On today’s show we’re talking about the many items that could prevent a development project from being realized. Some of these will be obvious, and then others simply defy rational explanation. Think of today’s show as a 5 minute Master-class on land development. Whenever you are contemplating a development project, there are dozens of constraints that are being placed on the development of a property. Often, the city will say no to a project for reasons that are surprising. I’ve seen projects denied for lots of reasons. On today’s show we’re going to look at the top 10 reasons why projects are denied. Zoning Zoning is all about land use. We’re talking primary use and secondary uses. The city decides in its official plan where they want to locate certain types of development. Generally speaking you want to co-locate similar types of land use. You want your industrial lands clustered together, your commercial retail grouped together. If your proposed project doesn’t fit with the plan, it is probably going to be denied. 2. Density The infrastructure of the city is designed to accommodate a certain density in a given area. Density relates to numbers of people in a given area, as well as land coverage. 3. Traffic Impact Many times you will be asked to perform a traffic impact study for your new proposed project. The impact of your new development on the existing traffic patterns in the area is something that the municipality will take into account. 4. Lack of utility capacity Cities develop their plan for utilities based on density. Your concept for that new apartment complex may meet the zoning requirements. But if the city doesn’t have the sewer capacity for another 200 toilets and showers and washing machines, it doesn’t matter. It could take years before the city digs up the streets and installs a larger diameter pipe to carry the additional load of higher density. 5. Neighborhood opposition If your project could impact the neighbours, you may be asked to hold a neighborhood consultation. If enough of the neighbours object to your project, that might be enough to kill it. Politicians often ask a couple of questions. How much increase in tax revenue will result from the approval of the proposed project? Secondly, how many votes could we lose if we say yes to a proposed project. 6. Drainage If you take a parcel of raw land and start covering it with buildings and paved surfaces, you eliminate the ability for that land to absorb water. The water needs to go somewhere. If constructing your project will result in flooding your neighbours, then your project is dead. 7. Lack of School capacity If you’re going to build that new subdivision with 200 houses, a percentage of those homes will have school aged children. If the existing schools in the area are at capacity, adding homes will only make the problem worse. Schools take longer to plan and build than individual houses. So you may experience the refusal for your proposed project, simply because the schools don’t have the capacity. 8. Neighborhood Impact Separate from your neighbours opposing your project, your project might create problems for neighbours that they’re simply unaware of. I’ll give you a couple of examples. If your proposal is to build a tall building, your building might cast a shadow on residential properties nearby. Imagine if that sunny southern exposure window in a neighbour’s house never saw the sun again because there’s now a building in the way. 9. Architectural Guidelines Sometimes the community has designated an areas to maintain a certain architectural character. 10. Parking This is probably the biggest constraint on development projects. Parking takes up a lot of land. In fact, it takes often as much area as the living space.

On today’s show we are talking about the top three mistakes that I see people make in an initial meeting when they are meeting with a potential business prospect. Confusing introduction It’s a bit of a cliche, but you don’t get a second chance to make a first impression. That has to do with the way you look, the energy level you bring to the interaction, and the way you introduce yourself. Some people who are real estate investors also have other things going on in their lives. If you are here to talk real estate, then talk about real estate. Don’t lead with the fact that you sell life insurance. People have a tendency to put you in a box. Understand that this process is at play. They will make a decision in the first few minutes. They will either want to get to know you better, or they will be wondering how long before they can politely talk to someone else. You don’t want to lie or mislead. If you are a doctor, then start with the fact that you invest in real estate. You can then casually mention that you also see patients in the afternoons. If you are are socially insecure, then this is something to work on. Becoming confident in social situations can be an acquired skill, developed with training and mastered with practice.  If you confuse the other party, the chances of them doing business with you drop dramatically. A confused mind doesn’t buy. 2) Talking too much If you spend more than 30% of the time talking, you are probably talking too much. If you are answering a question, offer an answer that is a conversation starter. Let’s say that you are tempted to talk about one of your projects. You might be building a small group of houses. Rather than talking just about the houses you are building, you can frame your answer in a context. That leaves an opening to talk further about the building project, or the context. So you might say something like, We’ve observed the huge reduction in inventory for sale, combined with the fall in affordability for single family homes. So we made the decision to reduce the size of the homes to reduce material cost, at the same time that prices are rising. That means that we have the potential to increase the profit margin, but more importantly reduce the risk to the downside if market conditions change quickly in the next 12 months as they always could. So then the other side would almost be compelled to ask where you made decisions to reduce cost. Maybe they take the conversation in the direction of the economy. Maybe they talk about decisions they have made in response to the current market conditions. You have the possibility of establishing a real connection with the person you just met. But if you just talk about yourself, they will lose interest quickly. If you launch into a speech about how you designed the homes, you will probably lose their interest very quickly. There is a natural cadence to conversation that is a little like a game of tennis. You want to pass the ball back and forth over the net and keep the rally going. If you run off with the ball and keep it on your side of the net, then it ceases to be a rally. It ceases to be a conversation. Some people talk too much when they get nervous. It’s time to truly listen.  3) Don’t ask questions If you are not being curious, how can you possibly have a chance to demonstrate that you are interested in the other party. But most important, you don’t get to dig down a few layers and develop a relationship. There is an art to asking questions. Some people ask questions in the way a prosecutor would cross examine a witness. You may know people who do that. We are not talking about that kind of questioning. We’re talking about establishing rapport. Finding out what you have in common, what you can both relate to. Questions that are too specific can sound like an inquisition too early in a relationship.

On today’s show we are talking about how market cycles form and the effect it can have on the economy and a business. How do you know when you are in a bubble and how do you protect against catastrophe when you are surrounded by insane market conditions? Market cycles are often driven by an irrational fear. We saw it last year during the early weeks of the pandemic. Grocery store shelves were emptied of paper products, of hand sanitizer, of cleaning supplies. Last night I went to the grocery store and the shelves were full of toilet paper. Not only that, toilet paper had taken over the seasonal shelf that last week had been full of Easter candy. Like many, we had a three month supply of toilet paper. Are we using more toilet paper than last year? Clearly the answer is no. So it stands to reason that if toilet paper sales in 2020 were $2B above 2019, then at some point toilet paper sales will fall to $2B below the average. That represents a fall of $4B from the peak sales in 2020. You’re probably thinking ok that’s toilet paper. What does that have to do with my business? What does that have to do with real estate? The market conditions a decade ago are a distant memory. Back then you could go to auctions on the court house steps and pick up half a dozen distressed properties over your lunch hour. You could buy properties for 60% less than construction cost. The population had not changed. People still needed a place to live. How did the demand evaporate and create these strange market conditions? The question is, with new supply coming into the market at the rate of about 1.2-1.5 million homes a year in the United States, and roughly 1/4 million housing starts in Canada, will there be enough demand to absorb the new supply in the locations where that supply is being added? This is the classic question of assessing the headwinds and tailwinds in a market segment. Unlike toilet paper, which can easily be shipped to meet the demand, houses are firmly planted in the ground. You could have a housing boom in Fort Lauderdale at the same time that you experience a housing recession in Detroit. That has more to do with migration trends than it does population growth. The lack of supply could be real, or perhaps artificial. Was there really a lack of toilet paper last year? Not really. People were hoarding toilet paper. They were buying toilet paper to hold. They were not selling it, and they were not using it any faster than normal. The question is, are people buying more real estate than they need and just holding it. How many people from the NE USA are buying second homes in Florida or the Carolinas? Those condos near the beach sit empty for most of the year. Perhaps they compete with hotels in the short term rental market. That does not constitute new household formation, but it does absorb inventory. How many young adults under age 30 are still living at home with their parents? This is a shocking statistic. In February of 2020, 47% of young adults between 18-29 were living with at least one parent. By July of 2020, that number had grown to 52% of young adults between 18-29 were living with their parents. Those are numbers that have not been seen since the Great Depression in the 1930’s . So what household formation trends can we expect? We know that the median age of first marriage has grown by two years in the past decade. The median age for men is 30 and 28 for women. So when we go from a shortage of toilet paper to a surplus, could you have predicted those market conditions? When real estate markets will go from low inventory to a surplus, what forces will drive that shift? Could you have seen those forces in hindsight?

While the world was distracted by a crippling pandemic, major economic shifts were underway and the headlines totally missed it. Changes that affect the course of history happen slowly at first, then all of a sudden. I believe we’re in one of those phases again, right now as we speak. The last time this happened was 1971. We’re still bearing the fallout of the damage that Richard Nixon did to the United States back in 1971 when he took the US dollar off the gold standard. I remember those days even though I was just a child. I was eight years old. We used to listen to a half hour news radio show every evening during dinner time at my house. I remember the news vividly. I watched the news conference when Nixon made the announcement. I remember the OPEC oil embargo of the US. Naturally, the narrative on the news made the oil rich nations of the middle east to be the enemy. It was those nasty greedy oil Barrons in Saudi Arabia that were responsible for the long lines at the gas station, the unprecedented prices for a gallon of gasoline. When in fact, the oil Barrons were quite right to be upset at the notion that they were being paid less for their oil with the illusion that the price remained the same. What followed was a period of inflation, unlike what had been seen in the US in recent memory. Inflation was out of control. It started with oil, then spread to other commodities. Eventually the price increases trickled through the economy and spread to include rent, transportation, food, and eventually wages. It was a time of labour strife, of unions going on strike to protest declining purchasing power and the demand for higher wages. There were strikes at car manufacturers, the post office, at airlines, the railways, the longshoremen unloading cargo ships. The culprits were the big bad corporations who were exploiting their workers. Or were they? Perhaps the erosion of the purchasing power of their wage was really to blame. But since the government wasn’t paying the majority of pay checks in those days, you could only look to your employer for a raise, not the government. So here we are in 2021, with commodity prices shooting up and yet inflation is still below the 2% target. But wheat prices are up 33% of last year. Oil prices are triple what they were at this time last year. Copper prices are up 72.4% over this time last year. Lumber is up 260%. Corn prices are up 80% over last year. Real Estate prices for residential homes are up 16% nationwide. Yet somehow inflation is worryingly low, below 2%. Somehow there is either a disconnect, or the effect has yet to trickle through the system. China is America’s largest trading partner. The tone of the talks this past week in Anchorage Alaska between the US and China have made it clear that China is taking the dominant role in the discussions. OK. So what does this have to do with real estate? If you’re a real estate investor and you’re trying to underwrite deals based on flat market assumptions about inflation, it’s getting more and more difficult to create a financial model that reflects the reality we are now experiencing. If prices are up, will rents follow suit? Transportation costs are up dramatically. The balance of trade can be clearly seen in the cost of transportation. Shipping a container from California to Shanghai cost $445. But that same shipping contained coming from China to Long Beach California costs over $3,000, and if you want to ship to the US East Coast, add another $700. The question is how long until China no longer accepts the devaluing US dollar as a means of payment? When that happens, you will see a rapid drop in value of the US dollar. When that happens, you want to be holding real estate and as few dollars as humanly possible.

