The Real Estate Espresso Podcast

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AMA - Can I Build Near An Airport? Apr 07, 2021

Show notes

Today’s question comes from Jeremy. He asks,

I’m looking to develop a residential subdivision that is close to a naval air force base. There are plenty of houses all around the subject property. Could the airport affect what gets built on the property?

Jeremy this is a great question.

The regions around airports are all subject to elevated noise levels. The good news is that modern civilian aircraft have got a lot quieter as more fuel efficient aircraft have replaced the early jet engines of decades past. Newer aircraft use a turbo-fan high bypass engine that relies on the turbine to rotate a fan, rather than simply using the thrust of the tent engine combustion to propel the aircraft.

But airports that are close to residential areas regularly get complaints from the general public. The airport authority don’t like getting complaints, so instead they restrict what can be built near the airport so that they don’t get complaints.

The aviation authority in most countries have a set of standards that they use to both measure and enforce noise coming from an airport.

The FAA has a measure of noise called Community Noise Equivalent Level (CNEL) and a second measure called the Day Night Average Sound Level (DNL) On a map these noise contours show the measurements as you get further from the airport. Some airports that are close to residential areas like John Wayne airport in Orange County have even gone so far as to restrict flight departure and arrival times so as not to disturb the neighborhood. No flight will depart John Wayne before 7AM, and they also need to use noise abatement procedures. That means taking off at a steep angle of attack until the aircraft reaches the boundary of the airport property, then throttling back and using a slower rate of climb. There is a close interplay between the operation at the airport and the surrounding community.

Now a naval air force station will have a lot of jets which are very noisy. They often depart in tandem, and they will go supersonic causing sonic boom which is loud enough to drown out conversations inside a home of office building.

Strange as it may sound, the airport authority may have jurisdiction over what gets built in the area surrounding the airport. They may prohibit development within certain noise contours. They may also impose additional requirements on the construction.

For example, if you are allowed to build, you might be required to provide additional sound insulation. That could include triple glazed windows instead of double glazed windows.

I spent several weeks evaluating a waterfront property a few years ago that was close to an airport. The way the map was drawn showed the airport exclusion zone roughly coinciding with the edge of the river.

Nobody could tell us whether the inside of the line, the outside edge of the line, or the center of the line represented the edge of the exclusion zone. It would take months for the airport authority to rule on any development. They would not even offer an opinion unless a full application was submitted to the airport authority. That meant spending a lot of money on design and engineering only to be told no you can’t build in that location.

So in our case we didn’t buy the property, even though it looked extremely desirable. The last time we looked, that land was still for sale 4 years later. I’m guessing we made the right decision.

There are noise and vibration engineers, which is a branch of mechanical engineering. There are a subset of that specialty who specialize in airports. These are the folks you need to consult in making a determination whether your property is buildable or not. The city will generally grant your zoning permit which could give you a false sense of security that you have all the entitlements you need to build a home in that location.

The Best Retail Locations Rent First Apr 06, 2021

Show notes

On today’s show I’m going to share a rather unscientific observation. It’s not based on a statistical sample size of any significance. But the data is first hand and for that reason, I’m paying attention to it.

A lot has been written about the pain of retail in the past year. There’s lots of office vacancy that has opened up as well. Many are wondering if the workplace of the future has been altered forever by the pandemic.

I’ve seen many retail vacancies almost everywhere I look. We’re talking the typical main street locations. Businesses that have held the same location for 40 years have closed.

However, I’ve had numerous conversations with commercial property owners in recent weeks.

My own commercial space is now fully leased, even if the monthly rate isn’t the highest. We have one tenant who is still struggling financially. But overall, the situation is manageable. The surprising part is that we are starting to get unsolicited interest from prospective tenants for commercial storefronts. This is after having extremely little interest for nearly a year.

Another commercial owner that I spoke with had four retail vacancies for much of the past year. Three out of the four spaces now have new leases signed.

That’s a remarkable change compared with only a few months ago.

Despite the economic pain, economies are looking past the pandemic. Let’s look at two completely different markets to see if there are some clues.

We’re going to compare Austin Texas and Las Vegas Nevada.

The biggest economic driver in Austin Texas is the tech industry. There is extensive growth in the tech sector from major tech employers including Amazon, Apple, Facebook, Tesla, Oracle and Qualcomm to name just a few. Come corporate relocations from California have accelerated the growth of the Austin market. These are high value jobs that have been resilient in during the pandemic.

