On today’s show we’re talking about the fallout from last week’s stock market correction. Investors hate uncertainty. Whenever there is uncertainty investors go running for the hills. This is why investors finally woke up to the earnings warnings that have been resounding through the back alleys of Wall Street in the past 10 days. Is the drop in corporate earnings going to represent a V shaped blip, or will it be more of a U shaped business impact? Will this viral outbreak last until the Spring and then disappear much like SARS did in 2003? Or can we expect this virus to circulate around the globe multiple times including mutations of the strain? Will the supply chain disruption result in a weak Q1 and a roaring Q2? Will the drop in travel result in airline and travel industry bankruptcies? As real estate investors it’s easy to be complacent and say that real estate is unaffected. Tenants still need a place to live. They’re still going to pay their rent and we haven’t seen any job losses being announced on a large scale. At least not yet. We keep hearing that investors have a lot of cash sitting on the sidelines. In the past week, we’ve had the markets fall by about 12%. The losses total 6 trillion dollars in just five trading sessions. How many day traders were undisciplined and didn’t close out their positions at the end of the day? How many day traders will have their margin accounts called in? How many investors left their cash in the market and were waiting on the right real estate transaction before cashing out of the market and using their gain to invest in a qualified opportunity zone investment? Exactly who was impacted by the loss of wealth? The bottom 50% of the population in terms of net worth are likely not to be impacted at all by the stock market correction. They have very little in the way of holdings. Where they are at risk depends on the where the pension plans had funds invested. If you’ve been listening to this show for a while, you’ll know that I’ve been advocating getting out of the stock market for some time. The valuations haven’t made any sense. But here’s where its going to start to hurt for real estate investors. If your traditional sources of capital have been impacted by the stock market correction, they may be feeling conservative at the moment. They may be saying that it’s not a good time to make investments and would rather wait a few months to see what is going to happen in the market before making any commitments. Remember investors hate uncertainty. They may be asking questions like “How will the coronavirus outbreak impact real estate markets?” It’s a difficult question to answer. How many people will wait for the quarantine orders to subside before making a decision to buy a larger home, or invest in a multi-family apartment complex? You may find that investors who had committed funds to a syndication all of a sudden pull back and decide to wait it out. I know of at least three investors where this has happened. The good news for real estate investors is that the yield on the 10 year treasury has dropped even further in the past week. Interest rates on permanent financing is index to the 10 year treasury yield which means it could be an excellent time to rate lock into permanent financing or refinance into a lower interest rate. There’s no question that the rates of infection are going to multiply. I took an hour this weekend and created a mathematical model for the spread of the corona virus. If the current rates of infection remain unchanged and quarantines prove ineffective, we can expect that much of the global population will be impacted within the next 90 days. If you’re raising capital in today’s uncertain environment, it would be a good idea to communicate with your investors and ensure they’re still on board.

Our book this month is Prosper!: How To Prepare for the Future and Create a World Worth Inheriting written by my good friends Chris Martenson and Adam Taggart. They run Peak Prosperity, and organization dedicated to helping people live a rich and sustainable life. Their book Prosper! is a companion to The Crash Course. It shows the way that our society is living in a way that is destined to break down. Arguably crises like the one the world is facing right now with the Covid 19 outbreak is an excellent case study. In the book Prosper, Chris and Adam outline many of the things that can happen in a moment of crisis. In fact, we’re seeing these scenes play out in many communities all over the world. We’re seeing lines to enter the grocery store in Korea, in Milan, and in Aukland New Zealand which just reported its first case of the Corona Virus. In the book Prosper, Chris and Adam outline the steps you can take to build a resilient life. This isn’t just a single thing. We live in a world where black swan events do happen. They’re rare, but they happen. We’ve had two World Wars in the past century. We’ve had several major economic recessions including a decade long depression. We’ve had terrorist attacks and natural disasters. In the past twenty years we’ve had four outbreaks of highly infectious disease that have threatened our health care systems and killed tens of thousands. Any one of these types of events can have a profound impact on our daily life if we’re not prepared. Now I’m not talking about building a concrete bunker 100 feet below your house and stocking a year worth of food and water. That’s for the doomsday prep community. We’re talking about investing in 8 forms of capital that will prepare you well in the event of a crisis. If the crisis never happens, it will give you a richer life. Financial Capital Living Capital Material Capital Knowledge Capital Emotional and Spiritual Capital Social Capital Cultural Capital Time Capital I found the book prosper to be a real wake-up call and it has helped me bring focus to what’s important. With this current global crisis, I’ve been following Chris and Adam’s recommendations and I have to tell you I feel very secure knowing that I have prepared a deep pantry with several months of food. If the supermarkets were to be emptied tomorrow, there are definitely some things we would miss like fresh vegetables. But we would survive without any worry whatsoever. There’s a comfort that comes from knowing that the grocery store could close for a month or more and I’d be fine. I could be quarantined for 30 or 60 days and be very comfortable. If you haven’t been following Chris’s daily updates on YouTube, I really urge you to look them up. They reveal a perspective that is not being shared widely in the mainstream media. But I can tell you that everything he shares is well researched and has no agenda apart from keeping you informed.

Adam Carswell is with Concordia Realty, specializing in anchored shopping centers. His story is how someone with little experience came into the world of commercial investing by adding value to the business.  Adam can be reached at carswell.io.  

David from Anchorage in Alaska asks 1. AirBnB was founded in 2008 at the height of the Great Recession. In the past 12 years, the travel and leisure sectors of the economy have exploded. There have been various dips in the economy, but the modern short term rental market has not been tested against a major downturn. Hotels and resorts have historically taken a large hit during economic decline, but do vacation rentals get lumped in with hotels or do they offer a cheaper alternative and continue steady? 2. Markets set aside. The Vacation Rental season is almost upon us in Alaska. Unless you’ve just come back from off the grid, you likely have heard that a COVID-19 “pandemic” is also almost upon us. As a STR owner myself, I am curious. There is no historical precedence for modern STR's and platforms like AirBnB during a "crisis" event. How will the escalation of COVID-19 affect the STR market? Will it affect an AirBnB IPO in 2020? David, That’s a great question. The obvious answer is it depends. There’s clearly a linkage between travel and hospitality. A portion of the short term rental market is made up of medium term stays. Some estimates put the proportion at about 20%. I received this number from an employee at AirBnB directly back in November. Of course this number varies by market. You need to look at how people arrive at the destination. How many arrive by air, how many by car and so on. For example for your market, I don’t expect that many people are going to be driving to Alaska compared with those who fly. The Corona Virus is clearly having a massive impact on air travel. We own several short term rental properties in the Rockie Mountains near some major ski resorts and a national park. A high percentage of the traffic to our properties comes from within driving distance. But if air travel is reduced and occupancy falls in hotels, we can expect prices to fall across the breadth of the market, including short term rentals. We won’t see as high a nightly rate as we might have seen in past seasons. Short term rentals cater to a different market than hotels. While there is some overlap, the reduction in air traffic will have a significant impact. In our market we routinely see plane loads of tourists from China and Japan in the summer months. During the peak season we see essentially full occupancy and nightly rates that are over $600 a night. Air traffic from Asia is down by 90% at the moment. If that continues into the peak summer months, it will be a problem. We’ve seen that vacancy in the short term rental market doesn’t hit the market uniformly. Properties with the best reviews and the highest ratings get a disproportionate number of nightly stays. Even during low season, many of our properties have seen very high occupancy, far above the market average. By offering a superior product, competitively priced you can get more than your share of occupancy. The vacancy will tend to go to the junk in the market. Active daily management of pricing is essential to keeping units full. We are at a moment when history is being made. We don’t know what the outcome will be. Be prepared for a bumpy ride in the short term rental market this holiday season. Finally, to answer the last part of your question. Whether AirBnB will delay its IPO remains to be seen. I have no inside information. A downturn in the hospitality industry could easily create unfavourable conditions for an IPO. When hotel stocks and airline stocks are falling, it will be hard for AirBnB to convince investors that they're different.

Today’s show is a personal story of why I canceled a trip to Italy today. I was scheduled to fly to Italy today to attend a wedding in Rome. It’s a study of what can happen in times when there is a major civil disruption like the one caused by the current Covid-19 pandemic. Italy is working hard to get the outbreak under control. Italy’s health care system is pretty strong by global standards. But it’s not perfect. The number of cases continues to escalate with 51 new cases reported in the past 24 hours. Each one of these 51 new cases could have spread the virus to others. The average number of people infected by a carrier is estimated to be around 3. Each person infected, transmits the disease to three others. You can do the math. Unless the number of those subsequently infected can be brought below 1, the disease will continue to spread. In some cases, there are a few super-spreaders. There was the case of a woman in Korea who infected nearly 100 people at her church. That single carrier was largely responsible for the large scale outbreak in Korea. The lengthy asymptomatic incubation period is the greatest risk overall. People are spreading the disease who don’t know they have it. When you couple that with the cases where people are not being tested, and some number of tests that give erroneous results, we have the makings of a disease that will continue to multiply quickly. I have many reasons to go to Italy this weekend. It was going to be a quick 3 day trip. It would be wonderful to see my cousins. I have an aunt who is 94 years old and experiencing some health issues. Any time you have the chance to spend quality time with someone in their 90’s, take it. When a member of the family get’s married, you can’t ask them to reschedule it. You can’t say, I’ll catch you on the next one. You either participate, or not. So far, the region surrounding Rome has reported only 3 cases of Corona Virus. The vast majority of cases are in the North surrounding Milan. I also have family in Milan as well and I’m concerned for them. One of my family members is in her 90’s and not in great health. I have no doubt that they’ll be able to stay out of circulation for a period of time. But grocery store shelves have already been emptied. Getting food and basic supplies will be an issue in the near future. This is a warning to those who are not prepared for how quickly a situation can change. Grocery stores can be well stocked one day, and then two days later be completely emptied. It’s easy to rationalize that I’m going to be in a small group of people. It’s not a huge wedding, about 100 people. My risk is low. But still, people would be traveling from all over the world to attend. Who will be on the planes and trains of those 100 people attending the wedding? I have no idea who is catering the food. Several of the meals are scheduled for restaurants in central Rome. This area is frequented by tourists from all over the world on a daily basis. I have no doubt that my direct flight to Rome would be pretty safe. There are no known cases of the disease in my community. What I can’t be certain of is the return flight. We’ve seen travel bans being instituted from parts of Italy. It would be problematic for me to be stuck in Europe in a quarantine situation, or unable to return home because flights are cancelled all of a sudden. Even back here at home, preparations are important. We have no known cases in our city yet. We’ve been stocking up on food. As of now we easily have a month of non-perishable food in our pantry. My local Home Depot is now completely out of N95 surgical masks. I purchased 3 out of the last remaining box. Walmart is out of hand sanitizer in the city. My wife bought the last two bottles after checking the inventory across a city of 1.4 million people. Check the inventory in your pantry and go shopping for at least a month of essentials.

