The Real Estate Espresso Podcast

Latest Episodes:

Big Changes In Apartment Lending Criteria Jan 21, 2025

Show notes

On today's show we are talking about the recently announced changes to the HUD lending programs for apartments in the United States. The HUD programs are direct competitors to the agency loans that you might get from Fannie Mae or Freddie Mac.

The possible loan proceeds have been increased by relaxing the debt coverage requirements and increasing the loan to value and loan to cost limits. This is a significant improvement and can make the difference for a lot of investors.

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The Three Loopholes In Guaranteed Construction Contracts Jan 20, 2025

Show notes

On today’s show we are comparing two different types of construction contracts, the cost plus contract and the fixed price contract. We will describe the major differences between the two and outline the major gaping hole that exists in both from which there is almost no protection.

As the names imply, a fixed price contract, sometimes called a guaranteed maximum price contract is supposed to guarantee the most that you would ever pay to get a project completed.

A cost plus contract adds up the cost of the work performed by the subcontractors and then adds a percentage on top of that total price to pay the general contractor or the construction manager. You might negotiate an attractive percentage for the general contractor.

Generally speaking, the construction manager will build in a substantial contingency into the guaranteed maximum price contract in order to protect their profit margin in the event of a cost overrun. On paper it looks like the guaranteed maximum price is higher than the cost plus contract. When you are getting quotes from subcontractors and you compare these two numbers, the cost plus contract will almost always appear to be less expensive.

But there are 3 loopholes that exist for the guaranteed maximum price contract that don't protect the owner. On today's show we outline these risks.

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Impact Investing with Sam Sells Jan 19, 2025

Show notes

Sam Sells is based in Austin Texas where he specializes in impact investing across multiple markets. Municipalities are playing a role in providing the incentives to solve the affordable housing crisis with specific populations in mind. This includes criminal rehabilitation, veterans, asylum seekers, to name just a few. On today's show we are talking about the economic model that makes impact projects viable in the current environment. To connect with Sam and to learn more, visit impactgrowthcap.com or learn more about his fund at impactgrowthfund.com.

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HOA Innovation with Brandon Barnum Jan 18, 2025

Show notes

Brandon Barnum is a principal at HOA.com where their software products include an entire suite of HOA management tools. The latest is an AI agent which interacts with residents and answers their most pressing questions. It also acts as a platform to connect with trusted suppliers.

To connect with Brandon, visit HOA.com or visit his personal website at brandonbarnum.com

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Is Mixed Use Worth The Complexity? Jan 17, 2025

Show notes

On today’s show we are talking about whether mixed use projects are worth the complexity.

This is one of those cases where the product design is designed for specific customers. A mixed use project has the benefit of animating a property and bringing additional amenities to the property at a community level.

When we’re talking about mixed use, we’re talking about a residential building with a ground floor commercial. Whether this is a plus or a minus depends on your perspective. The goals of the resident and the goals of the building owner might not be perfectly aligned.

A mixed use building is rarely the product of choice for a building owner. It adds complexity. The lender looks at the building like two distinct properties. There is a residential property that follows one set of underwriting guidelines and a second property that follows a different set of financial metrics. The property management for a NNN commercial space is going to be different from residential property management.

So why would you do it? In many cases, it’s a requirement of the zoning which requires ground floor commercial on arterial main streets. Cities need to maintain a balance between commercial and residential and there is a growing desire to return to the old world walkable city living that you find in virtually every European city or town. In Europe, very few people drive to a big box store to get their groceries.

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The Legacy Of The Los Angeles Fires Jan 16, 2025

Show notes

On today’s show we are talking about the legacy of the latest California wildfires. Wildfires are not new to California. We’ve seen them in the North and in Southern California. There was the Camp Fire in Northern California in 2018. There was the Cedar fire in 2003. There was the 2020 fire season in which more than 4 million acres burned throughout California.

The unusual Santa Ana winds that come off the mountains are often hurricane force winds that make the spread of fire difficult to contain. Flying embers are virtually impossible to contain. Unless we start building entirely out of non-combustible structures and cladding, the spread of these fires is inevitable.

The devastation in a dense urban area is hard to fathom. This type of thing is not supposed to happen in places where there is a fire hydrant on every street corner.

When we look at real estate after a major disaster, there are several effects.