In 2020, about 1.2M SF were added to the supply in the market. Vacancy increased from 4.2% to 4.9%. Much of the new growth was in outlying areas as the city continues to expand its boundaries in all directions. Asking rents continued to push upwards at $22.06 per SF, and increase of 0.5% compared with the previous year. Single tenant properties performed the best. Rents in the central business district fell as much as 20%. This area experienced the largest loss in business as workers stayed home during the pandemic.

Las Vegas on the other hand is heavily dependent on tourism and gaming. Both industries were decimated by the pandemic. Las Vegas has one of the highest rates of unemployment in the nation.

Retail vacancy increased from 7.2% to 7.6% over the past year. Most of that increase was the result of new product entering the market. Nearly 700,000 SF were added to the market in 2020 and an expected 702,000 SF or new retail is expected to hit the market in 2021, or about 0.7% growth of the total. Less than half of the new supply is expected to be absorbed this year.

So perhaps it’s no surprise that location matters more than anything else. In the case of retail, properties that are close to where people live performed the best. Those properties in new and expanding areas performed better than those linked to office workers. But you didn’t need a pandemic to know that downtown retail has performed poorly compared with the suburbs. That trend has been playing itself out for more than a decade.

There is no question that trends in retail are changing. Some retail space is functionally obsolete.

Anyone buying older retail sites has to consider one of two possible plays.

Purchasing at such a low price that you can make money by renting at rates well below the rest of the market.
Redeveloping the property to a higher and best use.

Oh The Complexity of Pandemic Accounting Apr 05, 2021

Show notes

On today’s show we’re talking about the difficult topic of how to account for what has happened in the past year during the pandemic. Now I want to be clear, I’m not an accountant, and I don’t play one on a podcast. The questions raised on today’s show are for you to discuss with your accountant and make a determination for your specific circumstance on how to treat the situation.

So here we go.

If you’re a commercial landlord, you probably had tenants that could not pay their full lease amount. Their business might have been forced to close in order to stop the spread of the pandemic. With no revenue coming in the door, the tenant would have been looking for a reduction in rent.

As a landlord, you had a few choices. To start with, your lease probably did not have any pandemic provisions in it. A reduction in lease payments, or a forgiveness in lease payments was probably not contemplated in the lease.

These concessions are taking various forms and include reduced rent (cash payment forgiveness) or possibly deferral of rent payments.

But if a lease modification was not properly undertaken, what is the proper accounting treatment?

Do you report the full rental income on your income statement and then carry the outstanding amount as an accounts receivable? What if you never get paid? When is the income written off from the balance sheet?

What if circumstances arise that are beyond the control of the parties of the contract, such as a force majeure clause, or the laws in the jurisdiction governing the lease may create an enforceable right when a concession is legally required?

If a lease agreement provides these rights and obligations, then the concession may not be considered a lease modification. If the lease makes no mentions of a concession, then the concession is likely a lease modification.

If you’re a residential landlord and your tenant has not paid, but still owes you rent, how are you supposed to account for the rent?

You have a moratorium on evictions and have limited remedies to get your tenants to pay up. The tenants still owe you the back rent. It has not been forgiven.

How are you supposed to account for it? Do you treat the unpaid rent as an accounts payable with no reduction in income? Do you reduce the income and treat the rent as if it was variable? Could you end up paying income tax on income you never actually received?

What if there was a foreclosure involved on the property?

A foreclosure is treated the same as a sale of property. Capital gain or loss may be triggered upon such sale and, in certain instances, taxpayers may also realize income from forgiveness on certain mortgage debt. Exclusions of income created in a foreclosure may be available to taxpayers but the specific facts should be first reviewed and all tax implications considered.

What if the lease was cancelled? How will that be treated by the tax authority? It’s not necessarily obvious. You need to check.

If your tenant left behind improvements, there could be tax consequences. Whenever a lease is terminated, whether early or at the end of a lease, a landlord generally becomes the owner of improvements which were made to such leased space during the lease. Did the landlord receive a benefit or income from acquiring new property that it didn’t have before the tenant terminated the lease? You might be deemed to have received a taxable benefit, and not actually have the income to pay the tax on this benefit.

But what if the landlord paid for the improvements and was recovering the improvements over the life of the lease? How will the improvements be treated in that circumstance? Are the unamortized improvements written off? There are so many questions.

The rules are complex and vary by jurisdiction. You can’t simply guess at what should make sense.

David Kafka Apr 04, 2021

Show notes

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

Cory Boatright Apr 03, 2021

Show notes

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

You can connect with Cory at REIProfits on Instagram or investingcapitalgroup.com to learn more about his apartment syndication business.