A new report was presented at a conference of global central bankers last week in New York that has multiple authors including several of the top economists.  The report advocates that central banks act early and aggressively when confronting a downturn. These crisis-era stimulus tools follow monetary policy. That is to say, the Fed, or any central bank tries to create stimulus in the economy by making money less expensive to borrow. We’re talking printing money, negative interest rates and forward guidance telling the markets that money will remain cheap. The idea is that if money is cheap, borrowers will use it to expand production, to hire people, and to make investments in growth of the business. On the consumer side, low interest rates make it attractive for consumers to buy now using credit instead of saving up the money to buy things when they can truly afford them. Today we are facing a crisis caused by the corona virus outbreak. If the impact is prolonged and travel becomes severely curtailed, we could start to see airline bankruptcies, hotel bankruptcies, and tour operators going out of business. We are seeing supply chain disruptions where the impact is not even fully understood. How this will ultimately impact businesses remains to be seen. We are already seeing companies unable to ship products because of component shortages. Making money cheaper to borrow won’t help. Federal Reserve Chairman Jerome Powell said recently that the Fed will fight the next recession aggressively with quantitative easing. That’s code for printing money. What will be needed in this instance is fiscal stimulus. But not just any form of fiscal stimulus. Typically when governments try to stimulate the economy they get busy building roads and bridges. That too would be completely useless as a remedy to today’s economic slowdown. Now is where government needs to step in and say to businesses affected by the corona virus outbreak, “here’s how government is going to help you directly”. So far none of the affected countries are making any meaningful statements about how they intend to protect their citizens from economic harm caused by the outbreak. Monetary stimulus will do nothing. It will require fiscal stimulus in the form of low interest loans or outright grants to affected businesses. Governments are way behind the curve in taking steps to contain the outbreak of the virus and they’re also way behind the curve in taking steps to protect the economy. So what’s the message in all this? Make sure you have taken the necessary steps to conserve cash in your business, take a defensive posture and be ready to rescue troubled assets when the time comes.

On today’s show we are talking about stock market valuations and how Wall Street justifies these high valuations. A year ago the Dow Jones Industrial average was trading at an average of 18.17 x earnings. Value investors the world over were fretting about how such a high valuation could be justified. As of Friday, the Dow was trading at 22.56 x earnings. First of all, let’s unpack what that means. The Price To Earnings Multiple is a measure of how expensive an investment is. In absolute terms it means that you would have to hold a stock on the Dow for 22.5 years for a company to earn back the investment an investor has made in the company. Let’s look at a low growth company like Consolidated Edison which provides regulated electricity, gas and steam to customers primarily in the NY area. Because they’re in a regulated industry, their ability to grow is limited by the utilities commission setting the rates that can be charged. Revenue grew by 0.1% last quarter. In the past year, Con Ed saw their net earnings shrink by 10.9%. Well Con Ed is trading today at 22 x earnings. This is a stock that should trade at a lower multiple. Historically, low growth stocks like this have traded at lower multiples like 10-12 times earnings. They’re stable year over year. I predict that we’re going to see a return to fundamentals in the near future. This is going to start with the more aggressively priced companies and then will spill over to the broader market. Today we still have a situation where the majority of trades in the market are computer program trades and not actual legitimate investor activity. We also have a large percentage of the investor market now investing in ETF’s, funds that track the market indexes. Let’s look at a stock like Apple or Google. These have traditionally been considered high growth stocks. We’ve been dealing with the Corona Virus outbreak for more than a month and the markets have shrugged it off and pushed valuations to all-time highs. Clearly investors have been disconnected from what is happening on the ground. We now have Apple issuing guidance that their first quarter will be impacted by supply chain issues. As of Monday’s opening bell, the shares were down 8% for the week and down 6.6% over the weekend. It doesn’t make sense that Apple trades at a premium to the market. The market multiples for Con Ed don’t make sense either. I’ve talked about 2 companies at opposite ends of the business spectrum. I believe that my argument applies to all the companies that occupy the space between these two companies. I believe that we will see a precipitous drop in the market averages as analysts come to grips with the true impact of the Corona Virus outbreak on the global economy. So far in the past week, we’ve seen a 4% drop in the S&P 500. Many have pointed to the stock market shrugging off the concerns about Corona Virus as a reason not to worry. Let me remind you of the irrational exuberance of the .com bubble in the late 1990’s. I lived through those days in the tech sector and was part of a company that had just gone public in the run-up to the .com crash. Markets have a way of being very wise in hindsight, but not so forward looking. Whether in good times or bad, but overwhelmingly when valuations are historically high I believe it is prudent to take a more defensive posture and invest in hard assets. Apple lost nearly 8% of its value in a few short days. Hard assets don’t typically exhibit that kind of volatility.

We are in the middle of a black swan event. We have a serious global health risk. The scope and magnitude of the impact is yet to be understood. Unfortunately, we have seen bureaucrats with zero understanding of scientific information making decisions that have put entire countries at risk. For example, the US State Department over-ruled other government departments and put 11 infected passengers from the Diamond Princess in the same aircraft as other passengers who had tested negative for the virus. The corona virus outbreak, also known as Covid-19 is what I would call a black swan event. The idea of a black swan was coined by  Nissam Taleb. It’s a metaphor used to describe an event that is so rare it is thought not to exist.  We typically can only see a black swan in hindsight. The collapse of financial markets in 2008 was a black swan event. A hurricane hitting a major populated area can be a black swan event. The terrorist attack on the world trade centre on Sept 11, 2001 was a black swan event. What will be the economic cascade of this situation? We tend to discuss counter-party risk as a financial issue between holders of assets and liabilities. There is another form of counter party risk that we rarely talk about. That is in the global supply chain. We don’t understand the complex web of linkages that make up the global supply chain. Economic activity can be disrupted by a drop in demand, or by a drop in supply. We have nearly 3/4 of a billion people in China on lockdown. This will clearly impact both demand and supply. When Japan experienced the Fukushima nuclear power plant failure, there was a single factory that supplied a critical component for batteries used all over the world. That single factory’s inability to supply for a period of time meant global disruption in the cell phone market. That was a single factory. Right now we have a situation where 50% of the containership traffic from China has been halted. Even if the products are on the pier ready to depart for North America or Europe, there is no way to get the products to market. Understand, each one of these container ships are capable of carrying more than 20,000 containers. That’s right, 20,000 20 foot containers. That’s the equivalent of 10,000 trucks on the highway for each ship. There are over 96 of these ships plying the ocean waters right now and a large number of them are stuck in port. We are going to experience supply chain disruptions on a scale we have not seen since the Great Depression. If companies can’t deliver their products, they can’t collect revenue. It doesn’t matter if there is demand. They simply can’t deliver because they can’t get the product to market. All it takes is a critical component to be missing in the manufacturing process. Some companies will be able to survive a number of weeks, or perhaps even a few months with their current inventory. In the world of Just-In-Time manufacturing, the most efficient companies focus on minimizing that inventory. Ironically, it’s the most efficient companies in the world that will experience the most acute pain in their supply chain. Finding an alternate sources of supply for a product is never quick, nor easy. Component substitutions and supplier substitutions take months or longer to implement. We have a number of companies that have massive corporate debt, much of it in the way of bonds. A large number of companies will have a very hard time withstanding a precipitous drop in business lasting more than a few months. The debt obligations of those companies assumes that growth will continue without interruption. I’m predicting a wave of corporate debt defaults over the next 90 days as a direct result of the supply chain disruptions. Those defaults will have a cascade effect due to counter-party risk on the paper.

Bob started his career in professional hockey where he played in the US and internationally. His brother played 15 years for the Montreal Canadians. Then after a start in real estate investing, he moved into the world of managing real estate projects with the help of virtual assistants. Today, he manages a team of virtual assistants based in the Philippines.  Real Estate Virtual Assistants is a company specially designed to supply virtual assistants to North American real estate clients, based in the Philippines. You can reach Bob at revaglobal.com

Bruce Firestone has been developing real estate for many years. He is best know for his role in creating a National Hockey League expansion franchise and creating the Ottawa Senators NHL team from an idea. Today's conversation in packed with powerful lessons on overcoming adversity.  

On today’s show we’re looking at some of the recently announced or completed hotel conversion projects. These projects are happening all over the country. Hotel News Now maintains an online database of all the hotel conversions that are announced across the United States. You can download the entire excel spreadsheet and look at the details of each project. In 2019, there were a total of 47 hotel conversion projects across the US. So far in 2020, seven hotel conversion projects have been announced across the country. On today’s show we’re going to showcase a few of those conversions to give a flavour for the types of projects that are getting funded in today’s environment. Some of the hotel conversions are merely a refresh of an old and tired hotel, along with rebranding the property with a stronger brand. There are a few examples where a property switched from a Quality Inn to a Ramada. The Vegas Hard Rock Hotel is now going to be a Hilton Curio Collection property. Some went from a private label like Turnberry in Miami to the JW Marriott brand. In one case, an Intercontinental hotel in Milwaukee Wisconsin removed the brand affiliation and chose to go the independent route. The improvements in a hotel conversion go beyond a fresh coat of paint, rectangular floor tiles and quartz counters in the bathroom. Today’s traveler wants the best of both worlds. They appreciate the unique experience that comes from staying in a boutique hotel. It’s far more memorable for a visitor to stay in a hotel with art deco interior, Venetian chandeliers and brass handrails on the stairs, than telling friends and family that they stayed at a nondescript Holiday Inn. But travellers also want the security of knowing that the property will adhere to international hotel standards for comfort and amenities. This is where the major hotel companies have been launching so many new brands. In particular, they’ve been launching brands that allow for boutique hotels to maintain the brand strength of the parent brand whether it’s Hilton or Hyatt, while embracing the unique aspects of the property. For example, Baywood Hotels purchased the downtown 14 story Oil and Gas office building with a plan to convert the property into a 175 key Canopy by Hilton hotel. This building was built in the 1950’s and was given heritage status in recent years. The hotel plans to open in 2021 after an extensive refit which was started this month. It’s hard to start with an old bank, or a post office and make that hotel conversion meet the specifications of a Hampton Inn. In fact, it would be silly to try. It would create confusion in the marketplace. The Hampton Inn brand would add very little value to a unique boutique property. When you are starting with an existing building and you would like to incorporate the history or the unique characteristics of the area into the building, it needs a distinguishing name that is in keeping with the character of the neighborhood. At the same time, travellers want to know that they can expect a fridge and coffee machine in the room, that there will be a safe for their valuables, a place to charge their electronic devices, the bed will be comfortable and that they will have high speed internet service for free with their hotel loyalty program membership. All of these things come with being associated with a major brand in one of the new boutique collection hotels. While these boutique hotels make up a small percentage of the overall portfolio of hotels in the market, they are a growing trend. The boutique hotels don’t demand all of the same architectural specifications that a brand like Sheraton might require. So the construction cost can be lower in a lot of cases. Those savings make for a more profitable hotel while maintaining the brand strength.

On today’s show we’re talking about how more New York City hotel owners are defaulting on their mortgages, succumbing to a crush of new supply and rising expenses. New York’s average daily room rate fell to $255.16 last year, according to hospitality research firm STR Global. That is down from $271.15 in 2014 and the lowest figure since at least 2013. A continued construction boom could push these numbers down further: 22,117 new hotel rooms were under construction or in planning as of January, according to STR. Here are a few examples. A $98 million financing package for two Manhattan hotels has sunken into default. As it turns out, I’ve stayed at one of these hotels. The debt, which dates to late 2014, is secured by two midtown lodgings: the 148-key Hampton Inn on 43rd Street and the 135-key Holiday Inn Express Herald Square, on the West side on 36th Street. When Cantor Commercial Real Estate originated the five-year, interest-only debt five years ago, income for the Hampton Inn covered debt-service requirements more than two times over, with a debt-service coverage ratio of 2.04. But by June that number had declined to 1.28. Revenue at the pair of hotels has held more or less steady over the course of the loan, rising to $21.9 million this year from $21.7 million at origination. But expenses have grown more rapidly: They’re up 15 percent over the same period, rising to $14.5 million this summer from $12.6 at origination. Otherwise, performance has been strong: As of 2019’s halfway point, the Hampton Inn’s 12-month occupancy rate stood at 92.3 percent, with the hotel earning an average daily rate of $224.65 Earlier in 2019, the owners of the NoMad Hotel, a luxury independent property located near Madison Square Park in New York, defaulted on about $140M of debt. The property was in jeopardy of going to foreclosure last June amid conflicts between the partners who own the property. At the 11th hour, the partners came together to save the property. Most recently, the old Milford Plaza Hotel in Times Square has run into trouble. This 1,331-room property was renamed Row Hotel. The property is in default on a loan package had a principal balance of $260.2 million. According to a report in the Wall Street Journal, the loan could now sell for as little as $50 million, say people familiar with the matter. The debt, which is secured by a long-term lease on the hotel rooms, has been in default since 2018 because income from the rooms isn’t enough to cover debt payments and rising expenses, according to the WSJ report. Several other hotel owners have had similar trouble. In June, a lender filed to foreclose on a hotel in Williamsburg, Brooklyn, over a defaulted $68 million loan. In December, a group of international lenders filed to foreclose on a Times Square hotel and retail tower once valued at $2.4 billion. Last month, the owner of the Blakely hotel in Midtown Manhattan said he would shut it down, citing stiff competition. And this month, a lender filed to foreclose on the former Hotel Americano, which in December was rebranded as Selina Chelsea.