Collins asks.  I’m purchasing eight acres of Wetlands. Many people do not know the difference between Flood Zones and Wetlands... which limits the amount of people with whom one can discuss options. The entire site is designated as wetlands. I have an approved permit from the Army Corps of Engineers for a fill pad and building, but NOT a city approved building permit.  I would have to apply for and receive a Wetland Development permit from the City. The city requires a 2:1 mitigation ratio (i.e. 2 square feet of mitigation credit for each 1 square foot of wetland filled…).  The city also requires undisturbed wetland areas to remain in a natural wetland state, so the yard surrounding the proposed building will have to be natural. This means no topsoil and sod is allowed for a manicured lawn, and the only plants or landscaping allowed have to be wetland species plants and trees, no invasive species or non-native wetland landscaping that are typical in a normal, suburban yard landscape. What are some creative ways to use or leverage wetlands? Perhaps borrow against the land as collateral? Or dig in for the long haul and seek mitigations in order to develop? Collins, This is a great question. The question of land value is one that varies widely based on the designation of the land. In my experience, land increases in monetary value only when it has development potential. Land that is zoned rural or agricultural, or environmentally protected is worth very little. You could have the exact same land zoned for residential that sells for $800,000 an acre. That exact same land zoned agricultural or environmentally protected might be valued at $4,000 an acre. We’re talking a 20x increase in value. Wetland mitigation is a designation worth getting for a property. You are correct that in some cases, a property with a wetland designation doesn’t necessarily mean it’s not suitable for development. For example, it could mean that the water table is buried only to a shallow depth beneath the surface. If it’s wet, it could affect the geotechnical stability of the soil It might mean driving piles down 40 feet or until you hit bedrock before in order to create a stable substrate to build a structure on top. A conventional cement foundation may not work in a wetland situation. So your cost of construction could be higher. The range of Wetland mitigations vary widely. At one end of the spectrum, you simply write a check to the relevant authority and they give you a certificate of mitigation. That form of mitigation is called compensatory mitigation. If you’re going to be negatively affecting a wetland, then the state may want some money in exchange to protect other wetland. Generally, mitigation obligations are not assessed on an acre for acre basis. Unavoidable net losses to wetland ecological value resulting from a project are quantified as habitat units using the appropriate Wetland Value Assessment (WVA) model. You can trade these habitat units resulting from a monetary mitigation action to equal the habitat units lost. At the other end of the spectrum, you could spend a ton of money and resources and get absolutely nowhere. Creating a mitigation bank is a complicated high-risk, high-return venture that requires a high-level of specialized expertise. At the very least, you will need to enlist the help of several highly qualified, experienced consultants to navigate the multi-step process. Another option to create value would be to develop a portion of the property and then donate a portion permanently to conservation using a conservation easement. The tax benefit of the conservation easement could be substantial since the value of the land for tax purposes might be assessed at its highest and best use, rather than its value as a wetland.

Kyle Wilson is best known as the President of Jim Rohn International. He has worked with so many of the world's top personal development thought leaders including Zig Ziglar, Brian Tracy, Mark Victor Hansen, Les Brown, Dennis Waitley, to name just a few. On today's show we're talking about how to build a long standing relationship with your customers without "selling them". Kyle is best known for saying that he never uses a marketing tactic that violates a principle.  To learn more, visit kylewilson.com. If you send Kyle an email to [email protected], he will send you a copy of one of his most recent books, "The Success Habits of Super Achievers". Let him know that you heard him on the Real Estate Espresso Podcast.

Jas Takhar is one of Canada's top 1% brokers. He manages a large team in Toronto. On today's show we're talking about the market cycle and how investors should be looking at the dynamics in one of North America's fastest growing cities. 

On today’s show we’re talking about a losing bid. Any time you lose a bid on a property, there is a natural reaction to second guess your offer. Did we offer too little or was the winner out of their mind? It happened to us this week. There were a total of 8 offers on this property in a good location. We calculated our offer price based on a reasonable set of zoning assumptions and a reasonable balancing of risk. A day after losing the bid, we spoke with the winning bidder to understand why they had bid nearly $900,000 more than our offer price. It came down to assumptions on the entitled density. If we could only get a low density approved, we would earn zero profit at the price the winner offered. But if he was right, even his offer price was still a bargain purchase price. It all comes down to what you believe the planning commission and ultimately city council will approve in that location. After careful deliberation, and the opportunity to do due diligence, we made an even higher offer to buy the contract from the winning bidder. So not only did we offer to pay $900,000 more than our original offer, we put a premium to compensate the winning bidder for their efforts. We may have got it wrong, or maybe we were right. But now we will have the time to perform the proper due diligence and determine the true potential for the property, and therefore its value. So why would we offer an even higher bid on the same property after having lost the bid? As long as the project ultimately meets our financial metrics, it really doesn’t matter that we’re paying a bit more. Would I prefer to pay less? Of course. The unfortunate thing about auction environments is that the winner almost always ends up paying more than if they were the only bidder. The question is whether auction fever takes over and the winner ends up paying too much. We are pretty disciplined investors and make sure that we don’t take needless risks. So now that we have the property under contract, the key is to determine the viability of the project during the due diligence period. The fact is, we don’t know if the project is truly viable yet. We will need to take the time over the next several weeks and truly determine the envelope of this project. We will run multiple different scenarios. What happens if we get a density of 4 units per acre, or 6 units per acre or how about 12 units per acre. Each one of these scenarios is a completely different product with a different market positioning. But now that we have it under contract, we have the control to make good decisions. Do we feel bad that we’re paying even more? Not at all. We’re constantly learning. What makes this project safe is the notion that land in the core of the city is fully developed. The city is one of the fastest growing cities in North America. It’s certainly within the top 10 fastest growing cities. The inventory is low, and the product we’re aiming to develop will continue to be in high demand, even if market conditions soften. Typically when there is a downturn in real estate, it affects the most expensive end of the market first. This particular property has multiple exit strategies. So we feel safe in developing a few hundred units of new residential housing. We’re still buying the land in a hot area at under $3.50 per square foot. The process of development can a little messy and unpredictable at times. You are literally dealing with a blank canvas. It takes multiple iterations of a design concept to arrive at something that truly fits in every respect. It has to fit the area in terms of features, price point, amenities. It’s truly a creative process that is an art form.

On today’s show we’re going to look at one of the largest barriers to housing affordability. But before we do, we’re going back to basic principles. We’re going to start with the law of supply and demand. If demand goes up and supply goes down, then it follows that prices will rise until a new equilibrium is reached. That’s exactly what we’ve seen over the past year. But in areas of highest prices, we have seen that the acute shortage is not of construction materials, nor has it been the ability to construct, but it’s been the cost of land. But it’s not just land that is expensive, but low density is expensive. Some communities have tried over the years to maintain their sense of community by restricting zoning. Property values have risen accordingly. Let’s look at the Township of Southold on Long Island. This is an area near the North-east fork at the far east end of Long Island. The community is extremely wealthy. Properties are expensive, and the community is decidedly anti development. According to the Township’s own zoning guide, land use within the Township has not changed much in the past decade. But here is the one statistic that fully describes the story. There are only a little more than 13,800 homes in the entire community. That’s a density of 1.27 units per acre in the residential zones. That’s extremely low density. The community has averaged only 30 new construction building permits per year over the past decade. It means that prices have risen to the point where people who live in the area could not actually afford to buy into the area. If they sell their home, they would have to leave. They can’t afford to stay. This situation describes so many communities across North America. But it’s not that Southold lacks land. On the contrary. They have plenty of it. Their zoning specifically is designed to be exclusionary. By artificially creating scarcity, these communities create an aura of exclusivity and therefore they keep the values of property high. Lack of affordable housing is a problem, yes. It’s mentioned in their 58 page zoning guide. But it could be argued that the lack of affordable housing is not really a problem, it’s a feature. Under the recently announced 3.1T Biden infrastructure bill, hidden deep within the pages is a provision to make housing more affordable. The proposed program of at least $5 billion would offer grants to cities and towns that relax restrictions on new construction. This initiative was reported this week in the Wall Street Journal. It’s interesting because it’s attacking the issue of affordability at one of the root causes of the problem. Many of the constraints on development are entirely artificial. It’s not that there is not sufficient land available. It’s that local governments are not allowing you to build projects that would result in affordable housing. They do this by limiting density. The Biden administration said in a fact sheet that the program would award “flexible and attractive funding to jurisdictions that take concrete steps to eliminate such needless barriers to producing affordable housing.” The White House won’t penalize cities if they don’t want to participate, according to some administration officials. Earlier this year I reported that some towns like Minneapolis have taken steps to relax their zoning code and allow for higher density in order to bring more affordable housing into nice areas. The link between value and entitlement has never been more clear.

Today’s question comes from Jeremy. He asks, I’m looking to develop a residential subdivision that is close to a naval air force base. There are plenty of houses all around the subject property. Could the airport affect what gets built on the property? Jeremy this is a great question. The regions around airports are all subject to elevated noise levels. The good news is that modern civilian aircraft have got a lot quieter as more fuel efficient aircraft have replaced the early jet engines of decades past. Newer aircraft use a turbo-fan high bypass engine that relies on the turbine to rotate a fan, rather than simply using the thrust of the tent engine combustion to propel the aircraft. But airports that are close to residential areas regularly get complaints from the general public. The airport authority don’t like getting complaints, so instead they restrict what can be built near the airport so that they don’t get complaints. The aviation authority in most countries have a set of standards that they use to both measure and enforce noise coming from an airport. The FAA has a measure of noise called Community Noise Equivalent Level (CNEL) and a second measure called the Day Night Average Sound Level (DNL) On a map these noise contours show the measurements as you get further from the airport. Some airports that are close to residential areas like John Wayne airport in Orange County have even gone so far as to restrict flight departure and arrival times so as not to disturb the neighborhood. No flight will depart John Wayne before 7AM, and they also need to use noise abatement procedures. That means taking off at a steep angle of attack until the aircraft reaches the boundary of the airport property, then throttling back and using a slower rate of climb. There is a close interplay between the operation at the airport and the surrounding community. Now a naval air force station will have a lot of jets which are very noisy. They often depart in tandem, and they will go supersonic causing sonic boom which is loud enough to drown out conversations inside a home of office building. Strange as it may sound, the airport authority may have jurisdiction over what gets built in the area surrounding the airport. They may prohibit development within certain noise contours. They may also impose additional requirements on the construction. For example, if you are allowed to build, you might be required to provide additional sound insulation. That could include triple glazed windows instead of double glazed windows. I spent several weeks evaluating a waterfront property a few years ago that was close to an airport. The way the map was drawn showed the airport exclusion zone roughly coinciding with the edge of the river. Nobody could tell us whether the inside of the line, the outside edge of the line, or the center of the line represented the edge of the exclusion zone. It would take months for the airport authority to rule on any development. They would not even offer an opinion unless a full application was submitted to the airport authority. That meant spending a lot of money on design and engineering only to be told no you can’t build in that location. So in our case we didn’t buy the property, even though it looked extremely desirable. The last time we looked, that land was still for sale 4 years later. I’m guessing we made the right decision. There are noise and vibration engineers, which is a branch of mechanical engineering. There are a subset of that specialty who specialize in airports. These are the folks you need to consult in making a determination whether your property is buildable or not. The city will generally grant your zoning permit which could give you a false sense of security that you have all the entitlements you need to build a home in that location.