Tax on Phantom Income Apr 02, 2021

Show notes

One of the widely accepted principles in the tax code is that you should be taxed on money you actually received. But there are a few examples of taxation on phantom income. The problem has the potential to get much bigger. On today’s show we’re talking about the concept of a deemed disposition. It’s pretty clear in the tax law of most western countries that if you sell an asset and you make a profit, that sale might be subject to capital gains tax.

But recently Janet Yellen, the new Treasury Secretary and former Fed Chair has been advocating that the government consider taxing unrealized capital gains.

The latest incarnation of this concept is called the “Sensible Taxation and Equity Promotion” Act of 2021, or STEP for short. Wonderful! Another catchy acronym for yet another destructive law.

Based on current US federal estate tax law, if someone dies today, his/her assets are exempt from federal estate tax up to $11.2 million, or $22.4 million for a couple.

That’s a hefty exemption that covers more than 99.9% of the population.

If it passes, the value of a newly deceased person’s estate will be valued at Fair Market Value.

Then, any unrealized capital gains would be taxed based on that person’s original cost basis.

Essentially they’re treating you as if, on the day that you died, sold all all of your assets and had to pay capital gains tax.

But they’ve dropped the exemption all the way down to $1 million.

Just about every asset is included, ranging from real estate to a small family business. They even specifically included collectibles like art, gold, and rare coins.

Some other countries like Canada don’t have inheritance taxes. But in Canada, there is a deemed disposition upon death and if any capital gains taxes are due, they need to be paid at that time when the terminal tax return is filed for the deceased person. The result has been that often the children will inherit a property that has been in the family for decades. The cost of the property was close to zero compared with today’s valuation. The new owners face a hefty tax obligation, or risk losing the property.

In many cases, the next of kin will need to get a bank loan to pay the taxes in order to hang onto the property. The only other choice is to sell the property and pay the tax on an actual disposition. In many cases, it’s preferable to transfer the property at a predetermined price while the parent is still alive in order to reduce the tax burden.

2021 could be the year of strategic tax planning.

BOM - Switch by Chip Heath and Dan Heath Apr 01, 2021

Show notes

Today is the first of the month and on the first day of each month we review the book of the month.

The book this month is by two of my favourite authors. Chip and Dan Heath are two brothers who are both university professors. One is at Stanford and the other is at Duke University. Together they have written multiple best selling books including Made to Stick and Decisive.

Our book this month is called Switch.

The book is dedicated to answering the question of how to change things when change is hard. The mind is governed by two different systems, the rational mind and the emotional mind. The rational mind wants that great beach body and the emotional mind wants that OREO cookie.

But this book is different than what you might be expecting. It examines change at the individual level, the organizational level and at a societal level.

The book is well researched and shows the path through stories and examples.

It doesn’t preach at you, but rather guides you to solutions that you discover yourself.

One of the central concepts of the book is the notion of bright lights. Bright lights are those shining examples of success that you can copy. The concept of a mentor who has walked the path before you is one possible bright light. But there are many others. One of the best and most powerful bright lights can in fact be your own experience. You could have a shining example of something that worked well in your past. That shining example can be a beacon of light for you to replicate that success, perhaps with a minor adaptation suited to the current circumstance.

In the book Switch, the authors share the story of how Robyn Waters a merchant buyer with little to no authority transformed Target from a lagging department store that low cost copied Walmart and Kmart, to a fashion leader. Robyn understood that she had no authority. If she was to transform the way purchasing decisions were made, she had to tap into the buyer’s emotional drive. The company culture was completely data driven. Sales of last years fashion products were used to determine purchasing decisions this year. By definition, the company would always be a fashion laggard. Their process was overwhelmingly Analyze - Think - Change. She transformed the culture into a See-Feel-Change decision making that was supported by the analytical approach. Early wins would be measured to make faster decisions on how to procure new products.

When the organization is so large and so heavy with momentum, change often seems impossible.

We often rush to judgement about people. Someone who inherently is a good driver, can become a bad driver if you put them in a traffic jam, 20 minutes behind schedule to catch a flight for a family vacation. They aren’t a bad driver per se. But the environment created the bad driver. It’s too easy to focus on the driver and make the driver the problem. But often the root cause is the environment. If you want to change the outcome, you could try changing the driver. But it might be more effective to change the environment.