On today’s show we’re talking about hotels and some of what’s happening in the hotel industry. The first major trend is that the hotel landscape is changing dramatically. Major hotels chains are launching more and more brands as they try to gain market advantage. Here’s what I believe. The value of a brand is called its brand equity. There is a ladder of brand equity that starts at the very basics Brand Awareness Brand Preference Brand Insistence Brand Advocacy I’m a pretty astute world traveler. I’ve visited over 55 countries in the world. That’s not going to break any records. But it’s fair to say that I’ve traveled. I’ve stayed in roadside hotels on the freeway at under 40 Euros a night, and I’ve stayed in luxury 5 star properties from Shangri La in Asia. I’ve stayed in Taj hotels in India, and Accor Group Hotels all over Europe. When it comes to hotels, I find that I struggle to keep pace with the proliferation of hotel brands. It’s like there is a hotel brand arms race underway. All the major hotel groups including Hilton, Marriott, IHG, Best Western and Hyatt have multiplied their brands. ntercontinental Hotels purchased Kimpton Hotels back in 2015. The company breaks down their business into Mainstream hotels and luxury and lifestyle. Their best known brands is Holiday Inn. Atwell, Avid are new brands that complement Holiday Inn and Holiday Inn Express as part of their mainstream portfolio. Some of the growth has taken place through acquisition, but much has happened as a result of launching new brands with positioning. Luxury and lifestyles (Intercontinental has 65 hotels under development). There are new brands like Regent, 6 senses resorts, and Indigo. Almost all of the 6,000 hotels in the IHG portfolio are owned by independent 3rd parties. At Hilton, they’ve added new brands like Tempo, Motto, Signia, Canopy, Tru, Home2, Homewood Suites, the Curio Collection and the Tapestry Collection. Marriott is now the largest hotel group in the world after having acquired the Starwood Group that owns Sheraton, and Westin. Hyatt has expanded with new brands including Andaz, Alila, and Thompson Hotels. The hotel groups are eyeing the growth of the middle class on a global basis as the main driver for demand. There has been considerable focus in the industry on bringing additional value to guests through loyalty programs. Someone who earns their Hilton Honors points at the airport Hilton when traveling for business will use their points at a vacation destination using one of the other brands when traveling for leisure. Today’s traveler is looking for specific amenities. When I travel, whether it’s for business or pleasure, the number one amenity that I look for is a refrigerator in the room. If it doesn’t have a fridge, I’m not staying there. It’s common in the downtown core of a major city to see many competing hotel brands, when in fact many are The seven largest hotel companies boast a mind numbing 134 brands. There has been so much consolidation in the hotel industry that even iconic family run hotel names like Waldorf Astoria, Fairmont and Ritz Carleton, are all part of a global conglomerate. So why are the hotel companies proliferating the number of brands? Strong brands like those under the Marriott and Hilton families attract the most visitors. They also attract the highest valuations from the REITs that aim to purchase performing hotels.

On January 31, a motion was put in front of Los Angeles City Council to expropriate an apartment building because the affordable rent covenant was due to expire after being in place on the property for 30 years. The motion asks city staff to draft plans for using eminent domain to seize Hillside Villa Apartments, a 124-unit, privately-owned development in the city's Chinatown neighborhood to avoid rent increases at the property. The property is currently under an affordability covenant that requires 59 units to be affordable for the first 30 years. The owner of the building sent notices to tenants over a year ago warning them of the increase, which will increase to market rates. That translates to an increase of up to $1,000 per unit. The owner of the building is Tom Botz. He said, ”I think it's a brilliant idea but I need to know: Are we in Cuba or Venezuela?" A condition of that loan was that the developer rent out units in the building at below-market rates for 30 years. Other government grants and loans that helped finance the building came with their own specific affordability requirements. The affordability requirements from the redevelopment loan were due to expire in June 2019. In May 2018, tenants started to receive notices that their below-market rents would be increasing in a year. In March 2019, tenants were given the option of signing new leases at the new rate or face eviction. In June 2019, several tenants, with the assistance of the Legal Aid Foundation of Los Angeles, sued Botz, claiming the tenants received did not receive proper notice. That lawsuit was dropped in July after a compromise was reached in which Botz agreed to extend the affordability covenant for another 10 years in exchange for the city wiping away the debt owed on the redevelopment loan. But after a period of time, Mr. Botz decided to not go through with that deal. He says that he had no hope that once the extended affordability requirement expired, activists and the city wouldn't just try to pressure him again into maintaining below-market rents at the building. The past six months have seen bitter feuding between Botz, tenant organizers, and Cedillo's office. Activists even picketed his home. Traditionally, eminent domain is used for projects that are considered in the public interest. These are situations where you need to build a freeway or an airport. The act of condemnation is not usually used for a city to simply buy a property. It’s not clear whether eminent domain would survive a court challenge. If the city  succeeds in condemning the building, it will erode property rights, possibly on a national scale. If this is a legitimate use of eminent domain, then it could be used again to seize other properties where affordability covenants are set to expire. The affordability covenants are usually set by HUD in Washington which is the primary source of funding and loan guarantees for these types of projects. Cedillo's motion asks the city's Bureau of Engineering to consult with the city attorney and then prepare a report on seizing Hillside Villa within 30 days. Botz says he will fight any effort to seize his property in court. It should come as no surprise that the increasing cost of housing follows the laws of supply and demand. Many within Los Angeles have opposed development and intensification. Intensification allows for more units within the city. Even though 70% of the land mass in Los Angeles is made up of roads, congestion is a major issue. For example, in 2019, LA Council voted unanimously against SB 50, a state bill that would legalized four-unit homes on most residential land and mid-rise apartment buildings near major transit stops. Should the city go down the path of seizing private developments to preserve units, it will discourage investment in developing new housing.

On today’s show we are talking about how to use other people’s money. As real estate investors we are trained to use other people’s money. We use the bank’s money. We might joint venture and leverage a partner’s money. We might syndicate a project and bring investors along for the journey. Robert Kiyosaki is famous for his assertion that your home is not an asset. An asset is something that puts money in your pocket. A liability is something that takes money out of your pocket. But what do you do in markets that are over priced? Everyone needs a place to live. I hear that mantra over and over again. What if you want to live in an expensive city like NY, San Francisco, Toronto or Vancouver? Let’s look at Vancouver where the median sales price for a 4BR detached home was $2.5M last month. Even a 1,000 SF 2 BR condo in Vancouver averaged $985,000 last month. That represents a price decline compared with a year ago. But you can often rent that same condo for $2,500 a month. Unless you believe that the 2BR condo is going to further inflate to $1.2M in the market, why would you ever take the financial risk of buying something that generates zero income at that price. Some people justify the purchase price of their personal home by saying that they deserve a nice place to live. I get that. So let’s look at the cost of owning that 1,000 SF condo in Vancouver. If you finance 80% at a 3.6% interest rate over 25 years, you would be looking at a monthly loan payment of almost $4,000 a month. When you add property tax and insurance you’re now at $5,000 a month and you have to tie up about $200,000 in equity just for the privilege of paying that $5,000 a month in holding cost. But wait, there’s more. The owner of the condo has $600 a month in condo fee. The monthly cost of ownership is a whopping $5,600 a month, for a 2 BR condo. That comes to $67,200 a year. Now on the other hand, let’s imagine that you could rent that same condo for $2,500 a month. All other things being equal, you would save $3,100 a month by renting instead of owning. That 2BR rental would cost you $30,000 a year. You would have zero maintenance responsibility. If the condo Corp isn’t properly capitalized and the owner faces a special assessment to replace windows or make repairs to the underground parking, you pay none of that. Imagine now that you took the $200,000 you would have tied up in equity and invested it in real estate, at a modest 10% annual rate of return. You would have $20,000 a year in income and could use the after tax portion of that income to further offset your monthly living expenses. You could probably reduce your monthly housing expense by another 50%. What I’m describing is heresy to many of my listeners. “Live where you want to live and invest where the numbers make sense.” I know that for some of you, what I’m saying is going to challenge some deeply held beliefs. Some of you will rationalize your belief by saying, you can’t rent a place that will be a nice as one that you would buy. Today’s show is based on real world apples to apples comparisons. The truth is, there are foreign investors who are looking for places to park cash in real estate. They are buying brand new construction condos, off of the builder’s plans and then putting those brand new properties into the rental market. It is happening every day. The concept of other people’s money doesn’t just apply to investing. It can also apply to your own home if you want to live in an expensive market where the numbers don’t make sense.

Rich Danby is the founder of Masters of Real Estate and is a frequent guest speaker at live events and on podcasts. He can be reached at [email protected]

Today's show is a live Q&A from a thought leadership conference in Toronto. Many of the questions center around the design and production of the podcast.  Enjoy...

On today’s show we’re talking about conferences. Who needs them? Are they worth all the effort, expense and time? Nothing has impacted modern life more than mobile technology. In fact, if you’re listening to this podcast, 85% of you are listening on a mobile device, either iPhone or Android. The continued evolution of mobile technology is a global effort with companies from around the world involved in the invention, design, development, deployment, localization, monetization, and promotion of mobile platforms, devices and applications. Yesterday, the GSMA, sponsor of the Mobile World Congress, the largest mobile conference in the world cancelled the conference, scheduled to be held in two weeks in Barcelona. This conference is massive in its scale and impact. Its cancellation also raises questions about the utility of conferences in today’s environment. Let’s dig into the details. It’s the first time in MWC Barcelona’s 33-year history that organizers have called off the event, which draws more than 100,000 participants from across the world to check out the latest innovations, pitch to investors and do deals. That’s right, 100,000 attendees. Hotels are booked months in advance. Short term rentals are booked months in advance. Poor unsuspecting tourists come into a city that is over-run by the event. The direct economic impact of the conference in Barcelona is estimated at $490 million dollars. The show provides temporary employment for over 14,000 people. This year, the list of big-name attendees started to crumble on Feb. 7, when Swedish wireless equipment maker Ericsson pulled out, saying it couldn’t ensure the safety of staff and customers. The first Asian company to pull out was Korea’s LG. As others pulled the plug from Sony to Nokia, Vodafone and Deutsche Telecom, it became harder for those remaining to justify their presence. The booths from the world’s largest equipment manufacturers are extravagant multi-story structures. Many of them include built-in conference rooms in which exhibitors can hold client meetings. Some of the booths cost more than $2M to construct. Booths are limited to 6 meters in height or about 20 feet. These three story structures are extravagant and eye catching. Why even hold a conference? Why is it needed? Do customers, many of whom work for government, or quasi government agencies really need to see all that extravagance? From an exhibitor perspective, the question is always whether trade shows generate any additional business. Do people walking up to your booth become customers? Are the people in your booth existing customers who you would have retained anyway? There are over 1,200 exhibitors and the attendees include experts from all aspects of the wireless industry. When I was attending, I was representing my company that manufactured chips that are used in mobile devices. We were meeting with equipment manufacturers who would ultimately use our chips in their devices. It’s an opportunity to compress timeframes. When I go to conferences, I hold multiple face to face meetings in a single day. Sometimes I’ll hold seven or eight meetings starting from early in the morning until late in the evening. I’m able to accomplish in four days what would realistically take four months. When people are in conference mode, they put the office on hold and focus to maximize the efficiency of meeting people at the conference. When I attend a conference, I don’t pick up the glossy literature. I don’t load up on free pens or sunglasses. I focus on meeting people, from dawn till late. Later this month, none of that is going to happen. The big question is, who is going to absorb the cost of the cancellations?