On today’s show I’m going to share a rather unscientific observation. It’s not based on a statistical sample size of any significance. But the data is first hand and for that reason, I’m paying attention to it. A lot has been written about the pain of retail in the past year. There’s lots of office vacancy that has opened up as well. Many are wondering if the workplace of the future has been altered forever by the pandemic. I’ve seen many retail vacancies almost everywhere I look. We’re talking the typical main street locations. Businesses that have held the same location for 40 years have closed. However, I’ve had numerous conversations with commercial property owners in recent weeks. My own commercial space is now fully leased, even if the monthly rate isn’t the highest. We have one tenant who is still struggling financially. But overall, the situation is manageable. The surprising part is that we are starting to get unsolicited interest from prospective tenants for commercial storefronts. This is after having extremely little interest for nearly a year. Another commercial owner that I spoke with had four retail vacancies for much of the past year. Three out of the four spaces now have new leases signed. That’s a remarkable change compared with only a few months ago. Despite the economic pain, economies are looking past the pandemic. Let’s look at two completely different markets to see if there are some clues. We’re going to compare Austin Texas and Las Vegas Nevada. The biggest economic driver in Austin Texas is the tech industry. There is extensive growth in the tech sector from major tech employers including Amazon, Apple, Facebook, Tesla, Oracle and Qualcomm to name just a few. Come corporate relocations from California have accelerated the growth of the Austin market. These are high value jobs that have been resilient in during the pandemic. In 2020, about 1.2M SF were added to the supply in the market. Vacancy increased from 4.2% to 4.9%. Much of the new growth was in outlying areas as the city continues to expand its boundaries in all directions. Asking rents continued to push upwards at $22.06 per SF, and increase of 0.5% compared with the previous year. Single tenant properties performed the best. Rents in the central business district fell as much as 20%. This area experienced the largest loss in business as workers stayed home during the pandemic. Las Vegas on the other hand is heavily dependent on tourism and gaming. Both industries were decimated by the pandemic. Las Vegas has one of the highest rates of unemployment in the nation. Retail vacancy increased from 7.2% to 7.6% over the past year. Most of that increase was the result of new product entering the market. Nearly 700,000 SF were added to the market in 2020 and an expected 702,000 SF or new retail is expected to hit the market in 2021, or about 0.7% growth of the total. Less than half of the new supply is expected to be absorbed this year. So perhaps it’s no surprise that location matters more than anything else. In the case of retail, properties that are close to where people live performed the best. Those properties in new and expanding areas performed better than those linked to office workers. But you didn’t need a pandemic to know that downtown retail has performed poorly compared with the suburbs. That trend has been playing itself out for more than a decade. There is no question that trends in retail are changing. Some retail space is functionally obsolete. Anyone buying older retail sites has to consider one of two possible plays. Purchasing at such a low price that you can make money by renting at rates well below the rest of the market. Redeveloping the property to a higher and best use.

On today’s show we’re talking about the difficult topic of how to account for what has happened in the past year during the pandemic. Now I want to be clear, I’m not an accountant, and I don’t play one on a podcast. The questions raised on today’s show are for you to discuss with your accountant and make a determination for your specific circumstance on how to treat the situation. So here we go. If you’re a commercial landlord, you probably had tenants that could not pay their full lease amount. Their business might have been forced to close in order to stop the spread of the pandemic. With no revenue coming in the door, the tenant would have been looking for a reduction in rent. As a landlord, you had a few choices. To start with, your lease probably did not have any pandemic provisions in it. A reduction in lease payments, or a forgiveness in lease payments was probably not contemplated in the lease. These concessions are taking various forms and include reduced rent (cash payment forgiveness) or possibly deferral of rent payments. But if a lease modification was not properly undertaken, what is the proper accounting treatment? Do you report the full rental income on your income statement and then carry the outstanding amount as an accounts receivable? What if you never get paid? When is the income written off from the balance sheet? What if circumstances arise that are beyond the control of the parties of the contract, such as a force majeure clause, or the laws in the jurisdiction governing the lease may create an enforceable right when a concession is legally required? If a lease agreement provides these rights and obligations, then the concession may not be considered a lease modification. If the lease makes no mentions of a concession, then the concession is likely a lease modification. If you’re a residential landlord and your tenant has not paid, but still owes you rent, how are you supposed to account for the rent? You have a moratorium on evictions and have limited remedies to get your tenants to pay up. The tenants still owe you the back rent. It has not been forgiven. How are you supposed to account for it? Do you treat the unpaid rent as an accounts payable with no reduction in income? Do you reduce the income and treat the rent as if it was variable? Could you end up paying income tax on income you never actually received? What if there was a foreclosure involved on the property? A foreclosure is treated the same as a sale of property. Capital gain or loss may be triggered upon such sale and, in certain instances, taxpayers may also realize income from forgiveness on certain mortgage debt. Exclusions of income created in a foreclosure may be available to taxpayers but the specific facts should be first reviewed and all tax implications considered. What if the lease was cancelled? How will that be treated by the tax authority?  It’s not necessarily obvious. You need to check. If your tenant left behind improvements, there could be tax consequences. Whenever a lease is terminated, whether early or at the end of a lease, a landlord generally becomes the owner of improvements which were made to such leased space during the lease. Did the landlord receive a benefit or income from acquiring new property that it didn’t have before the tenant terminated the lease? You might be deemed to have received a taxable benefit, and not actually have the income to pay the tax on this benefit. But what if the landlord paid for the improvements and was recovering the improvements over the life of the lease? How will the improvements be treated in that circumstance? Are the unamortized improvements written off? There are so many questions. The rules are complex and vary by jurisdiction. You can’t simply guess at what should make sense.

David Kafka is the Remax broker in Belize, specializing in helping foreigners who want to own property in Belize. On today's show we're talking about what it's like to own property there and how the economy has survived the pandemic. You can learn more or connect with David at 1stChoiceBelize.com

Cory Boatright hails from Oklahoma City where he has created a volume wholesaling business. In addition, Cory has also amassed a sizeable multi-family apartment portfolio. What sets Cory apart is that he is an expert at the art and science of marketing. On today's show we're talking about how to use split testing to refine any marketing campaign.  You can connect with Cory at REIProfits on Instagram or investingcapitalgroup.com to learn more about his apartment syndication business. 

One of the widely accepted principles in the tax code is that you should be taxed on money you actually received. But there are a few examples of taxation on phantom income. The problem has the potential to get much bigger. On today’s show we’re talking about the concept of a deemed disposition. It’s pretty clear in the tax law of most western countries that if you sell an asset and you make a profit, that sale might be subject to capital gains tax. But recently Janet Yellen, the new Treasury Secretary and former Fed Chair has been advocating that the government consider taxing unrealized capital gains. The latest incarnation of this concept is called the “Sensible Taxation and Equity Promotion” Act of 2021, or STEP for short. Wonderful! Another catchy acronym for yet another destructive law. Based on current US federal estate tax law, if someone dies today, his/her assets are exempt from federal estate tax up to $11.2 million, or $22.4 million for a couple. That’s a hefty exemption that covers more than 99.9% of the population. If it passes, the value of a newly deceased person’s estate will be valued at Fair Market Value. Then, any unrealized capital gains would be taxed based on that person’s original cost basis. Essentially they’re treating you as if, on the day that you died, sold all all of your assets and had to pay capital gains tax. But they’ve dropped the exemption all the way down to $1 million. Just about every asset is included, ranging from real estate to a small family business. They even specifically included collectibles like art, gold, and rare coins. Some other countries like Canada don’t have inheritance taxes. But in Canada, there is a deemed disposition upon death and if any capital gains taxes are due, they need to be paid at that time when the terminal tax return is filed for the deceased person. The result has been that often the children will inherit a property that has been in the family for decades. The cost of the property was close to zero compared with today’s valuation. The new owners face a hefty tax obligation, or risk losing the property. In many cases, the next of kin will need to get a bank loan to pay the taxes in order to hang onto the property. The only other choice is to sell the property and pay the tax on an actual disposition. In many cases, it’s preferable to transfer the property at a predetermined price while the parent is still alive in order to reduce the tax burden. 2021 could be the year of strategic tax planning. 

Today is the first of the month and on the first day of each month we review the book of the month. The book this month is by two of my favourite authors. Chip and Dan Heath are two brothers who are both university professors. One is at Stanford and the other is at Duke University. Together they have written multiple best selling books including Made to Stick and Decisive. Our book this month is called Switch. The book is dedicated to answering the question of how to change things when change is hard. The mind is governed by two different systems, the rational mind and the emotional mind. The rational mind wants that great beach body and the emotional mind wants that OREO cookie. But this book is different than what you might be expecting. It examines change at the individual level, the organizational level and at a societal level. The book is well researched and shows the path through stories and examples. It doesn’t preach at you, but rather guides you to solutions that you discover yourself. One of the central concepts of the book is the notion of bright lights. Bright lights are those shining examples of success that you can copy. The concept of a mentor who has walked the path before you is one possible bright light. But there are many others. One of the best and most powerful bright lights can in fact be your own experience. You could have a shining example of something that worked well in your past. That shining example can be a beacon of light for you to replicate that success, perhaps with a minor adaptation suited to the current circumstance. In the book Switch, the authors share the story of how Robyn Waters a merchant buyer with little to no authority transformed Target from a lagging department store that low cost copied Walmart and Kmart, to a fashion leader. Robyn understood that she had no authority. If she was to transform the way purchasing decisions were made, she had to tap into the buyer’s emotional drive. The company culture was completely data driven. Sales of last years fashion products were used to determine purchasing decisions this year. By definition, the company would always be a fashion laggard. Their process was overwhelmingly Analyze - Think - Change. She transformed the culture into a See-Feel-Change decision making that was supported by the analytical approach. Early wins would be measured to make faster decisions on how to procure new products. When the organization is so large and so heavy with momentum, change often seems impossible. We often rush to judgement about people. Someone who inherently is a good driver, can become a bad driver if you put them in a traffic jam, 20 minutes behind schedule to catch a flight for a family vacation. They aren’t a bad driver per se. But the environment created the bad driver. It’s too easy to focus on the driver and make the driver the problem. But often the root cause is the environment. If you want to change the outcome, you could try changing the driver. But it might be more effective to change the environment. One of the core concepts in the book is that the emotional side of the mind is a six ton elephant. The logical side of the mind is the rider. The rider attempts to steer the elephant by issuing commands and pulling on the reigns. But if there is a disagreement between the rider and the elephant, there’s little question as to which one will win. If you simply convince people logically, they will agree with you. You will have direction, but without motivation. That is the key insight. Your head and your heart must be in alignment.

On today’s show we’re talking about the real estate shortage. The obvious question is that if the population has not been growing significantly, and immigration has been curtailed significantly as a result of the pandemic, then why do we have a housing shortage in such a big way. The fact is, we have seen migration that has produced the shortage. There are surpluses in a few areas like NYC, San Francisco, Seattle. But migration, combined with a small number of people listing their properties has created real estate gridlock. Unless people list their homes for resale, there are not that many homes available for purchase on the market. While there are not than many distressed properties in the owner occupied market as of this point. Many of the properties that had their loans in forbearance have managed to exit their forbearance agreements and get back into good standing. But the real story is the nearly 8M rental properties where the tenants are seriously delinquent and the landlords have not been able to collect rent, nor have they been able to evict. Some of those properties are a ticking time bomb and they need to be factored into the housing equation. They’re being artificially held off the market as a result of the moratorium on evictions. The gridlock in the single family home market is such that demand exceeds supply in many markets. On a national basis, real estate sales for single family homes and condos have jumped 9.1% in February compared with 2020. Home prices are up 16.2% YOY. Inventories are at historic lows across most of the US and Canada. Normally when that happens, construction activity ramps up. But we have actually seen a drop in construction activity since the start of the year. New home construction has been hovering around 1M units a year for much of the past decade. The entire construction industry shrunk in the wake of the 2008 financial crisis. If you go back to 2006, the construction industry in the US was producing over 2M home a year. The current construction industry simply doesn’t have the capacity to produce that many homes any longer. Supply chain disruptions during the pandemic have pushed construction prices up. Hard construction costs are up 11.4% compared with this time last year. Oddly, there is a surplus of trees for softwood lumber, but a shortage of finished construction lumber. Tree growers are getting near historic lows for their trees, and the lumber mills are getting near historic highs for cut kiln dried lumber, nearly triple the price compared with this time last year. The biggest driver of demand is the number of new millennial buyers. There are now over 45 million people in the 30-39 year age range. This is part of the so-called echo boom generation. The age of first time home buyers keeps increasing and now sits at 33 years of age. That’s two years older than the previous generation. Over the next five years, the number of people entering that age group is expected to grow to nearly 47 million people. There is an expectation of 2.5 million new household formations in each of the next two years. This will place a lot of pressure on housing stock. The folks at Goldman Sachs have predicted an 8.1% increase in GDP for 2021 in the US. This would be the largest economic spike since 1951. Goldman is predicting that unemployment will fall to 4% and inflation will remain in check at 2.1%. The Federal Reserve had a slightly more cautious forecast for 2021. They’re predicting a 6.5% growth in GDP, unemployment at 4.5% and inflation at 2.4%. All of this suggests that the boom in the housing market will continue for at least another two years.

