2 heads thinking about real estate

Looking Closer at Expert Risk

2016 is going to be financial chaos, oil crashing, Canadian peso, worst is yet to come, imminent war. The US fed raised the interest rate 0.25% and the world is coming undone. These are what the headlines lead you to believe. But look back to fall 2008, all news, all everyone was talking about was destruction of capital. But back in late fall to winter 2008 and Q1 2009, it was a epic time to buy. The vast majority of market participants are wrong most of the time. This is why people are able to make a return, they take it from them. Those people don’t listen to television and media experts. Financial people who want to become recognized as experts need soundbites. To get picked up and quoted by newspapers, television and other media outlets pre-experts need a loud, louder than others, opinion. Becoming an expert this way builds a brand, the expert becoming “that guy”. A great example outside finance expert is Don Cherry. When he speaks its interesting, unpredictable, always … Read more

deal by deal pitfalls

Six Pitfalls of Deal by Deal Real Estate Investments

One fund, one property, one deal. This is how the majority of real estate investments are made. Investors know the property, how much it costs and are able to see the income statement and balance sheet. While this may be the market norm and appears straight forward, it introduces unintended secondary reactions and hidden pitfalls not generally found in other real estate investment structures. Less Risk? By segregating investors into a single asset, the “upside” of this is that the investors know exactly what they are buying, but the knowns introduce more risk into the fund. The perceived safety is a myth is that investors perpetuate by applying home purchasing logic to commercial revenue generating assets. The thinking being “who would buy a house without seeing it first?”.  Meanwhile institutional investors and professional investors routinely and quietly go about getting the largest returns with the lowest risk because the structure and the perception framing is far different. These are the top Six Deal by Deal Pitfalls: 1. Misalignment to Market Realities Great real estate … Read more

Solar panel install commercial

Alberta’s New Renewable Energy Incentives a Template

All stick no carrot With the new carbon tax rained down upon the Alberta populous, the new NDP Notley government needs less stick and more carrot. The party needs to realize, that new taxes in a recession is not the way to go, especially when the impact is directly upon the general public. Alberta is terminally dependent on the incineration of coal for 55% of its energy needs and has no hard plan to replace this. If the new provincial government wants real energy diversity and change they need an incentive program. The new provincial climate change policy announcing a pledge, not legislation to eliminate coal-fired plants by 2030. This is too far away, not realistic, and is typical of parties that are seeking soundbites.  BUT with an actual incentive program, one whose duration is short at 4 years could get us 20% of the way along. A program like this is long enough to know if it’s working, short enough to be … Read more

Calgary urban sprawl

Killing Us: Urban Sprawl

Urban Sprawl is killing us early, keeping us unhappy and costing municipalities tens billions. Here are some ideas to help stimulate a conversation. On the table is huge savings in energy and the elimination of unnecessary infrastructure. Smart city planning can even a double the wage of the average person. PROPERTY TAX BREAKS Counterintuitive, but strategic in the long term. In the mid 1800’s, Paris innovated with tax breaks for beautiful architecture. The city held annual competitions that exempted the six best projects from city taxes. By doing this they created a infrastructure of skilled labor, and architectural innovation for building owners looking to save money. The cost of the tax breaks offset the increased skilled labour needed to build such buildings. The finished buildings also raised area market values. Thus raising the bar for “everyday” buildings to become better looking. Winning buildings benefited by being able to charge a higher rent. They garnered a higher sale valuation because of the tax break and prestige of the building. Tenants got a prestigious building to … Read more

Calgary Overpass rebar fail

Fixing Canada’s Infrastructure With Volcanoes

Above: close up of a failed rebar on a bridge overpass in Calgary Canada’s infrastructure is failing and Canadians need to re-think the future. The problem with modern approaches to infrastructure is the constant need for maintenance, renovation and replacement. It could be that the RFP, lowest bidder process and lack of true building material knowledge is to blame. The current short term solutions approach taken to long term assets is expensive, environmentally costly- a better way can taken. The basis for modern life is concrete. Modern concrete is made from Portland Cement recipe and it has a usable outdoor life of 20 years. When the time comes to demolish these unsound structures, the dust generated contributes to air pollution. Also problematic is the manufacturing process. Portland Cement is responsible for 5% to 7% of the man made CO2 gas worldwide. The emissions are so high because of the heat (1,500C) needed to make to make the curing mineral, Alite harden … Read more

Whirling Dervish

Are REITs Relevant II?

Last article covered the basics of some misconceptions of REITs. In part II we address how managers “add value” and dodge restrictions imposed on them. The term “adding value” is short hand to justify management overhead. That value is supposed to be the profit, realized or not yet realized in a business that management created solely though its skill and expertise. The easiest way in the last 20+ years is to cut costs.The “Do more with less” ethos does work. But at the cost of employee attrition rates and wide knowledge gaps from senior employees leaving. Customer service levels also suffer because of low moral and chronic understaffing. The other most popular way is accounting slight of hand. The transition from GAAP to IFRS accounting has enabled REITs to capitalize things like window cleaning, carpet cleaning, lawn mowing, and the labor that goes into those activities. All serving to increase the “value” of the properties. This practice is not endemic to just REITs, O&G companies can do this as well. When a geologist drills … Read more

fair

Are REITs Relevant?

Created in the USA during the Eisenhower era, REITs have dominated real estate investment capital and in the past have returned healthy yields. Unchanged, they were introduced to Canada in the early 90’s and have flourished in popularity. Their primary attractiveness being their monthly dividend. This series aims to examine REITs, their structure, environment in which they operate and their risk to returns.The question being are they relevant in today’s marketplace?Started as an investment vehicle for real estate to compete in mutual funds, its often sited that REITs are superior structures as they dividend almost 75 to 95% of all excess cash. One of the main foundational documents of this thinking was written in the seminal 1986 paper entitled “Agency cost of free cash flow, corporate finance, and takovers”.  Here, the author Michael Jensen explored the notion of principal-agent http://papers.ssrn.com/sol3/papers.cfm?abstract_id=99580 The thesis of principal agent, was tied into several sectors, principally oil pipelines. http://en.wikipedia.org/wiki/Principal%E2%80%93agent_problem Summarized, both state that if left … Read more

Dark medieval city drawing

Entering Alberta’s New Dark Age?

Blown out of the water after 40 years, the Progressive Conservative (PC) party was tried, found guilty and hung from the neck until dead. Their atrocious track record of mismanaging opportunities and funds have come to an end. But is the devil you know better than the one you don’t? Is Alberta entering into a new dark age of NDP reign? Will Alberta default on a replay of Ontario’s early 90’s when NDP leader Bob Rae was in power? Most voters don’t recall out of province politics 20 plus years ago. When longtime NDP leader Bob Rae was elected in 1990, the Ontario Government was running a deficit of about $1.9 billion. The election premise was that the NDP was going to cut government spending, introduce California style unpaid holidays for government workers, cut health care spending, and increase taxes. Called the “Social Contract”, those massive cuts eliminated jobs, training programs, social & community programs, and increased taxation. … Read more