David from West Virginia asks: Nothing is selling here in the coal fields of WV. However, the rental market is really good. My question is, knowing I can buy cheap and rent with my long term goal being to eventually sell, Is this a reachable goal with our real estate market? David, this is a great question. My heart goes out to the communities where the main industry is shrinking. The fact is, real estate follows any other free market and must adhere to the laws of supply and demand. Communities connected to coal mining are shrinking because the employment is shrinking. For better or worse, coal has earned a reputation of being a dirty fuel and many jurisdictions have made the decision to eliminate coal burning for environmental reasons. Some of that reputation is well deserved, some not. There are some clean coal technologies under development and undergoing trials with the department of energy. If those trials are successful, it’s possible that we may see a resurgence of coal as a viable fuel for power generation. I doubt we will see power plants convert back from natural gas to coal any time soon, but it may enable some domestic power plants to extend their operating life. In particular, there are numerous plants in other parts of the world that may want to license clean American coal technology, or perhaps source clean American for their power plants. In my opinion, it would take something like a resurgence of coal in order for me to consider investing in an area where there is a dominant industry like coal mining. In order for me to invest, there has to be population growth, and jobs growth. If the jobs are disappearing, you’re trying to sell a product to somebody with no money. If they have no money, it’s not exactly clear why you would go out of your way to do business with someone who has no money. There might be a social benefit to doing so, or perhaps a humanitarian benefit to doing so, Those are all great things. But if your goal is an investment, then you want to evaluate the investment on investment metrics. The flow of money is straightforward. The tenants have the money. The way it works, is the tenants give you money at the start of each month. Over time, they help you pay for the property. In exchange, you take the financial risk of buying the property and borrowing the money from the future, along with personal guarantees and collateral to protect the lender’s position in the property. But if the tenants don’t have the money to start with, then the whole system breaks down. The problem with buying with the intent of selling in the distant future is that you don’t know if there will be buyers. If there are no buyers, then prices fall. It’s exactly the same situation as Detroit, albeit on a smaller scale. If there are no buyers, then prices fall. If there are no buyers, then you don’t have an investment. All you have is a prison for your money. Keep a close eye on whether clean coal gets adopted and whether it will drive a resurgence in coal mining.

On today’s show we are talking about how the arsenal at the Federal Reserve’s tool chest is getting empty. The Fed is taking the approach of monitoring the situation closely. Fed officials at their meeting last week left their benchmark federal-funds rate steady in a range between 1.5% and 1.75% and signaled little reason to change course for now. Fed officials had signaled before the coronavirus outbreak that they saw greater risks of surprises that could force them to lower rates than to lift them. Americans are driving the US economy along with borrowed money. The question is how much longer can it last? Consumer debt surged once again in December as Americans charged up their credit cards for the holidays. Total consumer credit grew by $22.1 billion in December, according to the latest data released by the Federal Reserve. That represents an annual growth rate of 6.3%. Total consumer debt now stands at a record $4.197 trillion. Just 5 years ago in 2015, consumer debt was a record $3.4 trillion dollars. Back then, we were all saying “How much higher can it go?” This is unsustainable. Here we are 5 years later with an additional $800 billion in consumer debt. The Fed consumer debt figures include credit card debt, student loans and auto loans, but do not factor in mortgage debt. A big jump in credit card balances drove the big rise in consumer debt in December. Revolving credit was up 14%. Americans have run up nearly $1.1 trillion on their plastic. The big jump in credit card debt reversed a trend of slowing consumer borrowing, but this was not unexpected during the December holiday shopping season. Non-revolving credit, including auto loans and student loans, grew by 3.7% in December. Total non-revolving debt outstanding stands at just under $3.1 trillion. Through 2019, consumer debt grew by $187 billion, a 5% increase. Americans are driving the US economy along with borrowed money. So if incomes have not grown by 5%, and inflation is low, some would say worryingly low, and consumer debt has grown by 5% and the economy grew by 2%, then there is only one possible conclusion. America is spending money it doesn’t have. The Traditional methods for stimulating the economy have relied upon the federal reserve lowering interest rates. The slow down in the economy is not the result of lack of investment by business. Lowering interest rates will have zero impact on economic growth. It won’t have much of an impact on consumer spending either. Even if consumer interest rates fall, the ability of the consumer to sustain higher levels of debt is highly questionable. The only economic stimulus weapon left is fiscal stimulus. That’s code for government spending more money and hoping that the increase in spending will circulate through the economy. Well folks, don’t get ahead of me. This is an election year and you can bet that the White House wants to stretch out this economic expansion as long as it can. Government spending is the only weapon left and you can expect them to use it. The White House released their budget for the upcoming fiscal year. The $4.8 trillion budget for fiscal 2021, released Monday, assumes that economic growth will be stronger than most forecasters project. The major elements of the budget plan are unlikely to become law, as Democrats control the House and spending bills in the Republican-led Senate need bipartisan support.

On today’s show we’re talking about how to reduce our energy footprint and one of the obstacles to doing so. Energy consumption per capita in the US and Canada is among the highest in the world. While our homes have become much more energy efficient, we still have a long way to go. One ideal is the so-called zero energy footprint home. These homes not only lead the way in terms of energy efficiency, they also produce enough electricity to cover their consumption needs. All of this comes at a price. The cost of building such a home is definitely higher than vanilla stick built construction. Since housing affordability is one of the most important issues in our communities, the idea of spending even more is outrageous to most people. One of the leaders in green technology and clean technology is a gentleman named Vinod Khosla. Vinod was the founder of Sun Microsystems in Silicon Valley. His company created some of the greatest breakthroughs in computing technology dating back to the 1980’s. His company has since been acquired by Oracle and he runs a venture capital firm called Khosla Ventures. He has a very pragmatic view of green technology. If the technology requires a government subsidy to be viable, it’s not interesting. If it requires massive investments in infrastructure, it’s not interesting. Your Toyota Prius, or your Tesla reduces greenhouse gas emissions by a tiny micro-fraction of a percentage. Until you come up with a technology that will convince the low income family in China or the single mother in New Delhi to stop cooking dinner on an open air fire using two bricks of coal, we will struggle to make headway on our global environmental challenge. The obstacles that make pollution the path of least resistance need to be removed. On today’s show we’re talking about one of those challenges. This is the story of Brad McLaughlin. He’s a home builder in New Brunswick who built a zero footprint home in 2017. But the three-bedroom, two-bath home stubbornly refuses to sell. It has been on and off the real estate market since 2017. Starting out, McLaughlin's asking price was $695,000. By May, 2019 he lowered it to $570,000. This week he put the two-storey house back on the market at $495,000. The problem appears to be financing. Appraisers don’t know how to model a high efficiency home compared with a regular home. They see comparable sales and comparable construction costs in the area, and they don’t recognize the lower cost of ownership associated with a zero footprint home. Their financial model assumes that the energy consumption will be the same as a conventional home, and that the purchase and sale price should be identical to any other home in the area. The technology for zero footprint is here. It’s a little expensive, but not out of line. Here’s the problem. Home prices in my area have gone up 19% in less than a year. Appraisers and lenders are happy to recognize a 19% increase as perfectly normal in a market. Lenders are willing to lend against it. But a 15% increase in cost in order to create a zero footprint home is way off-side. There’s a certain silliness that allows price increases of 8%, 15%, 19% in a single year to be OK, but the construction of infrastructure that will make a home consume zero energy for the life of the home is not considered to be a legitimate part of the home value.

Today’s story is about Mr. Steven Long. He’s a construction worked who lives in Seattle, Washington. Long had been homeless since March 2014, when he was evicted from his apartment after the rent got too high and he missed payments. He said he had previously lived out of a camper in the 1980s, traveling through five different states, so he thought he’d try sleeping in his truck.' In fall 2016, when Long was doing cleanups for the Sounders, he had parked his truck in the 900 block of Poplar Place, near the Interstate 90 and Interstate 5 interchange. “It was out of the way,” according to Mr. Long’s testimony. Steven Long returned from his job cleaning up CenturyLink Field after a Seattle Sounders’ game when he discovered that his truck was gone. He had been living in his 2000 GMC pickup, parked on a side street, but the city of Seattle towed it because Long had violated a city rule that requires vehicles be moved every 72 hours. Mr. Long claimed he told the officers he was living in the truck; Nonetheless, Mr. Long tore off the impound sticker, and left the truck in place. The parking officer waited at least four days before having the vehicle towed, giving Long extra time to buy a part needed to get it running. When the enforcement officer returned Oct. 12, the truck was still there but Long was not, and the vehicle was towed. At the impound hearing, Long said the truck was his residence. The city waived the $44 ticket and reduced the towing and impound fees from more than $900 to $557. Long sued the city but lost in Seattle Municipal Court in May 2017. He filed an appeal, which Judge Shaffer heard in the Spring of 2019, and she ordered the city to refund Long the money he has so far paid. King County Superior Court Judge Catherine Shaffer ruled that the city’s impoundment of Long’s truck violated the state’s homestead act — a frontier-era law that protects properties from forced sale — because he was using it as a home. Long’s vehicle was slated to be sold had he not entered into a monthly payment plan with the city. The City has since appealed the case to the State level appeals court. ] The appeals court judges have been asked to decide the case on two main questions: Does fining someone living in their vehicle violate the U.S. Constitution’s Eighth Amendment barring “excessive fines” and “cruel and unusual punishments;” and does attaching an impound fee to the vehicle, refusing to release the truck until Long entered into a payment plan to address the fees, violate Washington state’s Homestead Act, a frontier-era law that protects homes from being easily seized and forcibly sold? Long’s lawyers argue that not only was Long forced by the seizure of his vehicle to sleep outside, but the fines amount to the city punishing him for being homeless. They argued that it is punitive to take away a man’s home because of a parking violation. Long still lives in a truck, now with a trailer attached, but outside Seattle now. He’s working a full-time carpentry job in construction. A ruling from the State Appeals Court is expected within six months. There’s no question that the despite being among the richest nations in the world, we in the west haven’t figured out how to care for the homeless in our midst and help them get a roof over their heads.

Marc Koran specializes in commercial strip malls. These assets are income properties with strong anchor tenants. Marc's take on this segment of retail space has a unique twist that aims to protect against the changing landscape of retail. He can be reached at marckoran.com.

Scott Choppin is based in Long Beach California where he specialized in  new construction work-force housing. You will learn a ton from this conversation on development in a difficult market. Check it out.  