Today’s show is another AMA episode. Except, on today’s show I’ve had virtually the same question from several listeners in different geographies. I’ve synthesized a composite question which basically aims to cover the landscape of the question. The question is how to determine the density of apartments that you can build on a site having rather large dimensions. In one case, the property is in a dense urban location and measures about 200 feet by 500 feet. How many apartments can I get if the building is limited to 5 stories in height? This is a great question. Of course each municipality has rules that determine the setbacks of the building from the property line, front, back and sides. But the setbacks are not the constraint in this case. When you’re evaluating the utility of a building site for residential apartments, you need to think about the basic apartment as a building block. A one bedroom apartment is going to need about 22-25 feet of perimeter space on the building exterior in order to have windows in the living room and the bedroom. A two bedroom apartment is going to need about 35 feet of exterior wall space for two bedrooms and a living room. Apartments are not that deep. On the interior, you’re going to locate the kitchen, the bathrooms, closets, hallways, laundry facilities. None of those items require windows. Your most expensive real estate in an apartment building is the exterior walls because that’s where you have windows. At most, your apartment is going to be 30 to 40 feet deep. If you allow 6 feet for a hallway between apartments, then at most your building will be 85-90 feet deep from one side of the building to the other. If the property is too large, you have space in the core that is not really usable. Making a larger laundry room in an apartment is only going to add cost and is not going to bring you additional rent. So there are certain land dimensions that naturally lend themselves to building an apartment building, and then other dimensions that are just plain awkward. So if you have a property that is deeper than you need it to be for an apartment building, you’re not naturally going to be able to make use of that extra land. A site that is 200 feet deep is too deep for a single building to span the entire depth of the site and not deep enough to have two towers. You can use some of the extra depth in a dense urban setting to create a sense of open streetscape by setting the building further back from the street. You can also make a larger footprint on the ground floor for the amenities like the lobby, the party room, parking entrance, a gym, and so on. But carrying that extra depth up the to the top of the tower is wasteful. I’ve seen many rookie developers multiply the width of the property by the height restriction in and then divide by the size of an average apartments order to determine how many units are possible. But this simple calculation neglects the real constraints in designing an apartment building. A property that is 400 feet deep may be a candidate for two towers on top of a podium ground floor with a space between them. Perhaps a horseshoe shaped or U shaped building on top of a podium. The goal is to maximize the perimeter area of the building so you can get as many bedrooms and living rooms on the exterior of the building as possible. That one constraint is usually the limiting factor on the number of apartments that are possible. The second limiting factor for any apartment building is going to be the parking ratio. The city will determine the minimum parking allowed in the zoning code. But you also need to take market demand into account as well. If your building height and perimeter calculations can allow, say, 200 apartments, but you only have space for 100 cars, you might be limited by parking.

On today’s show we’re talking about how some businesses were largely left out in the cold over the past year, despite being mandated to close, or drastically scale back their business to prevent spread of the pandemic. A number of new initiatives have been brought forward since December and again most recently in the past month. Last week the SBA revealed the much anticipated timeline for $28.6B grant program for restaurants hit hard by the pandemic. This is one sector that has seen thousands of businesses close permanently. Those that remain are hanging on by a thread. I’ve spoken with several restaurant owners in recent weeks about how they have fared during the pandemic. It didn’t matter whether they were located in the US, Canada or the UK. The story has been pretty much the same. Naturally, they’ve laid off staff in order to survive. The biggest issue has been whether their landlords have been willing to work with the business or not. In cases where the landlord insisted on getting paid full rent throughout the pandemic, many restaurants have been forced to close. Many of the owners I’ve spoken with have adapted their menu and have created new menus specifically optimized for the take-out experience. But in most cases, these businesses have needed more than just a pivot to take-out business. Survival has required a combination of rent relief from landlords or government assistance. Those restaurants that are still left standing after the pandemic is over will in my opinion do a booming business. The Small Business Administration in the USA is planning to roll out the Restaurant Revitalization Fund grant program within 30 days. Those who are in the performing arts have also been stripped of their income in the past year. This includes musicians, actors, comedians, magicians, and all of the supporting businesses that form part of the performing arts. We’re talking about lighting and sound technicians, directors, ticket agents, ushers, and the food and drink concessions that form part of most performing arts venues. Earlier this year The SBA only recently announced the rollout of its Shuttered Venue Operators Grant program, first passed into law by Congress in December. The SBA said potential applicants must be registered in the federal government’s system for award management (SAM) in order to receive a grant. I can tell you from first hand experience, that getting a SAM number is a bureaucratic process that has a few stumbling spots in the process. Eligible businesses include live venue operators, promoters, theatrical producers, live performing arts organizations, museums, zoos, aquariums and theaters themselves. But even with the April 8 start date, eligible businesses will have to wait in line. The SBA has said the first 14 days of this program will only be open to venues that suffered a 90% or greater revenue loss between this past April and December, due to Covid-19. The subsequent 14 days will be reserved for venues that suffered a 70% revenue loss or more in that time. Only after the first 28 days can venues that suffered smaller losses be considered for the grants. Grants are sized by the average monthly gross revenue for each full month a company was operational, then multiplied by six and capped at $10 million. Funds can be used for a wide variety of expenses, including payroll, rent, utility payments, scheduled mortgage and debt payments, personal protective equipment, independent contractor payments, admin costs, state and local taxes, and even insurance and capital. We’re starting to see the return to normal for many businesses as the number of vaccinations increase. Some restaurants are now more than 50% full during dinner hours. The patterns have changed. It used to be the case that Friday lunch hour was the busiest. Now Monday and Tuesday lunch hours are the busiest.

Today's show is an excerpt of a talk I gave at a podcasting workshop earlier this week. We're talking about how to provide an effective pitch to a show host or show producer and what makes a good guest.

On today's show George Ross and I are discussing how to handle inflation of construction material prices. 

On today’s show we’re taking a retrospective look at what’s happened in the world of senior housing in the past year. Unlike other multifamily asset classes, senior housing follows completely different demographic and adoption patterns. That is certainly born out in the data over the past year. Rental properties have seen very little change in vacancy during the pandemic. Sales and refinance activity of rental properties have been brisk. According to data from NIC, seniors housing occupancy fell to another record low in fourth quarter 2020, though the rate of decline eased from earlier in the year: Occupancy declined 7.0% in 2020 to 80.7%. Underlying segment trends were similar: Majority Assisted Living (AL) declined 7.7% to 77.7% and Majority Independent Living (IL) declined 6.3% to 83.5%. Nursing care occupancy averaged 75.3 percent in the fourth quarter. Inventory growth also slowed to just 1,626 units added in NIC’s top 31 metropolitan markets, the slowest pace since the third quarter of 2013. Personally, I’m glad to see that new supply is slowing down. In my opinion, the majority of primary markets are oversupplied. The opportunity exists in secondary and tertiary markets. That means paying close attention to the hyperlocal market conditions. We’re talking about the demand side of the equation, and the income demographics to support the senior housing economic model. Of course averages don’t tell the full story. Results varied widely among metropolitan regions, according to NIC MAP, which found that the West Coast cities of San Jose, Calif., San Francisco and Seattle reported the highest occupancy rates at 88.5 percent, 86.8 percent and 84.8 percent, respectively. Houston, Cleveland and Miami saw the lowest occupancies at 73.5 percent, 76.6 percent and 76.7 percent. We have an 80 bed assisted living facility scheduled to open in the next couple of months and we should be in a position to start taking reservations for residents in the coming weeks. My partner in that project also operates a number of facilities in the Dallas market. In that portfolio, there is a 1.6% vacancy rate as compared with a nation wide market average of nearly 22% vacancy. The obvious question is what is being done differently in these facilities that is resulting in such a dramatically different vacancy rate. I believe it comes down to a few key differences. These homes are built on the residential care model. These homes are smaller facilities with 12 to 16 residents per home. That contrasts with the big box model of hundreds of beds in a single building We have not had any Covid-19 outbreaks in any of the facilities. We had a single staff member test positive for Covid-19 and they were immediately isolated from the rest of the staff and residents and fortunately we had no propagation of the disease into the homes. This emphasizes the importance of having a highly differentiated product in the market. When we perform the intake interview for most new residents, they’re not coming from their own home. They are typically coming from an existing big box care facility and they hated it. It is clear that there will be opportunities to acquire distressed assets in the coming months. Some have already appeared on the market. But success in the market starts with understanding the operating model for success, not just the averages.

On today’s show we’re talking about how Elon Musk could change the dynamics of real estate for ever. Now you’re probably thinking that is a bold statement. You might be thinking that I’m talking about electric cars. But I’m not. You see the value of real estate is determined by location, location, location. Location matters for several reasons. People want to be close to certain amenities. They don’t want to have to travel too far to get their groceries, eat a nice dinner in a restaurant, or commute to work. Many people view their house is a sanctuary, a place to get away from the density and hustle of the big city. But rural properties suffer from a number of problems. Unless the city has brought the infrastructure to your property, the cost of building and maintaining your own infrastructure is less appealing than using city services. We’re accustomed to having seven utilities at our property. We expect electricity, water, sewer, natural gas, TV, phone and internet. If even one of those are missing, the property is less desirable. The cost to bring those services to your property can be prohibitive. Well a little over a year ago, SpaceX launched its first satellites for its Starlink service of low earth orbit satellites. This mesh of satellites will enable global rural communications. Eventually, SpaceX hopes to launch 42,000 satellites to service rural internet in virtually every corner of the globe including the high arctic. Today’s satellite internet service uses geostationary satellites. But in order to match the earth’s rotation, the satellites must be 22,236 miles from the earth’s surface. Even at the speed of light, it takes about 1/9 of a second to reach the satellite from earth. Sending a round trip message to a satellite, another destination on earth and back takes about half a second. That’s a long delay in the world of computing. That’s just the travel time. Computers need time on each end of the link to process information. So satellite internet traditionally has been very slow. The Starlink service has already over 1,000 satellites in service. Each launch of the falcon 9 rocket carries another 60 satellites. Friends of mine are already participating in the limited beta trial of the Starlink service. The downlink speeds of 70-80 Mbps are pretty respectable. Uplink speeds of 20 mbps are also quite acceptable. The service today is prone to short term dropouts. Uptime statistics are reportedly between 98.5% and 99%. These brief outages are the result of gaps in coverage. As more satellites are launched, these brief periods of downtime should disappear. If the launch schedule is maintained, there should be 12,000 satellites circling the earth at a distance of 340 miles by 2024. The price for a receiver is $450 USD and the service costs $99 a month. I just purchased a rural property for my wife and I and the Starlink website indicates that I should be eligible to get a Starlink receiver later this year. If I can get respectable internet service for under $500 in up front investment and $99 a month, pretty much anywhere, then the choice of property location opens up dramatically.