People need a place to live. There is an immediate acute shortage of places to live. Those who had a waterfront home on the beach in Malibu, often own a second home somewhere else. They’re probably not homeless. So the demand for housing in the immediate are shoots up against a limited supply. Pricing shoots up in response to that local supply demand dynamic Some people will leave the area. They may go to other parts of California, or they may leave the state altogether. There have been more than 12,000 structures destroyed and rising. That’s a huge number, but still a relatively small percentage when looked at the size of LA County. If they leave California, the most likely destinations are the traditional ones of Arizona, Nevada, Idaho, Colorado and Texas. Some will seek a location that has a lower incidence of natural disasters. No more fires, hurricanes, earthquakes or snow storms please. It’s going to take time to rebuild. Some people had their insurance coverage cancelled in the last 30 days by insurance companies that had a crystal ball indicating higher risk. Reports I’ve seen in the media suggest that over 70,000 properties in the area had their insurance policies cancelled by insurance companies very recently. If there was a state component to the insurance plan, some policies had a limit of $3M in coverage. One beachfront property made headlines where there will be only $3M in insurance to cover more than $20M in recent improvements. There will be a shortage of trades in the local area to rebuild that number of properties. As a result we may see a jump in labor pricing and we may also see a surge of construction workers coming into the area looking to help with the rebuilding process.

There were thousands of properties destroyed. But there are over 2.5M properties in LA county. I’m not an insurance expert. But I would expect the remainder of these 2.5M properties to be experiencing a surge in fire insurance premiums. In fact, anywhere in the western states that is in an area of elevated fire risk could see their premiums skyrocket.

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A Long Evening In Front Of City Council Jan 16, 2025

Show notes

I am pleased to report that the annexation petition for our Karman Line project was heard in front of Colorado Springs city council last night. Our project consists of 1783 acres that at one time formed part of the Norris Ranch. Mr. Norris was the Marlboro Man in the cigarette commercials. We bought the last remaining remnant of the Norris Ranch from Steve Norris, the son of the Marlboro man.

The annexation petition passed the first reading in front of city Council late last night with a vote of 7 to 2.

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The New Last Mile Logistics Space Jan 14, 2025

Show notes

On today's show we are talking about an emerging trend in last mile logistics for e-commerce. The industry seems to be shifting to include an increasing number of well integrated third party logistics solutions that are well situated close to the end customers.

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How To Track A Construction Budget Jan 13, 2025

Show notes

On today’s show we are talking about the process of budget tracking for construction. The problem with most budgeting tools is that they track two numbers, plan and actual. But the needs of the project extend far beyond these two numbers.

Let’s talk about the various views that are necessary to properly track a construction budget.

Plan of record. We sometimes call this the anchor budget. This number is set at the start of the project and never changes. It’s the reference point. It is the budget that is approved by the lender in the sworn statement of construction. It’s also the budget that the cost consultant who works with the lender is using as their point of reference.
There is the forecast. The forecast in an ideal world would match the anchor budget. In an ideal world there would be no problems or surprises and none of the contingency funds in the budget ever get spent. But in reality, there are likely to be additional costs that dip into the contingency and this is where you track the actual running forecast to completion. Once a change is accepted by the lender or the cost consultant, you can think of this revised budget as the current budget.
Along the way you may have subcontractors propose changes to their line items. There is a period of time where these changes are not officially accepted. In fact, there could be several days or weeks where you explore alternatives to what the subcontractor is proposing. These changes might be accepted, or outright rejected, or maybe there could be a third alternative that gets proposed. At the moment, these budget items have to be treated as a risk and not as an officially accepted part of the plan. You will want to track these unofficial numbers and you need a separate budget summary to track these. The use of this column is temporary and should only last for a few days at a time.
The last line you will want to track is the actual. But because of all the complexities associated with the holdbacks and potential tax rebates, the actual will only be useful at the very end of the project when everything is tallied up and the last bill gets paid. Until then, the actual will not add up.
So in addition to the budget actual, you will need another way to track your spending against the budget that includes the adjustments and calculations for holdbacks and tax rebates. Unless you take this step, none of your budget reconciliation will work.

So instead of the simplistic two columns that most budgeting tools use consisting of plan and actual, a proper industrial strength tool actually needs 5 columns.

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