Today we’re going to be sharing a collection of short stories that have one thing in common. They should never have happened. We’re starting with the mundane custom furniture company that took an order for a custom made sofa. The lead time for the sofa is a full ten weeks and let me tell you, those ten weeks are going to pose a commercial problem for the business that is waiting for the furniture to arrive. The process of fabric selection took a week of back and forth negotiation between the sales team and the placement of the order. Now that we’re away from the country for two weeks, we get a message a week after placing the order that the fabric is not available, and what would we like to do with the order? Number 2. This is the story of the government department of health that is really two departments in one. Submitting an application to said department of health, as it turns out does not mean that the building application will get routed to both places within the department. Of course, there is no publicly available documentation saying that you must submit the application twice to the same department in order to get it routed through both subsections of the department. After getting the approval from said department of health, the city’s building examiner noted that the food safety division of the department of health had not signed off on the application. This was despite the fact that the department had the application for nearly 6 weeks. The food safety division promised to give speedy review of the application. But his ultimately meant a month of delay. When that was complete, it went to the city’s food safety review who then required the addition of a 500 gallon grease trap for each 3 gallon kitchen sink. Clearly that made no logical sense. Number 3. Then there’s the story of the internet service provider who would not provision fiber to a property because the property address wasn’t listed in the 911 database for the city’s public safety records. It turns out that the city is willing to collect taxes for that address. The road to the address is paved, and the mailman is delivering mail to that address. But the internet service provider could not recognize that the address existed. The location shows up in Google maps. The solution in this case was to bring the internet service to a friendly neighbor whose address did actually appear in the 911 database, and then we introduced a private extension of the internet service to go the last few yards to the subject property. The problem with this approach of course is that we experienced months of delay in the provisioning of the service, and we will won’t get the emergency services coming to the proper location if someone were to call 911 from a fixed device on that network. Number 4. There is the story of the client who chose the paint color for an office. The painter ordered the paint and proceeded to get to work. Total elapsed time for the job was forecast to be three days, one primer coat and two finishing coats of paint. At first, the client was happy with the paint color. They chose it after all. By the time the time the second coat of paint was expertly rolled and dried on the walls, the client admitted that perhaps it wasn’t the best choice. They would go back and order new paint. But now the painters would not be available for another week. It took three days to choose another paint color and then another week to repaint the entire office. So what do all these stories mean? They’re real life stories from our own business. Does it mean that we’re bad managers? The fact is, it means none of these things. These are real life risks that happen in any business. You can’t plan for the unknown, apart from allocating a time buffer at the end of each project. That buffer isn’t for anything specific. It’s there to deal with the unknowns that will arise with alarming regularity in real life.

Real estate investors are famous for saying that you can buy a property based on both price and terms. I will let you set the price as long as I set the terms. The trivial example is, I’ll pay you $10M for that old 1950’s single family home. But I’ll make daily instalments of $0.10 per day until the $10M is fully paid off. As long as you set the payment terms, you can agree to virtually any price. I learned a powerful lesson in the past month. It’s a lesson that I already knew, or at least I thought I did. Sometimes, I find myself learning the same lesson more than once. So here’s the story. I’ve always known that a confused mind doesn’t make a decision. The author and marketing expert Donald Miller is famous for his saying “When you confuse you lose, noise is the enemy, and a clear message is the best way to grow your business.” I’ve known this for a long time. A confused mind will not make a decision. My partners and I have a property under contract and we are looking to assemble several of the neighboring parcels in order to build a high rise project. This requires negotiating the purchase of these properties with each of the land owners. As with any negotiation, the seller wants to maximize the price, and as a buyer I don’t want to pay too much. The value of the land to me is largely dependent on what the city will ultimately allow to be built on that site. The value will be influenced by the height restriction, and by the setbacks from the property line. It will be influenced by any restrictions imposed by the zoning code.  Will the city allow 6 stories, 9 stories, maybe 14? The higher the density, the greater the value of the land. Can I build right to the property line, or will there be a required setback from the property line? So here I was, thinking that I had come up with a clever solution to negotiating the purchase price for three properties. In each and every case, the idea didn’t really connect with the seller. Out of the three, only one of them truly got it. Even then, they didn’t really value it. In almost every case, we were negotiating with one representative from each property. But there were multiple stake-holders behind the scenes that we didn’t have a chance to talk with directly. So what was the lesson. 1) Keep it simple and easy to understand. 2) Don’t assume that all the stakeholders will connect with your clever idea if they’re not part of the conversation directly.

Some people believe what they see. But in truth, I think the opposite is true. Most people see what they believe. Nowhere is that more true than in the political landscape. If you believe that the President of the United States should be removed from office, you’ll see evidence that supports your point of view. If you believe he’s innocent and was duly elected and is doing a good job, then that’s what you’ll see. If you believe that eating beef is healthy for you, then you’ll see the evidence that supports that point of view. If you’re Vegan and you believe that beef is bad for you, then you’ll see the evidence to support that point of view. I’m not telling you anything new. But there’s a link between this and economic survival. Consumers increasingly want to work with businesses who deliver all the values of price and convenience, but also those contribute outside the transaction in a societal way. Toms Shoes is a company that exemplifies this kind of impact. They invented the buy a pair, give a pair model. To date, they’ve given away almost 100 million pairs of shoes to people in need. Last week at the World Economic Forum in Davos, the CEO of Walmart spoke very eloquently about how these social factors are influencing consumer choices. Walmart is starting to look at Vegan products and are catering to consumers who match the values alignment with those products. The big question is what kinds of businesses are going to be successful in the next decade. Those that are local and only compete on a local basis will continue to do well, provided of course that they deliver a quality product and good value for their customers. Increasingly, they need to cater to their values, not just deliver the product. Some people will order a cup of coffee because it tastes good. Others will only order from a coffee shop that advertises “Fair trade” coffee. Commodity businesses are those that compete on a global basis where scale, convenience and lowest cost are the over-riding factors. This is the world of commodity. When the value is unclear, the discussion always degenerates to price. Price always wins in commodity. You can’t get your hair cut online and your dentist had better be local. But if you have a high ticket item, you can bet that an online purchase will be the way to go. Carrying that inventory in a bricks and mortar store will always lose. I just purchased a dishwasher for a commercial property online. There’s no need for the bricks and mortar store. But if loyalty to a store is going to exist, it requires three things: Repeat business. Transactions that occur infrequently such as once in a lifetime, or once a decade don’t generate loyalty. Wedding dress shops don’t have any customer loyalty. That’s why Competitive price and service. A connection between the buyer and seller. Increasingly these days, values alignment is being tested as a Could it be that businesses that identify as Tea Party values will be attractive to that target audience. Perhaps businesses that identify as LGBT friendly will connect with a large segment of the population? Businesses that are explicitly immigrant friendly. If you or your parents are new to the country, then you are part of the immigrant experience. Businesses that speak to you and the immigrant mindset might be more attractive. There’s no question that the landscape of business is changing. But the question is how is it changing? As a real estate investor, you need to know how business is changing because that’s the economic engine that ultimately pays for the rent in the buildings you own, whether you’re in the world of multi-family apartments, office, retail, or storage. All of these segments don’t survive without a vibrant local economy underpinning the community.

On today’s show we’re talking about a comprehensive look at short term rentals in a recent report from commercial brokerage house CBRE. This 52 page report outlines some major findings on the impact of short term rentals on the hospitality industry. The STR segment is also undergoing significant change as it matures. The supply penetration rate of short-term rental      (STR) units to traditional hotel units reached 10.4% in 2019 and is      expected to hit 12.2% this year with the addition of more than 100,000 net      new units. STR supply grew by 26% in 2019, down from      39% in 2018 and after seven years of exponential growth (100% to 500%)      since 2009. Growth rates are expected to slow further to 19% in 2020. Recent growth for STRs has been primarily      in suburban and rural areas. Units in urban areas make up only 21% of      total supply, down from more than 45% in 2014. Los Angeles remained the largest STR      supply market in 2019 after overtaking New York in 2018. Los Angeles, New      York and Orlando together accounted for about 12% of total STR supply in      the U.S. last year. Guests consistently cite price and      location as their top reasons for choosing alternative accommodations. Branded apartment/hotel models such as Sonder, Stay Alfred, Lyric and Domio depend on the pricing arbitrage between monthly apartment rent and nightly STR rates. Many companies have entered the market, primarily in U.S. urban areas. If we examine where these units are located and their market penetration, we find that nearly 20% of the resort market is made of STR with 80% being made up of more traditional hotel product. 13% are urban, 10.5% are small metro and 6.5% are suburban or airport.

Consumption accounts for 60% of GDP. Back in the 1970’s many of the western economies experienced the so-called stag-flation. The simultaneous occurrence of both economic stagnation and inflation. Traditional Keynesian economists postulated that monetary stimulus by governments would create economic growth. Until the 1970s, many economists believed that there was a stable inverse relationship between inflation and unemployment. According to this theory, the growth in money supply would increase employment and promote economic growth. The 1970’s proved that this theory was not true. Fast forward to today. We have central governments printing money like never before. However, it’s not having much of a stimulative effect on the economy. It’s inflating asset prices, but not creating a substantial jump in economic growth. The other major factor that can’t be over-looked is demographics. If I observe my own behaviour, there was a time when I was willing to spend money on a large scale. I remember ordering matching custom made leather sofas for our home. They were stunning. Today, my values have changed. I would never do that today. Perhaps it’s because I’m over 50. Maybe it’s the result of spending considerable time on board a boat and realizing that I don’t need all that stuff. There’s no question. I’m actively opposed to spending money these days. I want to invest, not consume. I’m putting increasing amount of money into assets and not into consumption. Am I also responsible for the economic slowdown? I see other people my age spending less on consumption, even if they’re not investors. In our family, we took the decision to reduce our household from two cars to one. The number of times when both my wife and I need the car at the same time is hardly worth justifying the extra expense. We have an economic system that requires never-ending growth in order to survive. Unless you have growth, there is no way to practically retire debt. Debt is borrowing from the future to spend money today. The only way that debt makes any sense is if you can have more money in the future. If the growth isn’t there, then the only solution is the inflation of the money supply. In the world of inflation the currency get devalued. This has the effect of increasing prices. When prices rise, three things are affected. People on fixed income have their purchasing power eroded. They can’t spend as much on consumption. The only way to feed the consumption side of the economy in those cases is to make more consumer credit available. Savings get devalued. Debt gets devalued just the same way that savings do. So the question is, are there new barriers to employment which are not influenced by monetary policy or fiscal policy? If you live in California, the state government continues to make it less attractive to do business there.. New laws are making it less attractive to hire in the state of California. If the fed prints more money or lowers interest rates further, you’re not going to see a lot of new hiring happening in California. Access to credit isn’t what’s preventing more people from getting hired. If you look at Japan, as soon as their population peaked in 2005 and started to shrink, you saw economic stagnation. In fact, today there are over 11M vacant, that’s right 11M empty homes in Japan. The birth rate and immigration are not sufficient to sustain the population. Japan’s population has continued to shrink and their fertility rate is currently 1.4, far below the 2.1 needed to maintain population constant. The US population is growing through immigration, but only barely. If you want see our economic future look to Japan for a clue on how it might unfold. Increases in government spending and higher debt to GDP ratios have not help stimulate economic growth.

David Barnett is a business sale consultant. He can be reached at davidcbarnett.com. Such a great conversation.

Brian Tracy has developed a massive following over the years because he has figured out how to connect with his audience. He’s studied with the likes of Jim Rohn, Les Brown, Og Mandino, Zig Ziglar, and Wayne Dyer. He’s part of that upper echelon of self improvement gurus. Brian Tracy’s book is “Get Smart: How to Think and Act Like The Most Successful People and Highest Paid People In Any Field”. Core to this book is the notion that there is a correlation between successful people and their time horizon. Successful people plan further into the future and are highly future oriented. Everyone, and I mean everyone is on a quest to improve their situation. How they approach that improvement is where the differences lie. The alcoholic seeks to feel better in the moment and uses a drink to get an immediate change in emotional state. The further in the future, the greater the impact and the greater the compound effect of working toward a specific goal. Brian Tracy’s premise is that your most powerful tool is the one you carry with you everywhere you go. The ability of the human mind to develop solutions simply by thinking is unparalleled in our universe. Thinking is the hardest work we do as humans, which is why so many people avoid it at all costs. There are those who think. There are those who think that they think. Finally, there is the vast majority who would rather die than think. It’s not enough to think. We’re thinking all the time, but most of that thinking is useless stream of consciousness. One random thought after another. Some people think quick, some think slow. Both have their place. Driving a car requires quick thinking. It’s almost instinctive natural reaction. But quick thinking is not the way to develop a strategy, to solve a difficult problem. This requires slow thinking, and slow thinking is best accessed in solitude in stillness. The author contrasts informed thinking versus uninformed thinking. He compares goal oriented thinking versus reaction oriented thinking. He compares result oriented thinking versus activity oriented thinking. These are just some of the ideas explored in the book Get Smart by Brian Tracy. In the book the author illuminates the path to the habits that when made part of you will enable you to access your best self, to harness your inner potential. Brian Tracy simplifies his ideas and makes them almost universally accessible. If you’re going to embrace an idea and translate it into action, you need a very specific reaction. You need to say to yourself, “I can do that”. If on the other hand you say to yourself, “I don’t know if I can do that. It seems pretty hard to me” chances are you won’t embrace it. But if you can visualize the idea and see how you can make it part of your daily practice, it becomes possible. Brian Tracy is a master at communicating the same idea in multiple different ways. It doesn’t matter whether your preference is analytical, philosophical, story based, or methodical, he finds a way to connect with the broadest possible audience. He brings an idea into the open and shows it up to the light from several angles, without being repetitive or boring. If you’re looking to diagnose why you might be stuck in some areas of your life, the book “Get Smart” may just open the door you’ve been looking for.

