is regional. Canada tends to see a stronger base of support in the Western provinces for the Conservative party, and a strong based of support for the Liberal party in Ontario and Quebec. I found there was little to vote for, only things to vote against.

Today’s show is a case study of a specific project which my wife and I visited this weekend. It seemingly has all of the right elements. The location is one of the best in the city. It’s directly across from the Rideau Canal one of the most historic and picturesque waterways in North America. During the winter months, the canal is the site of the world’s longest 7 mile skating rink. The property is walking distance to restaurants, shops, two universities. It’s in the heart of the community and still has lots of green space right outside your doorstep. The location counts some embassies in the same area overlooking the canal. The project is being developed by an experienced development team who have completed several other successful projects. The architect is one of the premier architects in town. The general contractor is one of the largest and most established contractors in building concrete structures in North America having built numerous high rise buildings, government office towers. They have over 14,000 employees and have been in business over 100 years. The showroom and sales center is situated in an old church that resides on the site of the future condo tower. The developer took the project through the entitlement process and the project is approved. The six story building has a few technical challenges. It’s across the street from the Canal which means that the water table is going to be extremely high. The underground parking will have to be protected from water intrusion that will ultimately be present. This will increase the cost of construction. The site is not that large. The original plan was for 32 units on 6 floors. The floorplans are large and spacious. The terraces and balconies are luxurious and spectacular. Once you have a project that is entitled, that process defines the envelope of the building. It defines the setbacks from the property line, from the street, and the height. In some cases, if buildings are going to be higher than other properties in the area, the city will require the upper floors of the building to be set back and have a smaller footprint so you don’t have a huge rectangular block. This creates tremendous opportunities for roof-top terraces on the upper floors. But there’s one small problem. The units are not selling. Why? Because in my opinion they’re too expensive. In fact the developer has pulled all the pricing from their marketing materials and have stated that they’re in the process of redesigning the interior. They plan to increase the number of units from 32 to 40 without changing the exterior envelope of the building. There simply isn’t that large a market for apartments at the 2.5M price point. Underground parking spaces are going to be priced at $45,000 each. At the end of the day, the target clients are going to be people who are empty nesters who want a property in a premier walkable location combined with the security of a lock and leave condo. They want to know that the maintenance of the building is handled and that they can spend a few months away in the winter without having to worry about taking care of their property. The problem is that the price point is too high. As developers we tend to think in terms of price per square foot. But retail buyers don’t think in those terms. Retail buyers think in terms of price point, of affordability. Tenants don’t think in terms of rent per square foot. They have a monthly budget of so many dollars per month. They might want a large two bedroom for that price, but if they can’t get it, they’ll accept something smaller that fits within their budget. If you’re choosing to develop a premium product, pay very close attention to your market demand and be prepared that it could take a lot longer for your project to sell than you imagine.

Hayden Crabtree is based in Atlanta Georgia and he owns and operates storage facilities in multiple states. On today's show we do a deep dive on a specific case study that I think you'll find fascinating.

Our guest today is the host of the Thought Leader Revolution Podcast. Nicky specializes in working with business leaders, olympic athletes, and authorities who are looking to establish themselves as thought leaders. You can reach Nicky at http://ecircleacademy.com. He is also offering to ship you a free book written by Matt Church called the Thought Leader's Practice. https://www.thethoughtleaderrevolution.com/free-book/

On today’s show we’re going to do a deep dive into a city consultation process as they grapple with the question of how to manage what is perceived as a problem with affordable housing in our city. To that end, they’re holding a number of public consultations including a public survey. Over the course of this past year, the City has met with and received input from multiple community and business organizations to discuss rental housing regulations. The purpose of going into this much detail is for you the listener to become involved in your own municipal consultations and for you to recognize that you have a voice. Tenants have shared a range of experiences related to housing quality, from very poor to excellent. While there is significant support within the community for a licensing/registration system for rental housing, the majority of tenants do not support these measures. In approximately 9 out of 10 cases, landlords make repairs when required and there is concern about the increased rental costs that would result from licensing and inspection fees. However, when problems do occur, both tenants and neighbours want to see a more robust response from the City. There is strong support for proactive enforcement as well as enforcement targeted towards properties with a history of violations. From landlords and the real estate industry, the city has heard that over-regulation will deter new construction and could also result in current units being taken off the market. This will likely result in higher rents and more residents living in unaffordable housing. However, it is important to note that the majority of landlords and tenants both agree that enforcement should target specific problems when they occur rather than taking a broad “one size fits all” regulatory approach.

In the good old days you went to the big box store and purchased a software application in a large cardboard box. The software as contained on a CD and you installed the software on your computer. These days, software is rarely a product any more. It’s increasingly cloud based and sold on a monthly basis as a subscription. That is what we now know as software as a service. The latest is something called banking as a service that aims to disrupt the world of banking much life the sharing economy has disrupted taxi services, hotels, and even the dining experience. On today’s show we’re going to do a deep dive on some of the innovations in banking that fall into the open banking and banking as a service initiatives that abound in the industry. These days a lot of the literature focuses on the mechanics of gaining access to bank data through defined software interfaces. These Application programming Interfaces (API’s) define how a third party software company can access customer data, or bank functionality or both. It’s important to make a distinction between these two because the security of your money is at stake. Unless you are in the business of banking, a lot of this can sound like technical jargon. On today’s show, we’re going to break it down so that you can understand what it means to you as a user of banking services. First of all, we need to spend a little time on definitions. Platforms break down into four main areas: Identity Verification Move Money Account Origination Design and Manage branded customer debit cards There are a large number of startup companies developing products in the financial technology space. They’re called fintech companies. So what do fintech companies do? They offer services that previously were not possible in the market. An example is a solution for taxis and public transportation: In this service, the bank's customers can send for a taxi from the bank's own app and identify all of the charges; and the bank gets payment fees and offers the service itself. Intuit, the maker of Quicken, Quickbooks, and Turbotax has a new product called Mint. Mint makes it possible to get a consolidated view of all your accounts, credit cards, loans and so on across multiple financial institutions on a single dashboard. You can see your entire financial life in one place. As you can imagine, that requires that each of those institutions provide secure access to your accounts so that you have the benefits and convenience of a single dashboard without the security risks of opening up your financial records to any unauthorized access. The mint offering includes a bill payment tracker, a budget goal tracker, an investment tracker, and an integrated credit score tool. You also have access to services and products including insurance quotes, loans, and 401K to IRA roll-overs. Another one of the recognized leaders in the open platform space is BBVA from Madrid in Spain. The opening of these platforms would enable banks to play more directly in services like peer to peer payment which up until now have been in the exlusive domain of companies like Paypal. The European Union has set clear rules in place for interchange of bank information and for open banking standards. These rules have put European banks well ahead of banks elsewhere in the world in terms of adopting open standards and more advanced service offerings. One of the major frontiers in fintech is the interchange between traditional bank accounts and various blockchain technologies and crypto-currencies.If and when that happens, it may revolutionize electronic commerce on a global basis and change the relationship between you, your smart-phone, your bank, and virtually every aspect of your financial life.