London has been paying the price for Brexit for nearly five years as the uncertainty of the outcome had businesses leaving the UK for a headquarters on the continent. Many companies chose the UK because it is English speaking and has a stable legal and monetary system, while giving those companies full access to the European market under the single pan European economic zone. But then those same businesses faced the prospect of losing access to the vibrant European market by virtue of having located in the UK, many businesses relocated to Amsterdam, Copenhagen, Belgium, and Germany. Real Estate prices in London predictably fell hard over the past five years. Here we are in 2021. Real Estate prices are showing a surprising rebound. Is this the same artifact that we have seen during the pandemic where supply of homes for sale diminished significantly? Throughout 2018, 2019 and 2020 we’ve seen one business after another relocate from the UK to other parts of Europe. Some of them relocated to Ireland which remained as part of the European Union. The UK is now divided with one foot inside the European Union and one foot outside. Needless to say, there has been a flight of capital from England to other parts of the UK and to continental Europe. For future for real estate in London looked bleak. Vacancies are up, and commercial vacancies have hit troublesome levels. But then came China to the rescue. You’re thinking wait, what? What does China have to do with England? How can China help UK real estate? Since the new security law was enacted in Hong Kong in 2020, the central Chinese government has taken steps to eliminate dissent. Freedoms in Hong Kong that were taken for granted under British rule are disappearing. The new security law, under which at least 100 people have already been arrested, makes it easier to punish demonstrators and reduces Hong Kong’s autonomy. This month, 47 activists were charged with subversion under the legislation, after a mass arrest in early January. Earlier this year, the Hong Kong government told UK citizens that they will need to choose between the having British status or Chinese status. On March 11, the Chinese central government put another nail in the coffin of freedoms in Hong Kong. But one thing is clear, people from Hong Kong have started arriving in London. They speak the Queen’s English and they are bringing investment dollars with them. There has been a surge in interest in London real estate from Hong Kong over the past year. According to Astons, Hong Kong residents represented the second-largest foreign buyer group in prime central London in the first three quarters of 2020. They accounted for 9.2% of foreign property purchases and spent an estimated £305.5 million across 243 transactions—or roughly £1.19 million (US$1.67 million) per property. So far in the second half of 2020, property prices in London edged up about 17,000 pounds. That’s not a huge increase, but its a reversal of the previous trend over the past four years. Pay close attention to geopolitical migration.

On today’s show we’re trying to make sense out of our financial markets. You would think that the Federal Reserve, the central bank for the world’s reserve currency is influential in the world’s monetary system. So therefore the chair of the Federal Reserve would hold the single most influential banking position in the world. You would also expect the person occupying that chair to demonstrate a modest amount of fiscal responsibility. It used to be the case that printing of money was something that was spoken of in hushed tones. It was a bit like cheating at the black jack table. Professional card players didn’t speak about it, but everyone knew it was happening to some degree. But now in 2021, there is no attempt to hide it. The US Federal Government brings in 1.7T in personal income taxes per year. That’s about half of the total revenues it brings in each year. But in 2020, the Federal Reserve printed about the same amount of money that the US government collected in taxes. Nearly 1/5 of the dollars in existence since the beginning of the US as a nation were printed in 2020. Now the latest comments from the Federal Reserve Chairman seem to focus less on any measure of inflation, but on the “anchoring of inflation expectations”. Anchoring is a concept that applies to psychology. If you believe it’s warm out, then it’s warm out. If the weatherman says the temperature is 10 degrees today, then it’s 10 degrees. The temperature has been measured and reported, irrespective of the weatherman’s opinion on the temperature. But if the weatherman says, it’s a beautiful warm day today, and the temperatures will be a nice balmy 10 degrees by mid afternoon, he is said to be anchoring an expectation. The Fed chairman in his remarks Monday, prepared for a presentation to the House Finance Committee today, said that a short term jump in prices would not be enough to trigger a panic about inflation. He said that as the economy emerges from the pandemic, there will be all kinds of increases in demand, and supply chain constraints, that will trigger price fluctuations. These price increases don’t concern him. He’s focused on the long term anchoring of inflation expectations at the 2% average. They intend to keep interest rates low until the economy reaches full employment and interest rates exceed the average 2% anchored expectation. The countries with excess US dollars are starting to get worried that the US is printing too much money and therefore the value of the dollars they’re holding is declining. The international market is clearly attaching a risk premium to the US dollar. But the US continues to behave as though it can do what it wants, when it wants as if it sets the rules alone. If the Fed says interest rates are low, then rates are low, irrespective of what international investors are saying. Other countries have tried this approach and failed. I’m thinking of modern day Argentina where interest rates are 38%. Back in 2012, their interest rate was a fairly respectable 9%. They boldly started printing their way out of their economic malaise. The memory of hyperinflation in the early 1990’s was a distant memory. But then why would other countries be selling their US Treasury bills and using the proceeds to buy gold? Russia sold almost all its US Treasuries and bought gold instead. China has been on a gold buying binge over the past 20 years. When I hear the word “anchoring” in the same sentence as inflation, I hear that the measurement is being replaced with a narrative, in order to direct attention away from the facts.

On today’s show we’re talking about construction budgets and how to make sure you’re insulated from construction price increases during the early phases of a project. When you’re investing in new construction, you need to lock in expectations. You are setting expectations with your lender who is going to take a few months to underwrite the project and approve the loan. You’re dealing with investors and you’re setting expectations on the total equity investment and the rates of return. Then along comes a year like 2020, or 2021 and construction prices are volatile. How do you set realistic expectations with your lender on the total investment? How do you set expectations with your investors when the ground is shifting beneath your feet? This raises the question about whether we’re in an inflationary environment or not. Are the price fluctuations an artifact of short term supply constraints? It’s been clear that lumber prices have swung wildly over the past 12 months. In March of 2020, lumber was priced at $264 per 1,000 board feet. By September, the price was $985 per 1,000 board feet and by November had fallen to about half that price. Today we’re back up around $1,000 per 1,000 board feet. Are these prices here to stay? Over the past 20 years, prices have fluctuated up and down. Energy prices are up compared with this time last year. Oil is now up to about $67 per barrel. That’s more than double the price at this time last year. We even had a short term supply glut when prices ran negative as some futures contracts expired with a shortage of midstream storage capacity. Inflation as measured by the consumer price index is an average over a basket of goods. If prices for materials go up, will rents go up correspondingly? Will salaries go up correspondingly or not? Which of the metrics be negatively impacted? Modeling the future of a project that is a year away from construction becomes an exercise in Crystal ball gazing. How do you buffer your project for construction price increases? Do you assume that rents will go up or not? So the question becomes, how do you plan your projects to be resilient in the face of inflation, and the beneficiary in the event of longer term inflation? We’ve spent a lot of hours modelling these scenarios in our business as we put together various pro-forma estimates for our projects. There are two questions that you need to answer. What would be the impact on the IRR on a 5% increase in cost of the project? Is it still a viable project? Are your profit margins still in an acceptable range? Will your debt coverage still meet the metrics with a 5% increase in cost? What happens to the cash position within the project if you’re faced with a 10% increase in hard construction, or a 5% increase in overall project cost? Do you get backed into a corner and risk running out of cash during construction? It’s the second scenario, running out of cash that is the most dangerous to a project. You have to make sure you don’t run out of cash. That means using your leverage responsibly. It means increasing your loan reserves to protect the project. It means bringing 5% more equity to the table. If you bring 5% more equity to the table, you could theoretically borrow 5% more money if you needed to. That doesn’t mean you have to increase the cost of the project by 5% in your pro-forma. You still have your original plan based on a prudent forecast of construction costs. But if you had to ask the bank for additional funds, you have the necessary equity already raised as part of your capital raise to handle the larger loan request. In an inflationary environment, the road can be bumpy. It will likely work out in the end and leverage will multiply your returns. But you need to design in a buffer to protect yourself from the downside risk.

Dr. Trevor Blattner is an endodontist (specialist in root canals) and real estate investor. On today's show we're talking about his new book "Redefining the Top 1%".  Everyone's journey into real estate investing and development is unique. To learn more reach out to Trevor at  DrTrevorBlattner.com You can pre-order his book and take advantage of a bunch of pre-release goodies including the workbook and the audio book. 

John Lee Dumas is the host of the wildly popular Entrepreneurs on Fire podcast. After more than 3,000 interviews with the world's leading entrepreneurs, he has distilled down a decade of learning into a new book that represents  the 17 key steps to have a successful business and a successful life.  The book is called "The Common Path To Uncommon Success" by John Lee Dumas. The book launches on March 23, 2021. Go to uncommonsuccessbook.com to pre-order your copy. John includes a number of free additional resources for those who pre-order the book.  I'm an avid listener as well to his daily show Entrepreneurs on Fire which can be found on all the major podcast platforms. It was Entrepreneurs on Fire which was my inspiration and proof point that a daily show was both possible and realistic. Now nearly three years later, The Real Estate Espresso Podcast is still going strong as a daily show. 

On today's show, this is a personal reflection on a day that seemed filled with setbacks.  It’s easy to get discouraged when setbacks occur. But as I took inventory of my own emotional state at the end of the day. Surprisingly, I was not upset. I came to the conclusion that what happened had nothing to do with me. Those setbacks in a project don’t reflect on me personally. I clearly wasn’t happy about the situations. But I wasn’t upset. I found that my energy and focus remained consistent throughout the day. Each setback was met with immediate acceptance of the reality. The decisions that resulted from each of those setbacks were obvious. There was not angst, no worry about the future. Just simple logical decision making. I have to tell you, this was not always the case. There was a time when I was younger that I would have grieved during a setback. I would have experienced a sense of loss. But today, I don’t As I spoke with members of my team, there was a real recognition that the journey we are on is truly the best part of the experience. Setbacks are part of the process. We’re truly having an amazing time, even when the ball takes a bounce that is not the way we wanted. We also have dozens of things that have happened the way we would want them to. It’s easy to focus on the negative. Those items are glaring. I’m closing out the day with an immense sense of gratitude for the commitment of our team, and for the support that we have received along the way.