Ramon asks, I recently purchased a small multifamily property at which I am doing a renovation project with a budget of approximately $300k. My contractor and I have a long relationship, spanning more than 10 years, and have successfully completed numerous projects together. At the beginning of the project we defined a clear scope of work, timeline and payment schedule. After getting off to a good start, we are now 8 weeks behind schedule and I’m noticing some work that is not up to his typical high-quality standard. I had a conversation with him about these issues and he said that he underbid the job and wasn't making any money, but despite that he plans to honor the deal (he pointed out that many contractors would just abandon the job in that situation). I believe that because of this underbid he is skimping on certain things and has a smaller crew than is required to speed up the process. As I see it I have 3 choices: (a) I can let him finish which will likely result in the project falling another month behind schedule, (b) I can increase the agreed upon price if he agrees to hire more people (this may be a wash compared to the extra holding costs if I go with option (a)) or (c) fire him and hire a new contractor to finish which will likely result in more delays. How would you approach this situation? Ramon, This is a great question. It does happen that contractors underbid projects. When they do underbid, they start taking steps to protect their profit margin. They use lower cost labor. They start pulling quality out of your project and using cheaper materials. They slow down to preserve cash flow since they’re going to be losing money. They will do more of the work with in-house labor instead of using the proper subcontractor for the work. They will cut corners at every turn. Put yourself in their shoes. You would do the same thing. Even good people make mistakes. I don’t think you should just let him finish the contract, even on a slower schedule. I believe that the impacts will extend beyond just time. You will find quality and materials will be short of your expectations. If you fire the contractor, there will be costs to break the contract. The contractor will claim that they are owed money for work completed. From there, you will bring a new contractor into the job. They will recognize that the job was underbid, and they will make sure that they don’t lose money. So you will definitely pay more. By the time you put the project out to bid, you will lose even more time and you will definitely pay a lot more. If you don’t agree on the amount owing to the previous contractor, you can expect a mechanics lien on the property, in which case your lender and a new contractor will have a problem with the presence of the mechanics lien. Think about it, would a new contractor take on a project knowing that he might not get paid? I would recommend the following. Require complete transparency on the scope of work. Agree on a fixed profit margin for the GC. If their normal profit margin is say 10%, you’re going to agree on a haircut for that number, maybe 5%, or better still a fixed amount and it won’t be payable until the job is done. Review the scope of work and get agreement on the pricing for all the subs and in-house labor. In-house labor would be treated the same as a subcontractor for the purpose of the You can at that time value-engineer any of the finishes and make material tradeoffs yourself. I don’t know the details of your project. So I’ll just through out some ideas for you to explore. You might choose a less expensive flooring material, or eliminate the trench drain in the showers for a lower cost center drain. You might choose a lower cost granite for the kitchen counters, or lower cost windows. You can recover some of those costs in a value engineering exercise.

On today’s show I’m going to make a bold economic prediction, and its not a popular one. I don’t frequently make large predictions, but this one seems obvious to me. I haven’t seen anything in the media talking about this as of yet. I believe that we will see a global recession in 2020. The trigger for this recession is the outbreak of corona virus that has the city of Wuhan in China as the epicentre. British Airways suspended flights to China today, and it remains to be seen if governments or other air carriers will implement travel restrictions. Air travel is one of the most effective methods for transmitting illness. You have a few hundred people in close proximity for several hours with a high percentage of recirculated air. The older the aircraft, the more air is recirculated. Even if infection isn’t transmitted on the aircraft, you have the possibility of infected persons exporting the disease to other parts of the world making it that much more difficult to contain. The Spanish Flu pandemic of 1918 infected an estimated 500 million people and killed an estimated 50 million people. Think about it, the world had just experienced WW1, and all of the horrors of that multi-national conflict. It was the war to end all wars and hot on the heels of that, along comes a strain of H1N1 that killed another 50 million people. Back in 2003, the SARS outbreak killed an estimated 800 people worldwide and it too had a high mortality rate. A few years later in 2009, the so-called swine flu pandemic was another H1N1 virus. Remember, the world was already in recession in 2009. We were in the middle of the largest economic downturn since the great depression. So the impact of a downturn in the global travel and leisure industry was hard to measure. It was just more bad news on top of a mud puddle of bad economic news. There are no official estimates. Some economists estimate the impact of somewhere between 0.5% of GDP and 1.5% of GDP. But here’s what we do know. After 911 in 2001 travel on a global basis was hit hard. It triggered a downturn in hospitality. People still took vacations at that time, but they were increasingly driving vacations that didn’t involve air travel. In 2001, the global airline industry was weak and were already forecast to have somewhere between $1-2B in losses. In the wake of 9/11, the industry losses grew to $11B and a portion of this was offset by government bailouts of the airline industry. Midway airlines shut down. US Air went into bankruptcy and United Airlines was on the brink of bankruptcy. The only profitable airline in the US that year was Southwest. In total, 13 airlines applied for relief under the stabilization act. With the SARS outbreak in 2002-2003, the same thing happened. Travel numbers were down dramatically for leisure. Even business travel was restricted and business people held more video conferences than ever before. At the time, video conference technology was not nearly as widely used as it is today. So here we are at the beginning of 2020. Several countries are working hard to develop a vaccine for the corona virus. It will be at least 6 months before a vaccine is approved for use in humans and still longer before it is manufactured and available in meaningful quantities. A lot can happen in the spread of the disease in 6 months. We have already 6,000 reported cases in Wuhan, an increase of 50% in about a week. The virus is now reported in 17 countries. Containment is vitally important to prevent a global pandemic. This will affect global travel patterns.  I’m going on record as saying that 2020 will experience a global slowdown in the travel industry that will be of sufficient magnitude to push most major economies into economic recession. This will have a ripple effect into other sectors of the economy.

Ray from Florida asks, I am talking to an owner that will owner finance 100% of a small 20 unit mobile home park, that also has 3 commercial buildings. The problem is that 16 Mobile Home sites are occupied and the homes are PARK-OWNED. From everything I’ve read it seems wise to see if I can get the tenants To own these homes through a rent to own program or gifting. The sellers business would then be very different than mine and therefore value the different differently, right? This park has been on the market for over a year. How would I go about valuing this property while also understand if he is going to finance the whole thing for me. Thanks for your help! Ray, this is a great question. The problem that I see with the park is that it is too small. Even if you get the park to 100% occupancy, you're only looking at income from the ground rent in the mobile home park of about $4,000-$6,000 a month. That doesn't even pay for the staff to operate the park, let alone pay taxes, maintenance, and so on. Even if you got the park for free, I'm not sure it's worth the effort. If the seller is going to seller finance 100% of the park, then you are sort of getting it for free. If they’re offering seller financing from the beginning, it means that other have tried to buy it already and passed on the opportunity. If you aspire to become an investor, as opposed to simply buying yourself a job, then you need to look at assets that generate enough income to hire staff. You only have four vacancies, and therefore your upside is pretty limited. You can only collect an additional $800-$1200 a month depending on how much you charge per home site. If you’re serious about getting into the mobile home park business, I suggest that you build relationships with people who are experienced mobile home park operators who can help mentor you on what makes a successful park. The fact is, you can have a vision for the community that you want to build. Some parks are the housing of last resort for the economically weakest members of our society. These are sometimes the worst slums in an area. At the other end of the spectrum, there are amazingly beautiful parks that are well kept, retirement communities with great amenities, and some of the new high quality modular homes that are built by the nation’s best modular home builders. All too often, I see newer investors going after smaller assets because they don’t have the cash to buy something larger. The skill that’s missing is the skill of raising capital. The conventional way of thinking is to only use the money you currently have available at your fingertips. I personally believe that the ideal mobile home park should have at least 150 spaces. If it’s distressed, then it should be at about 50-60% occupancy and operating at break-even. From there, we can take the park to full occupancy and add significant value with minimal downside risk. Those larger parks might cost more to purchase, and you probably need more cash than you have available. A larger park brings enough income to justify the staff. If you want to be a real estate investors, then you need a project that can fund employees. If you had the skill of raising capital, then the purchase price ceases to be an obstacle. If you had a team of specialists where one of you was an expert at operations, another was an expert at raising funds, and perhaps a third was an expert at construction management you could grow and scale your business without limits. Don’t be scared of a larger project. The path to financial freedom is found in those larger projects, but only when combined with the skill of raising capital.

Today the Wall Street Journal reported that we could be facing a synchronized slowdown in home prices. On today’s show we’re talking about how to make sense of the conflicting data out there. But what’s reported in the news for individual home owners is very different from what investors will experience. The Wall Street Journal reported that across 23 countries, an index of inflation-adjusted home prices compiled by the Federal Reserve Bank of Dallas grew 1.8% in the third quarter of 2019 from a year earlier. The report said that home prices in many countries were falling, including prices in Canada have fallen 0.5% in the past year. A key catalyst is the global slowdown over the past two years that kept a lid on housing demand and home-price gains. In large cities, affordability constraints are deterring many would-be buyers, and foreigners’ appetite for overseas properties has cooled. Broad Statistics like this drive me crazy because they’re meaningless. At the same time that prices have fallen in some markets, we’ve seen prices rise dramatically in others. It is true that foreign buyers in many major cities have fallen. We see this in Miami, Toronto, San Francisco and Seattle. The claim of a slowdown in Canada is simply not accurate, even in inflation adjusted terms. Here’s my take on what is happening. Toronto is the fastest growing city in North America with over 125,000 population growth each year. There were only 27,410 housing completions in Toronto in 2019, down from 37,750 in 2018. The fact is, there is very little developable land left in Toronto. There is a huge reduction of single family homes and townhouses being built. Getting new projects approved in Toronto is a slow and expensive process. The vast majority of new construction is in the condo asset class and fully 60% of new product is high rise condo, 27% single family or townhouse, and 13% rental. This shortage of supply is what is driving prices up. The Bank regulator in Canada implemented additional credit tightening to try and cool what was seen as an overheated real estate market, specifically in Toronto and Vancouver. By making it more difficult to borrow, that has put a cap on prices, but only in some segments of the market. We have seen prices falling at the top of the market. At the same time, we’re seeing prices rising at the bottom and the middle of the market. People will only pay for a home based on what the bank will allow them to borrow. This has reduced the rate of price increases, but prices are still increasing as long as people can borrow. Home sales increased 14% in November and active listings are down 27% compared with last year. Prices have increased on average 7.1% in Totonto. In my home city of Ottawa Canada, prices have increased 10.3% for single family homes and 11.5% for condos. Active listings are down 33% compared with last year. Sales volume is up 14%. There is an increasingly loud chorus of people predicting that home prices will crash in several markets once the current generation of boomers exit home ownership. There’s no question that new supply will open up when that happens. The big question is demand, and how immigration will impact the balance of supply and demand. If you’re making a financial decision for the next 25 years, I suggest you look out more than the next 90 days to predict where home prices are heading.