One of the core concepts in the book is that the emotional side of the mind is a six ton elephant. The logical side of the mind is the rider. The rider attempts to steer the elephant by issuing commands and pulling on the reigns. But if there is a disagreement between the rider and the elephant, there’s little question as to which one will win.

If you simply convince people logically, they will agree with you. You will have direction, but without motivation.

That is the key insight. Your head and your heart must be in alignment.

We Need More Houses Mar 31, 2021

Show notes

On today’s show we’re talking about the real estate shortage.

The obvious question is that if the population has not been growing significantly, and immigration has been curtailed significantly as a result of the pandemic, then why do we have a housing shortage in such a big way.

The fact is, we have seen migration that has produced the shortage. There are surpluses in a few areas like NYC, San Francisco, Seattle. But migration, combined with a small number of people listing their properties has created real estate gridlock. Unless people list their homes for resale, there are not that many homes available for purchase on the market.

While there are not than many distressed properties in the owner occupied market as of this point. Many of the properties that had their loans in forbearance have managed to exit their forbearance agreements and get back into good standing.

But the real story is the nearly 8M rental properties where the tenants are seriously delinquent and the landlords have not been able to collect rent, nor have they been able to evict. Some of those properties are a ticking time bomb and they need to be factored into the housing equation. They’re being artificially held off the market as a result of the moratorium on evictions.

The gridlock in the single family home market is such that demand exceeds supply in many markets. On a national basis, real estate sales for single family homes and condos have jumped 9.1% in February compared with 2020. Home prices are up 16.2% YOY.

Inventories are at historic lows across most of the US and Canada. Normally when that happens, construction activity ramps up. But we have actually seen a drop in construction activity since the start of the year. New home construction has been hovering around 1M units a year for much of the past decade. The entire construction industry shrunk in the wake of the 2008 financial crisis. If you go back to 2006, the construction industry in the US was producing over 2M home a year. The current construction industry simply doesn’t have the capacity to produce that many homes any longer.

Supply chain disruptions during the pandemic have pushed construction prices up. Hard construction costs are up 11.4% compared with this time last year. Oddly, there is a surplus of trees for softwood lumber, but a shortage of finished construction lumber. Tree growers are getting near historic lows for their trees, and the lumber mills are getting near historic highs for cut kiln dried lumber, nearly triple the price compared with this time last year.

The biggest driver of demand is the number of new millennial buyers. There are now over 45 million people in the 30-39 year age range. This is part of the so-called echo boom generation. The age of first time home buyers keeps increasing and now sits at 33 years of age. That’s two years older than the previous generation.

Over the next five years, the number of people entering that age group is expected to grow to nearly 47 million people.

There is an expectation of 2.5 million new household formations in each of the next two years. This will place a lot of pressure on housing stock.

The folks at Goldman Sachs have predicted an 8.1% increase in GDP for 2021 in the US. This would be the largest economic spike since 1951. Goldman is predicting that unemployment will fall to 4% and inflation will remain in check at 2.1%.

The Federal Reserve had a slightly more cautious forecast for 2021. They’re predicting a 6.5% growth in GDP, unemployment at 4.5% and inflation at 2.4%.

All of this suggests that the boom in the housing market will continue for at least another two years.

AMA - How Many Apartments Can I Build? Mar 30, 2021

Show notes

Today’s show is another AMA episode. Except, on today’s show I’ve had virtually the same question from several listeners in different geographies. I’ve synthesized a composite question which basically aims to cover the landscape of the question.

The question is how to determine the density of apartments that you can build on a site having rather large dimensions. In one case, the property is in a dense urban location and measures about 200 feet by 500 feet. How many apartments can I get if the building is limited to 5 stories in height?

This is a great question. Of course each municipality has rules that determine the setbacks of the building from the property line, front, back and sides. But the setbacks are not the constraint in this case.

When you’re evaluating the utility of a building site for residential apartments, you need to think about the basic apartment as a building block. A one bedroom apartment is going to need about 22-25 feet of perimeter space on the building exterior in order to have windows in the living room and the bedroom. A two bedroom apartment is going to need about 35 feet of exterior wall space for two bedrooms and a living room. Apartments are not that deep. On the interior, you’re going to locate the kitchen, the bathrooms, closets, hallways, laundry facilities. None of those items require windows. Your most expensive real estate in an apartment building is the exterior walls because that’s where you have windows. At most, your apartment is going to be 30 to 40 feet deep. If you allow 6 feet for a hallway between apartments, then at most your building will be 85-90 feet deep from one side of the building to the other. If the property is too large, you have space in the core that is not really usable. Making a larger laundry room in an apartment is only going to add cost and is not going to bring you additional rent.