On today’s show we’re talking about government playing a central role in monitoring every single financial transaction in a nation. Crypto-currency has been hailed as a way to break free from the chains of government based fiat currency. So far, many nations have not weighed in on crypto-currency. The two best known forms of crypto-currency are Bitcoin and Etherium. But in truth there are several thousand such currencies in existence. They vary in their features and functionality. Governments are clearly afraid of losing monetary control over their economies. They are not about to surrender control of the money supply to a merry band of independent software programmers. I expect we’re going to see governments start to implement their own version of a crypto currency in order to sell the benefits of crypto to the general public. The first country to start the rollout of a digital currency is China with the digital Yuan. So far, the country has the currency undergoing limited trials. Benefits that some users report include the convenience of paying with their smart phone. This is similar to the convenience of paying with something like Apple Pay on your phone. But in this case, there is no middle-man, and there are no transaction fees that are typically associated with digital wallets. Digital wallets like Ali-pay or Tencent’s WeChat Pay have received wide adoption in China with over 700 million users of these systems today. Both companies are required to share transaction information with the central government if requested. Right now, the central bank has the a trial with about 700,000 users participating in a trial. The central bank has said that they intend to protect privacy. This means that privacy may exist horizontally. If you buy groceries at the store, the grocer won’t have any information about your identity. But vertically the government has full visibility of all of your transactions and funds. Now I’m not a huge conspiracy theorist. But the fact is, giving government full oversight over every single transaction in the economy represents a massive invasion of privacy. In case you think this is only happening in China, think again. The president of the Federal Reserve Bank of Cleveland made comments last September at the Chicago Payments Symposium conference. In her speech, she outlined a number of initiatives underway at the Federal Reserve. Legislation has been proposed that each American has an account at the Fed in which digital dollars could be deposited, as liabilities of the Federal Reserve Banks, which could be used for emergency payments. Other proposals would create a new payments instrument, digital cash, which would be just like the physical currency issued by central banks today, but in a digital form and, potentially, without the anonymity of physical currency. The Indian crypto community is closely watching whether the Indian Federal government will ban cryptocurrencies, including bitcoin. The latest information regarding the Indian crypto ban comes from Reuters which reported Sunday night that “India will propose a law banning cryptocurrencies, fining anyone trading in the country or even holding such digital assets.” If you’re keeping you cash in your own Digital wallet that is located on your phone, what happens to all the bank deposits? If there are no bank deposits, how is the bank going to have sufficient funds to lend money out? Of course they don’t have enough money now. They only keep 10% of the loans on their books in deposit reserves now, and in some countries in Europe, only 3%.

On today’s show we’re looking at the fragile recovery in the travel and hospitality sector. This week was March break in much of North America. The signs of recovery are starting to show. This is clear from anecdotal reports, as well as from the hotel analytics firm STR Global. STR issues a weekly report on the health of the hotel industry which can be viewed on the data insights portion of their website. The leisure-and-hospitality industry added 35,700 jobs in February. Hotel occupancy for the first week of March was 49%, a 20 week high. The increased willingness to travel seems to come down to a number of factors. Falling case counts across the nation. Increasing number of people being vaccinated. Fatigue with the whole pandemic. Some states have opened up their economies Overall, occupancy has recovered to 70% of pre-pandemic levels and REVPAR has recovered to about 55% of pre-pandemic levels. One hotel that we monitor closely is the Golden Nugget Hotel and Casino in Lake Charles Louisiana. One of our team members attempted to book a room this week at this 1,100 room property and found that there was no vacancy mid-week. Even in our own portfolio of short term rentals, we’re seeing climbing occupancy. Throughout ski season, we experienced occupancy of close to 90%. We’re seeing longer term reservations and rising nightly rates. All of this seems positive for the upcoming summer season. But we don’t believe that occupancy levels will return to pre-pandemic levels until international travel returns in a big way. Many countries have still closed their borders and many are grappling with the whole question of vaccine passports. While none have truly implemented this, we have yet to see how international travel will be held back by rates of vaccination. There are obviously ethical questions about whether restricting travel based on vaccine status is an infringement of human rights. No doubt there will be legal challenges on this question. We are starting to see capital transactions happening in the hotel business. Blackstone Group Inc. and Starwood Capital Group said Monday they had teamed up to buy Extended Stay America for $6B. Extended Stay is a midprice hotel chain that focuses on lodging for guests interested in staying for weeks or longer, offering kitchen facilities and more space than a typical hotel room. During the pandemic, its rooms and suites attracted essential workers, healthcare professionals and others who needed to travel. That business helped Extended Stay achieve a 74% occupancy rate last year when occupancies industry wide were running below 45%. This says that the inclusion of full kitchen has made the properties a more desirable product in the market. It mirrors the experience we have had in our own portfolio of short term rentals that happen to be located in hotel properties with rich amenities. Blackstone are experts in the hotel business. They’re a savvy buyer. They used to own Hilton hotels from 2007 to 2018. They bought Hilton at the peak of the market and within months were deep underwater on their investment. Through hands-on management, rolling up their sleeves, they learned the hotel business. By the time they turned it around, Blackstone turned a catastrophic loss into a $14B gain. This is a savvy purchase. The market place should pay attention. I predict that this is not the last move that Blackstone is going to make in the hotel industry. They might make further acquisitions. They might reposition the brand. They might use the Extended Stay America brand as a launch point to purchase distressed assets that can complement the existing portfolio.

Today's question come from David in Belize.  Love the show and thanks again for all the work you put into it.  We always hear if you see a problem, find a solution. I see a big problem in Ambergris Caye Belize in parking. I think we could help the downtown area since there is always no parking and streets very congested. We would have challenges as to locating a lot. The lot if we found would be around 50’ x 70’ . The garage would be for golf carts and we can do 4 or 5 floors. We could do concrete, steel or a combination of them. I would want an elevator or 2 and maybe 2 entrances and exits. But 1 may work. So, 2 people working 2 shifts so like 5 people. Plus, maybe a maintenance person. I feel we would get a lot of long-term workers paying and then the tourist. The other challenge is the hourly or daily fee. I see some parking lots lot’s charge like $25 USD a day. The airport charges $2 just to go in and $25 USD a day as well. I need to do some more research but there are no garages here other then just empty lots they rent spaces out in Belize City and places like that. I was wondering your thoughts on a syndication on a parking garage. The payback would be a bit long The spaces would be like 100 for the 5 floors. After the setbacks, road drive paths. Maybe $800k to $1M to build. At $12.50 per day average Seems like the umbers work at 50% occupancy. David, thank you for the kind words and this is a great question. I’ve been to San Pedro in Belize and I know exactly of the parking problem you’re speaking about. It’s a dense area and there is very little parking. There are narrow streets packed with small shops and lots of pedestrian traffic competing with golf carts for a clear lane. The town has lots of character, even if it seems a little chaotic a times. Parking is one of those real estate plays that are not very sexy, but can be a great investment. In fact, one of the largest companies in France called Vinci made its’ wealth globally by investing in parking lots all over the globe. The problem with parking lots is that when many of the transactions are done in cash, for whatever reason cash has a tendency to go missing and not be fully accounted for. If you have a parking lot attendant who is handling a lot of cash and they’re earning only a few dollars an hour, the temptation is simply too great for them to pocket some of the extra change. Even if you make the parking lot attendant a partner in the business, they could still steal from you. In tropical locations like Belize you could experiment with electronic payments exclusively, but I don’t know if that would be a barrier to adoption. It would probably work with tourists who regularly carry credit cards. But the locals may choose not to use it. I would test market your idea on a limited basis with an existing ground level parking lot. Structured parking is expensive and you need to gain some operational experience in the local market to determine whether the idea will work. That will make for a much more compelling value proposition when it comes time to raise the capital for the construction. Finding the right location for a parking lot can be a challenge. Sometimes, you may find an old building that is condemned or functionally obsolete. Parking can be a very viable temporary investment. You buy the derelict building, demolish it and build a temporary parking lot for a year or two while the developer who will ultimately develop that location gets their plans and financing together. You may be able to propose a deal with a local developer to operate the parking on their behalf in order to gain first hand experience with managing a parking operation on the island.

On today’s show we are talking about how to win in a super competitive environment. There is no question that today’s environment resembles more of an auction than a true market place. We see it consistently in the single family home market and even in the market for multi family apartments. Last week a colleague of mine was shaking his head at the sale of a rural single family home with no municipal services that sold for $500,000 above its fair market value. The buyer was so frustrated with attempting to buy in the core of the city that they overpaid simply to buy some acreage. I’ve observed sales of apartment complexes that frankly make no sense. Some sellers are demanding that buyers deliver a firm offer with no conditions, or a conditional offer with $200,000 non refundable deposit in order to be eligible to bid on the purchase. Offers without these conditions will not be considered in the words of the listing agent. The apartment complex in question is an older property with obvious deferred maintenance in a lower income area of Dallas. I personally would never make a purchase under those conditions. Yet it appears that some buyers are willing to go there. So if you are a sane rational buyer, how do you win in this environment? Do you lower your standards and succumb to the insanity? The best deals are done off market so that you stay out of the auction environment. But what if you can’t seem to find these off market deals? The auction buyers are obsessed with speed. They want to see a new listing. They will offer on a listing that is hours old. If a listing has been on the market for 30 days or longer, the auction buyer automatically assumes that there is something wrong with the property, that the property has been rejected by the the competitive buyers. It can’t possibly be a deal if it’s still on the market after all this time. What if the assumption is incorrect? You have the entire auction marketplace looking with anticipation at new listings. They want listings that show 1 day on market. They are not focused on the listings that show 25 days or 35 days on market, or 60 days on market . Those listings are stale. In truth, some of those 25 day old listings were on the market for one day, they were conditionally sold for several weeks and then reverted back to being an active listing. In truth they’ve been on the market for two days, but the listing shows 25 days because they were conditionally sold for 23 of those 25 days. The number of buyers for the stale listing is reduced dramatically. You might be the only bidder for a property that just came back to active listing. So how do you ensure that you get a good shot at these properties? You track the properties that show as being under contract. You let the broker know that you are a patient buyer and that you are interested if the property goes back on the market. You are in a different category than the other offers that were ultimately rejected 25 or 30 days ago. Those buyers have moved on to other properties. You are at the front of the line to buy a cancelled contract. In an environment where properties are selling above asking price, some relative bargains are possible. If you want to get out of the auction environment, then your first choice will certainly be the off market property. A close second could be the cancelled contract that is unfairly labeled as a stale listing.

Today's show is the third in a series with Sheraton hotel heiress Mitzi Perdue. On today's show we're talking about growing up in a hotel family overcoming personal adversity, multi-generational wealth, and legacy. If you haven't heard the first two segments, you may want to go back over the last two weeks and listen to those first.  To connect with Mitzi and to support her efforts combatting human trafficking, visit her website at winthisfight.org. 

Justin Sliva specializes in buying land that people have largely neglected. This is a fascinating story of how parcels of multi-generational land get forgotten and can be purchased for a bargain price.  You can connect with Justin at CasualFridaysREI.com where he also hosts a weekly podcast. 

This question comes from Tomas. I believe that on a previous podcast you mentioned that there is an expanding opportunity in the market for short stay accomodations. There are folks that are looking for 1-3 month stays in their local markets to fill the gap between moving from one property to another. Do you think that it is possible to have a small boutique hotel with regular guests and a floor of longer term (1-3 month) guests all under one roof? Or are there simply too many negative issues. If so, would such an arrangement even be desirable from an asset management perspective? I would love to get your perspective on this. Best, Tomas Tomas, this is a great question and I love the way you’re thinking. What you’re describing is following one of the basic rules of business. That is, you’re solving a business problem. The question is whether the hotel product in question is a suitable solution for the problem you’re outlining. The problem exists in a number of specific areas. In business the more precisely you can speak to your target customer, the better the connection. You have a few distinct problems that can be solved here. A seller is reluctant to sell because they know it’s going to take a while for them to find a replacement property. What if the realtor could present a solution to the problem of the seller has no place to go. So they don’t put their property on the market. Maybe their replacement property is a new construction home and it’s going to take months for the new house to be built. But they don’t want to carry two loans. It would be better to rent during the period of construction so that the capital from the sale can be used to build the new house. Carrying double the debt might feel high risk for some home owners.A tailor made rental for the temporarily displaced homeowner could be perfect. Maybe the seller has a new house under construction and the builder is delayed. This happens with alarming regularity.  There is clearly a market for solving this problem of delayed new home closings. So the question is what is the right product to meet that needs of that target client. When you say a hotel, I would assert that this would need to be a suite hotel with full kitchen, a large enough work space, and enough breathing room to be a viable location for a few months. There are very few hotels that meet that description. If it’s an extended stay hotel with high quality beds and high quality amenities, it could work. If the hotel guests and the medium term residents are segregated on separate floors, that may be enough to entice medium term guests. I think that the first reaction from a potential guest at the thought of staying in a hotel room for 6 months would be negative. So it would need to properly positioned. But if you can market it as an extended stay residence that happens to be co-located on the same property as a hotel, it could work. It’s increasingly the trend in hotels to double brand a single hotel property with two different brands within a hotel family. You will see a Residence Inn co-located with a Marriott Courtyard on the same property. Another key to marketing this to clients would be a word of mouth recommendation from the real estate agent who is brokering the deal, or the builder who is responsible for the delay. One of the objections is the perception that a hotel room priced on a nightly basis is going to be too expensive compared with a monthly rental. While the hotel might be willing to discount the nightly rate when renting by the month, the perception is still that the nightly rate is going to be too high. In order to satisfy the client that you have the right product, I believe the product will need to be branded and positioned as a monthly, all inclusive, medium term executive rental.