This question came up on Saturday where it was part of a lunch discussion with a group of investors over the weekend. This particular sponsor was trying to figure out how to work with a private lender who would be lending funds that the project sponsor would ultimately use to fund the earnest money deposit and the equity for the project. The lender wants a 10% rate of return on their money. He’s also asking which property will be used to secure his loan. But the property has not been purchased yet. How can the sponsor convince the lender to keep money available until it’s needed so the 10% interest isn’t being spent on money that I can’t put to work yet. This is a terrific question. The first thing to pay attention to is the fact that money is not all green. Money always has an agenda. When I wrote the book Magnetic Capital, I found that raising money was straightforward when there is a perfect fit between the goals for the money and the goals for the project. In fact, there are 5 elements to raising money and if one or more of these elements are missing, then raising money becomes problematic. The 5 principles are: Relationship Trust Results Compelling Opportunity Alignment Where you’re having trouble is in the last element called alignment. It’s very important to match goals for the money and the goals for the project. If you don’t have a perfect match between those objectives, don’t take the money because you’re trying to force a square peg into a round hole. Alignment covers the structure and the terms of the transaction. These are things like the Size of the investment The length of time the money will be tied up The rate of return Are the funds secured on title? What’s the tax consequence? What’s the control structure? What’s the risk? The first thing to be aware of is that you are proposing a structure that might be governed by securities laws. Now let me say that it’s not my role to provide legal advice. I’m not a lawyer, and I’m definitely not a securities lawyer. I definitely recommend you get legal advice from a securities lawyer. Any time you have a situation where there is an active party who brings effort, and a passive party who brings money, you could be walking in securities territory. You may qualify for one or more exemptions. A mortgage exemption is one of the securities exemptions that could apply. But if you’re going to be using the funds for the earnest money deposit, those funds are needed prior to closing the land purchase. Unless you’re prepared to cross-collateralize another property it’s not going to be possible to use the mortgage exemption. It seems to me like you have a fundamental mismatch between the goals for this particular lender and the goals for the project. There should never be anything in the process of raising capital that feels forced. It seems to me like you are ideally looking for an equity partner. An equity investment is not a secured investment. It is an ownership investment, not a loan. You can get a loan for the rest of the project, but you will need some equity in the project. If you bring an investor into a project to co-invest with you, then you might also consider a joint venture partnership. This could involve you investing a small amount of your own cash, and involving the investor directly in the decision making. That way, you are both contributing money to the project, and all the partners are active in venture. They become a full partner in the joint venture, and then you don’t have to worry about compliance with securities laws, because a joint venture where all the members are active is not a security.

JP Albano skipped over single family homes and small rentals and dove directly into the world of multi-family investing. His first investment was a 28 unit building.  You can connect with JP at jpalbano.com

Today's show is an extract from a talk that I gave at a thought leadership conference in Toronto on Jan 23. If you've ever want to know how the show is put together behind the scenes, this is the show for you. Enjoy...

Dr. Kevin Hsu from NYC asks I like your idea of buying on the line and moving the line. Does that concept ever apply to what the US government calls “opportunity zones” as well , those designated areas generally which are considered bad and in need of development , Rehabilitation. Supposedly they have significant tax incentives if selling after ten years?What are your thoughts on investing in Opportunity zones? Kevin, this is a great question. Over the years we’ve developed this strategy called buy on the line, move the line. What is that line? It’s that line between the hot fashionable neighborhood with coffee shops and art galleries. You go two blocks too far in the other direction and you’re in the hood. Wherever you live, I can virtually guarantee that every city in North America has that situation. The idea is to buy a property just on the wrong side of that line for pennies on the dollar and redevelop that property. Once you’re done, the line is now on the other side of your property. When you go to get an appraisal, your only comparable property is in the hot area next door. There are no comps in the hood. A Qualified Opportunity Zone is something that was introduced in the Trump Tax Code of 2017, the single largest revamp of the tax code since Ronald Reagan was President. The idea is to stimulate development in some of the poorest and economically disadvantaged areas in the country. Each state had the opportunity to designate up to 25% of the lowest income areas as opportunity zones which would qualify for preferred tax treatment by sheltering capital gains from taxation. The short answer is yes, Qualified Opportunity Zone investments can often dove-tail nicely into the buy on the line strategy. In particular, we’ve seen several cases where the boundary of an opportunity zone is actually in a good area, or across the street from a good area. How these maps were arrived at is anybody’s guess. It’s not my role to provide you with tax advice. I’m not an accountant. I’m not a tax lawyer. Everyone’s tax circumstance is different and what I’m saying may or may not pertain to you. If you take the time to do the math, what you will discover is that the rate of return for something that is fully sheltered from Capital Gains Tax for the full 10 years, will give you an internal rate of return that is 2% points higher than one that is not. So if your investment would naturally give you a 12% IRR, then the equivalent project in an opportunity zone would give you 14%. If your IRR was 14% in a vanilla project, now you could expect 16%. As you know, you need to assess the risk on that 14% IRR. After all, the 14% IRR is only a forecast, constructed by a financial model that has a number of assumptions and risks. Finding the right opportunity requires extensive work and due diligence. If it’s a new development project, then you want to know that the developer who is developing the project has strong experience and track record. In my experience, the greatest risk is in fact the developer and not the project. You want to perform due diligence on the deal sponsor, the project, and the submarket. The deal might look good on paper, but unless the sponsor can execute on it, it doesn’t matter how good it is on paper.

On today’s show I’m talking about a property that I placed an offer on, and ultimately lost. The West end of Ottawa Canada has extremely low inventory. Some realtors estimate that there are 75 potential buyers for every one seller. Inventory is less than 10 days. In fact, in my suburb of the city which represents a population of 90,000 people, there are only 16 homes listed for sale, 14 of them are South of a major freeway and in a less desirable area, and only two of them are North of the Freeway and one of those is already conditionally sold. So to say that there is zero inventory in our market is not much of an exaggeration. The home I placed the offer on was about 21 years old. The builder had acceptable build quality, and I know the builder first hand having purchased another home from them several years ago. The owner of the home was the third owner in 21 years, and none of the owners had made any upgrades to the property to speak of. There was no backsplash in the kitchen, the appliances were new. The furnace was original. The windows needed replacing. There were many signs of deferred maintenance. The furnace was sitting in a puddle of water and there was a dehumidifier set up next to the furnace. Needless to say, there was a lengthy list of items to investigate. As is often the case in a sellers market like this, the agent for the seller set up the sale process as an auction. Offers would be accepted up until 3PM the day after the showing and I submitted my offer on time. Our offer was a cash offer and had only a 10 day contingency for inspection. Given the scope of problems we saw in our short initial visit to the property, an inspection by a professional inspector was clearly warranted. An hour later, the agent came back and said there were multiple offers. Did we want to amend our offer? In response, I increased the offer price by $10,000 and reduced the inspection contingency period by 5 days. The agent came back an hour later and asked if we could come up another $5,000 which we did. Then by dinner time, the listing agent came back and informed me that we did not win the bidding war. The seller was not comfortable with the inspection condition. They went with another offer at a lower price with no conditions. So here’s the interesting situation. The buyer took the risk of a significant amount of deferred maintenance. I saw about $30,000 of work with the naked eye in less than 15 minutes on the property at night time. I probably would have seen more with a proper daytime inspection, and still more with a professional building inspection. I think the buyer was silly to take the risk on that much deferred maintenance. I’m not scared of repairs and upgrades. In fact, I was glad that the seller didn’t try to do a poor quality renovation. A poor quality remodel would have made the home even more difficult to purchase. One agent told me that in the current market, placing a condition of any kind on an offer means losing the auction. I don’t regret losing the auction. I don’t like auctions, and I don’t like the artificial scarcity that an auction represents. Auction fever is real, and when it takes hold, paying too much is almost always the result. I’m not an anxious buyer. I’m never an anxious buyer. It’s far more important to me to purchase a property using the right process and not cut corners. Just because other people are willing to be desperate, doesn’t mean I need to be desperate. Decisions made out of haste or desperation are rarely the best decisions in life.

On today’s show we’re talking about how to save money by unbundling. There’s two ways to buy a service. You can pay an hourly rate, or you can pay a fixed price. It’s attractive for a buyer to pay a fixed price from a budgeting standpoint. If you are raising capital for a project, you need to know how much something is going to cost. You can’t simply write a blank check and hope that it will all work out the way you want. Some contracts are a guaranteed maximum price contract. In those contracts, you go through tremendous pains to make sure the scope of work is fully understood and you conduct a detailed review of the specifications to make absolutely sure that nothing has been missed. In a fixed price contract, the price is fixed, and so too is the specification. If there’s an error in the specification, you can expect to pay more to have it fixed. It’s often the case that when items are packaged together in a fixed price contract, you end up with some of the things you want and then other things you are not that keen on. You might feel stuck because you’re buying services and products that are not to your liking, in exchange for the certainty of a fixed price contract. I’ve seen this happen many times when dealing with construction contracts. There are some times when a construction contract is priced too high. That’s particularly true when the contractor doesn’t know how much time something will take. They tend to quote high to protect their margin. In those cases, it’s in your best interest to pay for the work on an hourly basis instead of paying a fixed price for a package. If you still want a guaranteed maximum price contract, then the solution might be to quote a time allowance for a particular line item in the contract. Any time over and above the allowance would be charged at an hourly rate. A simple case in point was a drywall plastering job that had three extra line items that were priced above the original scope of work. Each of the line items when bid at a fixed price came to $2,600 in extra work on top of the base contract. When I asked the person doing the work on site how much effort it represented, he estimated about 8 hours of work. There’s no way that I would spend $2,600 for only 8 hours of work. There’s no way I would spend that much if I paid for the extra work on an hourly basis. In that case, I went back to the manager for contractor and asked him to quote me an hourly rate for the extra work and then I gave him a blanket authorization for the extra hours. In the end, the extra work cost me $800 instead of $2,600. This was all with the same contractor. I don’t feel like the contractor was trying to rip me off in any way. They were estimating the job the way I would expect contractors to estimate the job. We are often conditioned to think that fixed price contracts are the best way to go. I’m here to tell you that it’s not always the case. Before you can realistically negotiate this with your contractors, you need the expertise in house to estimate the work and figure out what it should really cost. Sometimes the local knowledge of the site conditions can give you an advantage over the estimator who is trying to do their work quickly and efficiently. Their goal is not always to get you the lowest price. Their goal is to get the job done, to keep their people busy, and to minimize the time lost to mobilizing staff on and off the job site.

On today’s show, we’re talking about a global perspective of growth. The World Economic Forum opened this week in Davos Switzerland. The price of admission to that conference is high, but the networking is awesome. If you’re like me and have projects to get done, you’re probably limited to watching a handful of the video recordings. The International Monetary Fund’s World Economic Outlook was part of the opening statement from the World Economic Forum this week. It highlighted their growth projections for the next two years. In that forecast, the advanced economies like the US and Europe are expected to grow by 1.6% this year and next. The emerging and developing market economies are expected to grow by an average of 4.4% this year and 4.6% next year. The big talk is about a slowdown in China. But frankly, it’s hard to see 6% growth, down from 6.1% growth in the Chinese economy as a slowdown. 6% growth of an economy that’s almost the size of the US economy is still massive growth. That’s 735 billion dollars of growth. Just the growth in China next year is larger than all of Spain’s GDP. It’s larger than all of Austria’s economy. It’s larger than Portugal, Hungary, Serbia, Bulgaria and Croatia and the Czech Republic combined. Here’s the kicker. China’s growth alone is larger than the entire Argentinian economy. We’re conditioned to think historically of Russia and the US as the two global Superpowers. That was certainly the case for the second half of the last century. That’s no longer the case. China dwarfs Russia and all of the former Soviet republics. The US economy is the largest, followed by Europe, and then China. The other emerging market economies of Brazil, Argentina, India, and Russia are a rounding error by comparison. Gita Gopinath is the director for the research department at the IMF who issued the forecast. In her update she said that the risks to the global economy have reduced in the past quarter. The two major risks were US China trade, and the risk of a no-deal Brexit. The biggest downward revision of 0.1% in the global economic forecast comes from a slowdown principally in India. Gita sees the US China phase 1 deal as offering a bright light. Risks remain to the downside according to the IMF. I bring the World Economic Forum to your attention because it’s an event where some of the most influential people in the world come together for a week. There are the prepared statements which often are not that impactful. What I do find useful is to hear the questions. Some of the panel discussions are taking questions from the Internet, not just from the attendees in the room. By participating in the World Economic Forum even from an armchair vantage point, I feel more strongly connected to the major forces that are shaping our world. I get to see the spectrum of political opinions directly, and not through the lens of the news media’s interpretation of what was said. I’m a huge believer in bypassing the intermediary and going directly to the source.