So there are certain land dimensions that naturally lend themselves to building an apartment building, and then other dimensions that are just plain awkward.

So if you have a property that is deeper than you need it to be for an apartment building, you’re not naturally going to be able to make use of that extra land. A site that is 200 feet deep is too deep for a single building to span the entire depth of the site and not deep enough to have two towers.

You can use some of the extra depth in a dense urban setting to create a sense of open streetscape by setting the building further back from the street. You can also make a larger footprint on the ground floor for the amenities like the lobby, the party room, parking entrance, a gym, and so on. But carrying that extra depth up the to the top of the tower is wasteful.

I’ve seen many rookie developers multiply the width of the property by the height restriction in and then divide by the size of an average apartments order to determine how many units are possible. But this simple calculation neglects the real constraints in designing an apartment building.

A property that is 400 feet deep may be a candidate for two towers on top of a podium ground floor with a space between them. Perhaps a horseshoe shaped or U shaped building on top of a podium. The goal is to maximize the perimeter area of the building so you can get as many bedrooms and living rooms on the exterior of the building as possible. That one constraint is usually the limiting factor on the number of apartments that are possible.

The second limiting factor for any apartment building is going to be the parking ratio. The city will determine the minimum parking allowed in the zoning code. But you also need to take market demand into account as well. If your building height and perimeter calculations can allow, say, 200 apartments, but you only have space for 100 cars, you might be limited by parking.

Help For Restaurants And The Performing Arts Mar 29, 2021

Show notes

On today’s show we’re talking about how some businesses were largely left out in the cold over the past year, despite being mandated to close, or drastically scale back their business to prevent spread of the pandemic.

A number of new initiatives have been brought forward since December and again most recently in the past month.

Last week the SBA revealed the much anticipated timeline for $28.6B grant program for restaurants hit hard by the pandemic. This is one sector that has seen thousands of businesses close permanently. Those that remain are hanging on by a thread.

I’ve spoken with several restaurant owners in recent weeks about how they have fared during the pandemic. It didn’t matter whether they were located in the US, Canada or the UK. The story has been pretty much the same.

Naturally, they’ve laid off staff in order to survive. The biggest issue has been whether their landlords have been willing to work with the business or not.

In cases where the landlord insisted on getting paid full rent throughout the pandemic, many restaurants have been forced to close.

Many of the owners I’ve spoken with have adapted their menu and have created new menus specifically optimized for the take-out experience.

But in most cases, these businesses have needed more than just a pivot to take-out business. Survival has required a combination of rent relief from landlords or government assistance.

Those restaurants that are still left standing after the pandemic is over will in my opinion do a booming business.

The Small Business Administration in the USA is planning to roll out the Restaurant Revitalization Fund grant program within 30 days.

Those who are in the performing arts have also been stripped of their income in the past year. This includes musicians, actors, comedians, magicians, and all of the supporting businesses that form part of the performing arts. We’re talking about lighting and sound technicians, directors, ticket agents, ushers, and the food and drink concessions that form part of most performing arts venues.

Earlier this year The SBA only recently announced the rollout of its Shuttered Venue Operators Grant program, first passed into law by Congress in December.

The SBA said potential applicants must be registered in the federal government’s system for award management (SAM) in order to receive a grant. I can tell you from first hand experience, that getting a SAM number is a bureaucratic process that has a few stumbling spots in the process.

Eligible businesses include live venue operators, promoters, theatrical producers, live performing arts organizations, museums, zoos, aquariums and theaters themselves.

But even with the April 8 start date, eligible businesses will have to wait in line. The SBA has said the first 14 days of this program will only be open to venues that suffered a 90% or greater revenue loss between this past April and December, due to Covid-19. The subsequent 14 days will be reserved for venues that suffered a 70% revenue loss or more in that time. Only after the first 28 days can venues that suffered smaller losses be considered for the grants.

Grants are sized by the average monthly gross revenue for each full month a company was operational, then multiplied by six and capped at $10 million. Funds can be used for a wide variety of expenses, including payroll, rent, utility payments, scheduled mortgage and debt payments, personal protective equipment, independent contractor payments, admin costs, state and local taxes, and even insurance and capital.

We’re starting to see the return to normal for many businesses as the number of vaccinations increase. Some restaurants are now more than 50% full during dinner hours. The patterns have changed. It used to be the case that Friday lunch hour was the busiest. Now Monday and Tuesday lunch hours are the busiest.

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