On today’s show we are taking a look an how office buildings are falling over like dominos. Of course I’m speaking in metaphors. About three years ago I was presented with the opportunity to purchase a medical office building that was 50% vacant. The price was great. The building was owned by 8 partners that included doctors within the building, a dentist and a pharmacist. This 27,000 square foot building had a lot of potential. The increasing number of small businesses that provide independent consulting services to government and the tech industry would be perfect for such a building. Technology startups would be perfect tenants. The vision painted by the seller was amazing. Well, I didn’t quite see the vision. I saw a dying building. The dentist who was a part owner in the building rented space across the street in a brand new construction ground level commercial space with more parking and large modern windows. Dentists are great tenants. They put a ton of money into tenant improvements. They put lead lining in the walls to provide Xray shielding. They install plumbing, high pressure compressors for their air drills, air handling. A dentists office is not a transient tenant. Once they’re in, they’re not moving. But here we had a dentist who was a part owner in the building who had a financial incentive to not only have a thriving dental practice, but also a successful business. When the dentist moved across the street, it said to me that the dentist saw the building as a liability to his business, not an asset. That was all I needed to know and I didn’t buy the building. Fast forward to 2021 and in hindsight that decision not to buy is looking better than ever. Office buildings all over North America are experiencing falling occupancy. Our market was already oversupplied with office space. Office vacancy was averaging 12% for the five years prior to the pandemic. By 2019 vacancy was 8% just prior to the pandemic, and then we saw vacancy steadily increase throughout 2020. But understand that commercial office leases are usually multi-year leases. Decisions to vacate space made in 2020 may not appear in the market until this year, next year, or the year after. A year ago, Interrent REIT purchased a 50 year old 11 story office building for $21.8M on the edge of the downtown with a plan to convert the building into 153 apartments. A 50 year old office building would have a difficult time competing with new product in the downtown core. It would take a substantial refit to turn it into Class A space. Even then, it would never capture top rental rates. When you layer the high rate of vacancy on top, maintaining the building as an office building would not make financial sense. In the latest news, the developer of a planned new office tower in San Francisco announced that Salesforce has apparently withdrawn from plans to lease a major block of space at a planned San Francisco office tower, according to comments made by one of the developers during a public hearing Monday. At that meeting it was disclosed that the “initial lease commitment” that the developer had for the unbuilt 61-story Transbay Tower “is no longer in hand.” Another project, Oceanwide Center — a 2M SF project near the Salesforce tower was proposed to be the city’s second tallest tower. Construction is now stopped.  The GC is a company called Swinerton. There is currently a dispute on the roughly $60M that is allegedly owed to Swinerton on that project. It doesn’t matter whether we’re talking about a 27,000 SF medical office building, or a 1.5M square foot project, all of these offices are struggling. These buildings are an endangered species with the pre-pandemic economic model. It’s going to take some price discovery to find the new equilibrium of fair market value.

Today’s show is a retrospective look at one of my favourite hotels in North America. It’s a hotel that I’ve stayed at many times over the years. The Fairmont San Jose — Silicon Valley's largest hotel — has filed for bankruptcy and is closing its doors, at least temporarily. On Friday of last week, the hotel informed guests rather abruptly that they needed to leave. That included an NHL hockey team that was in town to play against the San Jose Sharks. If it does reopen, though, it likely will be under the flag of another brand. FMT SJ LLC, which operates the hotel, filed for Chapter 11 bankruptcy protection Friday. The company expects the iconic 33-year-old hotel, located downtown on the east side of Plaza de Cesar Chavez, to remain closed for two to three months. The company hopes to use its bankruptcy to get an extension on its mortgage debt, end its agreement with Fairmont Hotels, and find a new hotel brand to partner with that will provide the hotel with new financing. The company purchased the hotel from Maritz, Wolff & Co., a real estate investment firm headed and co-founded by Lew Wolff, one of downtown San Jose's most influential developers. Wolff's firm purchased the hotel from the San Jose Redevelopment Agency for a reported price of $36.7 million in 1996. At the time, the hotel was at risk of falling into foreclosure; Maritz, Wolff & Co. helped to stabilize its business. It also constructed a 14-story annex to the hotel that was completed in 2002. This is a marquis hotel. It’s in a great location. It’s a terrific property. The dispute at this stage is about money. It’s not a question of whether this hotel will re-emerge as a going concern. Of that there is little doubt. What’s not 100% clear is the ownership structure of the hotel. Will it be the same owner operator? Will the lender take a haircut? Or will the lender attempt to foreclose and take possession of the hotel? Will the hotel owners require an injection of capital to stay alive and retain their ownership position? At a time when about 20% of the hotels in North American are in default on their mortgage debt, we can expect to see more surprises like this. 

On today’s show we’re talking about the three areas that I am seeing the most technology investment with venture capital and angel investors. The pandemic has served as an accelerator and has exposed weaknesses in a number of sectors. All of these areas of innovation were on a growth trajectory through the natural evolutionary course of the marketplace. Innovations get funded when they solve specific problems. This requires a clear statement of the acute problem. The first area that was dramatically impacted by the pandemic was healthcare. Many family medicine doctors and specialists had to adapt to new protocols. In particular, we saw many doctors resorting to telemedicine, attempting to diagnose over the telephone and limiting in person patient care to the absolute minimum. Tele medicine is one area that is begging for innovation. The US military has been using telemedicine within its own proprietary communication systems for years. But there are very few well developed solutions for public health or for family medicine. Would it be possible to integrate certain diagnostic or measurement apparatus into a smart phone app that the doctor can rely upon? While large advances have been made in electronic medical records, significant delays still exist between pathology testing labs, x-ray labs, and the attending physician’s desk. The second area that is crying for innovation is educational technology. The classroom on zoom is better than a webinar, and it’s better than watching a movie. But it’s a long way from optimum. Zoom was not designed to be an electronic classroom, nor was Microsoft Teams. This is an area with lots of opportunity for innovation. An integrated platform for teaching and testing doesn’t exist. There are a handful of trends underway in edtech. The biggest area where technology stands to improve education is by personalizing education. We’ve gone from a world that focused on everything for the masses to a world that is focused on the individual. Academic records are being sent electronically these days. But these records are prone to tampering. Blockchain technology can solve this problem. The third area is retail sales. The internet has enabled an increasing proportion of sales to go Direct to Consumer (DTC). The question is which search engine should be used to find the product you’re looking for? Amazon is a search engine, an e-commerce engine, and a distribution channel. The direct to consumer model doesn’t require a platform like Walmart or Amazon. You want an organic eucalyptus based insect repellant made by monks in Tibet? What’s that? Walmart doesn’t carry it? No problem. In the world of direct to consumer, you don’t need Walmart or Amazon or Alibaba. You simply need to be able to find it using a search engine. There are emerging specialty search engines out there. It’s not just the world of Google. Pinterest is a search engine. Etsy is a search engine. Direct to consumer is an area that is still a wide open field waiting for improvement. Shopify is one company that has made significant inroads in the new world of direct to consumer. So why am I telling you this? What does this have to do with real estate? As I’ve said on previous shows, the next shift in real estate will come from the world of online innovation. Let’s imaging that 1/3 or 1/2 of visits to the doctor’s office can be replaced with telemedicine. Would that affect the design of doctor’s offices, of medical clinics, and possibly of hospitals? I think the answer is yes. A medical office building that ignores these shifts is destined to become a dinosaur faster than necessary. Will the design of a classroom change with innovations in edtech? Will the design of a university campus change if 50% of the classes are held online? Will the world of retail be further affected by direct to consumer model? The answer to all three of these questions is clearly yes.

Today’s show is a little bit of rant. I get morally offended and outraged when I see people within the general public taken advantage of. I recently came across a homeowner who was looking to renovate her home. We’re talking about the addition of a 12x14 bedroom, the redesign of a room to create an ensuite bathroom, new siding, new windows, new insulation, the addition of a garage and some landscaping. Contractors were quoting her an all-in cost of close to $400,000. My initial reaction was to say that she could be an entirely new house for that price. A detailed review of the quotes showed the problem. A simple amount of education could save this homeowner hundreds of thousands of dollars. I consider these types of quotes to be outright theft. There is nothing criminal about charging a high price. If the grocery store starts charging $10 for a kit-kat chocolate bar, there is nothing compelling you to spend $10 for a chocolate bar. But when that happens, then everything else in the grocery store is called into question.  So if you don’t know construction pricing, and more than one general contractor gives you a high price, then you might be tempted to think it’s normal. Let’s look at a few specific examples from the quotes this poor homeowner received. Let’s start with the bathroom. It’s a relatively small bathroom at 5 x 12 feet. The quote for the tile work was for $10,000. If we tiled the entire bathroom, across the entire floor, the shower floor, and all the walls from floor to ceiling including behind the cabinets, there are 332 feet of tile area. Let’s say that we hire an expensive tile installer at $8 per square foot, and let’s say that we spend $6 per square foot on the tile which is more than triple what a builder would pay.  If you add all of that up, the most you could spend on tiling that bathroom would be $4,650 on the worst day ever. How the contractor justified their quote of $10,000 is a mystery to me. So the question is, how does the average homeowner avoid paying these types of inflated retail prices for modest construction work? Simple home remodelling projects like this are small projects. The really small contractors are the ones who are often gouging customers. I call these contractors 2 guys and a pickup truck. Everything about them is inconsistent. They don’t show up on time. They don’t keep their word on pricing. They charge too much. They take advantage of homeowners who don’t know any better. The true professionals in construction on the other hand are a pleasure to work with. They work quickly, methodically, fairly. There is pride in workmanship. They spend the first half day on a job site measuring and marking with a laser level. They are slow and careful at the beginning, and then accelerate when it comes time to do the construction. They’re faster than you could imagine. But unless you’re prepared to offer them full-time employment, how do you get access to them? Well, it turns out that many of these professionals are willing to work evenings and weekends for a little extra pocket money. These weekend warriors will work for the same wage as their full-time employment. They will do quality work. They will be fast. But don’t waste their time picking up supplies. Make sure the materials they need are on the job site before they arrive. The most difficult job to get done with quality people is the one that is too small for the major construction firms and too big for the weekend warriors to get done on evening and weekends. But if your goal is to get a job done at a reasonable price, with high quality, figure out how to carve it up into chunks that are small enough for the weekend warriors to bid, commit, and complete. If you do, you’ll save more than 50% compared with the shark infested waters of retail home renovation contractors.

Randy Blankstein hails from Chicago where he specializes in single tenant lease commercial properties on a nation-wide basis. On today's show we're gazing into the crystal ball to see the future of retail commercial space. To learn more or connect with Randy, visit the bouldergroup.com. 