This question is from Carol in Toronto. My husband and I have been living in the same rental for 18 years. For the past 6 weeks, our stove has stopped working and the landlord has not fixed it. He claims he doesn’t have the money. My landlord has been increasingly elusive. We have some evidence that he’s trying to push us out so that he can get a new tenant and raise the rent. The property has other problems with moisture and mold which could be affecting my health. In the past 18 years, he has only raised the rent twice. It would cost me far too much to move. I’m hearing that my landlord may claim that the landlord tenant act doesn’t apply because the home we live in is zoned commercial and not residential. There used to be a business located at our property before we lived here. I want to avoid confrontation, but the way the landlord is treating us isn’t right. I can’t afford to be forced out of my home. Well Carol, this is a complex question. First of all, I’m not a lawyer and don’t want to be giving you legal advice. There are a number of aspects to your question. You are clearly paying below market rent. Rents in Toronto have gone up significantly in the past 18 years and you’ve been getting a good deal for all these years and continue to do so. In the province of Ontario, landlord tenant issues are governed by the residential tenancies act. If you have a dispute with your landlord for items regarding your lease, these are judged at the landlord tenant tribunal. As you’re probably aware, this is a slow process. But there is one major exception to the rules. The issue with the stove is not a landlord tenant issue but a property standards issue. The same is true for the mold in the property. That too is a property standards issue. The enforcement of property standards is not a provincial matter, but has been delegated to the city. A simple phone call to the bylaw enforcement office will have a bylaw enforcement officer come to visit your property. This is a simple phone call, and they will show up in short order. The province of Ontario instituted rent controls a few years ago. The landlord has the right to increase your rent. He can’t evict you simply because he failed to increase your rent all these years. The only circumstance that I know of where a landlord can evict a tenant for anything other than non-payment of rent is that they intend to owner occupy the property, something the owner of the property has the right to do. They don’t have the right to evict you because they don’t like the rent you’re paying and then turn around and rent it to someone else at a higher rate. I appreciate your desire to avoid a confrontation with your landlord. But the fact that you’ve been without a stove for 6 weeks is unacceptable. In my opinion, you already have a confrontation in the sense that you’re having to spend extra money to buy prepared food instead of cooking at home. A stove is not that expensive and you’re paying your rent on time each month. Ultimately, you need to decide if you believe your landlord is trying to force you out of your property by making it too unpleasant to live there. That is, in my view against the law. The residential tenancies act is pretty clear about that. Again, the purpose of this podcast isn’t to provide you with legal advice. I’m not a lawyer. But I can point you in the direction of some publicly available information that is easy to download from the city’s website. Getting bylaw enforcement involved is as simple as a call to a 3 digit number. If you dial 311 within the city of Toronto, you will be connected directly with the city.

On today's show, I'm talking about negotiation with George Ross. I love getting George's insight's. 

Roy Smoothe hails all the way from the UK, where he specializes in helping business and entrepreneurs with their brand image. You can learn more about Roy at RoySmoothe.com or at his music website success2music.com. Join me for this fascinating conversation about how to get noticed in today's noisy world. 

 On today’s show we’re talking about an innovation in creating more affordable housing. The city of Los Angeles has amended their definition of an accessory dwelling unit. The history of an accessory dwelling unit has has be the traditional in-law suite, or the nanny suite. This is sometimes an attic apartment, or a basement apartment. It’s usually attached to the principal home and forms part of the home, but is a separate unit. In these secondary units, the utilities come from the main house and they’re really considered to be part of the main house. Under the latest change, the city of Los Angeles is adding movable tiny houses to the definition of ADU. I’m going to read the definition directly from the text of the municipal ordinance. MOVABLE TINY HOUSE. An enclosed space intended for separate, independent living quarters of one Family as defined in Section 12.03 of this Code and that meets all of the following: Is licensed and registered with the California Department of Motor Vehicles; Meets the American National Standards Institute (ANSI) 119.5 requirements or the National Fire Protection Association (NFPA) 1192 standards, and is certified for ANSI or NFPA compliance; Cannot move under its own power; Is no larger than allowed by California State Law for movement on public highways; and Is no smaller than 150 and no larger than 430 square feet as measured within the exterior faces of the exterior walls. So these are truly tiny houses. There are a few restrictions. For example, No ADU is permitted on any lot that is located in a Very High Fire Hazard Severity Zone designated by the Los Angeles Fire Department. One parking space is required for an ADU, except that no parking is required for an ADU that is: (i) Located within one-half mile walking distance of a public transit. All exterior walls and roof of a moveable any tiny house used as an ADU have to be fixed with no bump outs, slide-outs, 7 tip-outs, nor other forms of mechanically moving room area extensions. Even if your lot is large, you’re only allowed one of these on the property. If the tiny house has wheels, they have to be covered and hidden. The house has to sit on a paved surface. You can’t just put down some gravel and bring in a trailer. The question is why would the city of Los Angeles want to bring movable tiny houses into the city? Who is it helping? Is it creating more affordable housing? The fact is, it is creating a small amount of affordable housing for those who reside in the tiny homes. Equally important, it’s making home ownership more affordable for those who wish to purchase a single family home, but can’t quite afford it. The city is also putting restriction on the types of homes. It’s pretty clear that you can’t just by an RV and hope that it will qualify as a tiny home. They have put rules in place to make it extremely difficult to use an RV for this purpose, without coming out and explicitly saying that they’re outlawing RV’s. For example, the home must have square cornered windows. You’re not allowed to have radius corners on the windows. Materials used on the exterior of a moveable tiny house shall exclude single piece composite, laminates, or interlocked metal sheathing. The home can’t be more than two stories and you’re not allowed to place the tiny home between the main house and the street. Those who live in tiny homes have given mixed reviews on the experience. On the plus side, you save money because your property is small. Equally important, you have so little space, that you tend to not buy stuff. There’s no point purchasing consumer items that you have no space to store.

On today’s show, we are talking about solar energy. Let me be clear, I want solar to work. I have solar electric panels on both of my sailboats. I love the idea of getting energy for free. If solar energy is going to take hold on a large scale, it will be because it makes financial sense for all the stakeholders including consumers of electricity to make the investment. Governments in California don’t trust the population to do the right thing. So starting Jan. 1 of this year, all newly constructed homes and low-rise apartment buildings in California are required to have rooftop solar panels. The state is the first in the nation to carry such a mandate. Prior to the enactment of the law, about one in 5 new homes came equipped with some form of solar energy supplement. All new building permits in 2020 and beyond will require it. The law also requires better insulation and air filtration for new homes. Some areas also are seeing mandates on the use of natural gas. The rules for energy use are intended to help alleviate the state’s greenhouse gas emissions. The new laws apply only to newly constructed homes. The California Energy Commission estimates that the solar mandate and additional building code changes could add between $8,500 - $9,500 per home in construction costs. However, they say the changes will save homeowners $19,000 in energy and maintenance costs over 30 years, or $55 a month. From my perspective, that’s an optimistic view. The solar contractors I contacted estimate the savings at closer to $35 per month per home. That means we’re talking about a 22 year payback on the solar installation. I don’t know about you, but these solar systems have not been tested to a 22 year life. If they don’t last beyond 22 years without maintenance or repairs then it’s likely that the solar installations never fully return their investment. Many states have implemented financial incentives to sell power back to the electric utility at favourable rates. These rates are often higher than the cost of producing electricity using convention power generation, and certainly higher than the retail price of electricity. Most utilities, including California have switched from buying power at peak rates to a method called net metering. So let’s say that your home generates more electricity than you use, will the utility write you a check? The answer is no. The problem is that the economics don’t yet support solar on its own merits. The cost of electricity from your utility is driven by two major costs. The first is the variable cost. That is, the cost associated with producing an incremental KWH of electricity. If you are burning natural gas to produce that electricity, then the cost of the fuel is the variable cost. The bigger problem is the cost of the infrastructure required to produce and distribute the power. The power system provided by the utility is designed to handle the peak power demand, not the average. Solar power systems produce electricity that lowers the average consumption, but doesn’t really lower the peak demand. The problem is that the majority of the cost associated with delivering electricity to a residential home is fixed. That is, the infrastructure is so expensive, that the majority of the cost is the amortization of the fixed infrastructure over a number of years. The actual variable cost associate with the energy burned to deliver that electricity to the end customer is tiny by comparison. The problem is that the revenue model for the utility is based on consumption. Lowering consumption lowers the revenue for the utility, but doesn’t actually lower the cost by very much. The problem is that politicians in this instance are pandering to an idealistic notion that is not born out in reality. If they could shut down a power generation plant, or retire the transmission infrastructure, they could save some real money.

On today’s show, we’re talking about math errors that some contractors make. These are simple errors to make, but ones that can cost you money. There are many places where a contractor can hide expenses and it can be difficult for you to figure out where they are. When you are dealing with high quality contractors, they will be transparent in how their bid was put together. They will clearly show what it costs for each division of work. There will be a line item for framing, for foundations, for site work. Electrical, plumbing, mechanical and so on. There will be somewhere between 15 to 30 separate line items. Then they will show you a line item for their fee, and a line item for what are called general conditions. General conditions are the items that are needed on the job site that don’t pertain to any particular subcontractor. These are things like the perimeter security fence, rental of the portable toilets, rental of cranes, the waste material disposal and a portable site office. The general conditions are required to mobilize the construction team. When there are problems in a quote, it’s usually because there is an error in one of the underlying calculations. I take the time and double check the math to make sure it’s correct. For example, I will divide the cost for flooring by the floor area and make sure that the correct rate is in use. Sometimes there is an error. Sometimes the error is in the materials, and sometimes it’s in the labour. Let’s start with the material allowance. Let’s say you have a room that is 10 feet by 10 feet. We would agree that the room is 100 square feet. Most people would also agree that you need to purchase more than 100 square feet of material to cover that floor. The cuts won’t match the room exactly and you will have left-over pieces that are too small to use. The usual material allowance is about 10% above the floor area or the wall area. But if you have irregular geometry, the material waste can be even higher. So let’s say that the tile contractor purchases 110 square feet of tile. I’ve seen that same tile contractor charge for 110 square feet of tile installation. That’s mathematically incorrect. There’s only 100 square feet of floor area. They should charge you for 110 feet of tile material and 100 square feet of tile installation. If the tile comes in boxes of 15 square feet per box, then your will purchase will need to be 120 square feet of tile, because 105 square feet of tile probably won’t be enough. Will the contractor now charge you for 120 square feet? Again, they need to charge you for the exact floor area when it comes to installation, not more. Then there’s the contractor who charges you for their insurance as a separate line item in the project. If its a large project, then its absolutely fair for the project to bear the burden of the builders risk insurance. But if you’re paying for the builders workman compensation insurance or the builders general liability, and then paying for it in general conditions, that’s double dipping. Sometimes, the contractor will calculate the labour component based on the materials and not the actual area or length shown on the drawings. That extra is a little bit like the waiter in a restaurant who charges a service charge of 15% and then gets another 15% tip. It’s double dipping. I can tell you that the addition of 10%-15% in cost on a project can make the difference between a viable project and one that’s not.