Robert Helms is my guest today. He's the host of The Real Estate Guys Radio Show, now in its 25th year on the air. Robert is a dear friend, a fellow developer and investor with projects both in the US and internationally. On today's show we're talking about navigating the past year and an upcoming event (yes live) in Dallas. To learn more send an email to [email protected]. Enjoy...

Carl in Ohio asks: I’d love to get your input on 3D printed homes, and wonder if you have considered putting together any projects for that and raising funds for it. If you have any free time, I’d love to get your input on it. You’re one of the few people I’ve invested with that has a very diverse technical background and can look at a topic to see if it has a potential for exponential growth, or is gonna be a dud. Have a great day, and thank you for your time. Carl, This is a great question. First let’s frame what we’re talking about. This is not the same as the nozzle that puts out a narrow strand of nylon to manufacture small components in a lab environment. We’re talking about erecting a large truss system that is wider and higher than your house and has a nozzle on a three dimensional track. The nozzle squeezes out a uniform stream of cement according to the computer generated 3 dimensional drawing that is loaded into the system. The nozzle moves at a pretty good speed of about 6 inches per second. Current generations of 3D printers are capable of finishing a 600 square foot structure in about a day if it’s running continuously. Cement is an excellent building material. It’s strong and relatively inexpensive. Estimates from one manufacturer are about $8-12 per square foot in cost. One manufacturer claims that the same surface can be used on both interior and exterior. All that is needed is a coat of paint. Raw concrete while workable, is not always an acceptable interior finishing surface. So if you don’t want drywall, you might save a little more cost. But to determine whether 3D printing makes sense, let’s look at the budget for constructing a conventional stick built home or apartment complex. The actual framing of a building or house accounts at most for 15-20% of the hard construction cost. The average is around 17%. So even if you cut the cost of the material and labor in half, at most you’re saving 8% of the total construction cost. The developer doesn’t really care what material is being used for the framing. If wood prices go up, they’ll switch to steel studs. If steel goes up, they’ll switch to masonry. You get the idea. The expensive part of the construction is the plumbing, electrical and HVAC. None of these are candidates for 3D printing. A typical 2,000 square foot home will attract about $12,000 in plumbing costs, $14,000 in HVAC, and another $12,000 in electrical. The interior finishes are most expensive in the kitchen and bathrooms. You’re looking at about $4,000-5,000 in appliances. Flooring is about $6.00 per square foot installed. Yes, you can go cheaper, but I’m talking basic builder grade materials for new construction. When you add it all up, you’re looking at between $120-$134 per square foot for the hard cost of construction. The largest variable cost in a project is site related. Maybe the soil isn’t suitable for supporting a building and needs to be replaced with compacted fill that is structurally stable. Maybe there’s bedrock that must be broken or blasted. Maybe the city forces you to build underground stormwater detention in cement pipes at $100 per linear foot. These types of site related issues can add millions to the cost of a project with zero added value. When when you add the land cost, the impact fees, architecture, engineering, insurance, sales tax, the cost of borrowed money you can have a total cost of nearly $200 per SF. In dense urban situations, the cost could be much higher where the cost of the land is equal to or greater than the cost of construction. In that instance, saving $2-5 per square foot for a 3D printed structure is not a game changer. It’s single digit percentages savings.

On today’s show we’re taking a look at the impact of the emergence from the pandemic. We are facing a renewed sense of optimism in the economy with signs of dropping case counts for new infections. We have states like Texas and Mississippi fully opening their economies and dropping mask mandates completely. But the path from A to B is rarely a straight line. Some of the dropping case counts represent a false sense of security. A small but growing proportion of these cases are the so-called mutant variants that have higher rates of transmission. The UK variant is nearly 50% more transmissible than the original SARS Cov2 virus and represents a fast growing percentage of the new cases. It only took a few months in the UK for the new variant to become the dominant strain of the virus. So while the current case counts are dropping, the new variants represent a threat to the pandemic recovery. There is no question that the emergence from the pandemic will vary widely from one geographic region to the next. Cities that have a high exposure to travel and hospitality like Las Vegas will experience a protracted recovery, even if governments throw the gates wide open tomorrow. It is going to take time before the public at large regains the confidence to travel en masse for vacations. 2021 will continue to be a second year of social distanced, driving distance vacations. Friends of mine who have taken recent trips report less than 25 passengers on aircraft capable of carrying 150 passengers. The rate of vaccination is another variable. As of the first week of March, some states in the US report less than 15% vaccine penetration. Other states are currently at 25-30% vaccine penetration. These differences will also Israel has led the world in terms of vaccine rollout. So far 85% of those over age 60 have been vaccinated, and 40% of those aged between 16 and 60 have been vaccinated. Recent reports from earlier this week show that Covid-19 infection rates for those who have been vaccinated in Israel are one in 1,500. If these results are mirrored elsewhere in the world, the outlook for an end to the pandemic is promising. But it will take a long time before the rest of the world catches up to Israel. President Biden made a bold claim that enough doses will be available in the US to fully inoculate the population by May. So far as of March 3, the US has administer 23 doses of vaccine per 100 people. But in Canada, that number sits at 5 doses per 100 people. There are a few warning signs for investors in hospitality. Of course the hotel industry has been hammered in 2020 due to the pandemic. There was a lot of new supply under construction in 2020 which could not have foreseen the pandemic or its impact. Four markets stand out with more than 9% of the existing inventory of rooms under construction. Those four cities are Nashville, Austin, San Jose and New York. Ten markets have between 6-9% of their existing inventory under construction. Such a large increase in supply coming online in a short period of time leaves an uncertain future for hotels in those markets. Those 10 markets are Portland, Salt Lake, Denver, Savannah, Oklahoma City, Jacksonville, Columbus, Charlotte, South East Florida, and Detroit. Hotel occupancy was 45% for the year and currently about 20% of hotels are in default on their loans. But lenders appear to be working with hotel operators and the number of forced transactions remains small at the moment. Not surprisingly, hotels in sun belt destinations have fared better than most other areas. The lone exception is Hawaii where hotel occupancy is one of the lowest across the US. The five worst performing markets for travel and leisure were New York, Boston, Chicago, Seattle, and San Francisco. All of these markets show declines in rev per available room in excess of 65% compared with 2019.

On today’s show we’re talking about a tectonic shift that is happening in virtually every community in North America. There is a lot of development land available in the core of major cities. Now as you’re hearing this you’re probably thinking, no there isn’t, not in my city. But I want you to think about large land parcels that have the potential to be redeveloped. It is rare to find anything more than 5 acres in the core of a city. But these do exist. What I’m seeing are the handful of shopping malls that have become functionally obsolete in each community. These shopping malls are every 4-5 miles apart. Many of them are dying. At one time they had one or two anchor stores, maybe a Kmart or a Sears department store. These medium sized shopping malls were designed and built in the 1960’s and 1970’s. The large national brands have left these malls. The tenants are small independent businesses. You might find a real estate brokerage, or an insurance company, a dental clinic occupying space in the shopping mall. There might be a pharmacy or a walk-in medical clinic. But this type of use is no longer the shopping mall experience for which the space was designed. Once an anchor to a mall is gone, it’s unlikely that a new anchor will be induced to occupy that space. I’ve seen major development firms acquire shopping malls with a view to redeveloping those sites. They are land banking those sites in the short to medium term. It takes a while to put together a plan, get the community on board with the redevelopment of the site and complete the development. I don’t typically give our listeners homework. But today I’m going to give you homework. This homework is for anyone who is truly interested in forecasting what is going to happen in their local community. So if that describes you, you want to pay close attention. The assignment is very simple. You mission, should you choose to accept it, is to document all of the dead or dying shopping malls. You want to figure out how large those parcels are and estimate what type of multi-family product could be developed on those properties. Some might end up as a garden style apartment complex. Others might be a high rise project. In both cases, the limiting factor is almost always the parking density. You need to figure out will the project be limited by surface parking or structured parking. Parking nearly always consumes almost the same amount of land as the apartments. So once you’ve gone through that analysis, you will be able to predict the projects that will come to fruition over the next 5 to 10 years. You’ll be seeing around corners and predicting what will happen in terms of new supply entering the market, before the zoning applications hit the zoning office. The next thing to pay attention to is all of the dead or dying office buildings and make a determination which ones have the potential to be converted to residential, the hotels that have the potential to be converted to senior housing, and the ones that are functionally obsolete and can’t be repurposed. We are at an inflection point in real estate. The pandemic has poured jet fuel on some trends that might have taken 20 years to play out. Now they’re going to happen in half the time or less. When you start to look at a city through the lens of a developer, you can start to see around corners. Why? Because you’re the one who’s creating the bend in the road. If it’s not you, then it’s someone you know.

Today’s show is another book of the month book review. Our book this month is a brand new book called “Think Again: The Power of Knowing What You Don’t Know” by Adam Grant. Adam is a deep thinker. His book is a deep exploration of the question. “What do we know?” Adam Grant is an organizational psychologist at Wharton. He’s one of TED’s most popular speakers and his books have sold millions of copies. His talks have been view more than 25 million times and his podcast called Work-Life is great. I listen to it regularly. He’s been recognized as one of the world’s 10 most influential management thinkers. He’s a graduate of Harvard and completed his PhD from the University of Michigan. Adam’s book Think Again examines numerous questions like: What does it mean to be mentally fit? Normally we think that intelligence is a prerequisite. Intelligence is traditionally viewed as the ability to think and learn. Yet in our current world, there may be another set of cognitive skills that might matter more: the ability to rethink and unlearn. He examines how opinions and beliefs are formed. He looks at the history of research on the topic and how faced with the exact same circumstances, some people get attached to their thoughts. Their very identity is wrapped up in their opinion. For others, they exhibit the ability to let go of opinions, to change their mind, and to remain attached to principles and values rather than beliefs and opinions. Being wrong is often burdened with social stigma, with weakness. This is particularly true for men. So rather than believing what we see, we see what we believe. In psychology there are at least two biases that drive this pattern. One is confirmation bias: seeing what we expect to see. The other is desirability bias: seeing what we want to see. These biases don’t just prevent us from applying our intelligence. They can actually contort our intelligence into a weapon against the truth. Thinking like a scientist involves more than just reacting with an open mind. It means being actively open-minded. It requires searching for reasons why we might be wrong—not for reasons why we must be right—and revising our views based on what we learn. “Arrogance is ignorance plus conviction,” “While humility is a permeable filter that absorbs life experience and converts it into knowledge and wisdom, arrogance is a rubber shield that life experience simply bounces off of.” What I love about Adam’s book “Think Again” is that he challenges both loosely held and even tightly held beliefs about the way we conduct ourselves. He doesn’t care that he might offend someone. He has the research to back up all of his assertions. His findings are at times counter intuitive. The conclusions often break the author’s previous beliefs. He had to unlearn some of his old ideas. It’s only then that we can grow past our own limiting beliefs.

Bob is the author of the book of the month this past month "The Go Giver". On today's show we are taking a look behind the curtain to understand the process of writing a book and being positioned as a thought leader. There are several powerful lessons in this at times intimate conversation with Bob.  To learn more or connect with Bob, his website is at burg.com

Bill Ham is a specialist in redevelopment of properties. On today's show we're talking about mass obsolescence of assets in the market that has not been factored into the housing metrics by demographers, city planners, or even investors.  Bill is based in Atlanta Georgia where he runs Broadwell Property Group. You can connect with him directly at broadwellpropertygroup.com