value creation in infill development part 5 - surviving as a value creator

This post is a discussion, not of how to create value in the infill marketplace, but how to survive personally while doing so. Earlier post mention the personal cost of enduring, or surviving, the development game, with all of its intrinsic stress and hardship, and above all, the risk. How does one best organize his/her personal affairs while chasing the dream of operating, full time, as a real estate investor and developer? Recall the old real estate investing joke, Q - ‘How do you know when it is time to quit your job to become a real estate investor?’ A - Does your spouse have a job? If yes, you can become a full time real estate investor.

Imagine the monthly cost of the fledgling infill developer. Housing, food, insurance, transportation, let’s estimate that at $5k/mo. Once committed to that first project, the fixed cost of living endures regardless of wage income, or lack of. The final outcome, a complete project, leased up, or sold, is a distant vision. After a land deal is under contract, planning starts, permitting likely takes 6 months. Construction is approximately 12 months. This new developer has locked in a personal cost of 18 months of living expense, while chasing the dream of creating massive value. Regardless of the success of the project, $90k is now earmarked for survival during the build. Take a construction budget, call it $1MM. 9% of this is now added to the project cost as the owners overhead. The hurdle for break-even of the overall project is now getting more complex, (land + construction + cost of capital + project management + owners overhead = breakeven). This is how the development dream is littered with the broken lives of the operators. No value is created until these other inputs to the equation are covered. Simply put, the deal must create a lot of value simply to break even for the owner.

Here are some survival strategies and pitfalls related.

1. Keep the day job - continuing to work at the current occupation as long as possible - this makes sense, or does it? Earning a fixed wage will help cover the monthly cost, but also has an impact. During costruction, the project eats $100k per month for a smaller build, and needs intense management to run effectively, Monday to Friday work is needed, not evening and weekend. The best time spent of the developer may be simply managing cost, and running the build as a self performer. Just managing the schedule on time, or avoiding cost overruns, let’s not even mention finding savings here from the budget, 5% of this $100k/month burn is enough to fund those living costs. A poorly managed project will cost many multiples of what a wage earner can earn at a salary position just in time losses. Is it worth continuing to work a day job while the project needs such intense oversight? I would say no.

2. Drastic lifestyle changes - Does the developer need to continue the same lifestyle during the project cycle as when was employed full-time? I would say no, significant austerity measures can be adopted. This is total commitment to the project for a serious developer, lifestyle costs, entertainment, holidays, all can be eliminated with the greater goal in mind, temporarily. It is best for the developer to tackle the initial project at as young an age as possible, to avoid that lifestyle creep, and the dependents of a young family. An individual not prepared to accept this degree of austerity simply should not embark on a value creation mission. Young people are also better equipped to rebound from a major failure, and reinvent themselves than someone later in life, and can live much lower cost lives in that post college period than in their 40’s.

3. Take on another project to manage - This works for those already in the project management game, take on a project for another investor, and use the management fee to survive while chasing the infill developer dream. This is a favourable strategy to an experienced operator, basically, continue to work and split time between an investor project and your own. The challenge here is to manage both jobs concurrently, to earn the fee related to that second job without negatively impacting the developers own build. While a recipe for burnout, this is a real option for an aspiring and energetic developer, and a way to build a better network and reputation much faster.

4. Start small - scrap the above equation, and simply take smaller project that turn quicker. House flipping, renovation, a single home spec build in a safe market. This can shorten the overall cycle and lower overhead cost. A means of building a war chest, tackling smaller project with more likelihood of quicker success can be a means to creating enough value to be able to survive and scale up later, and creating cash to invest with faster.

5. Partner with investors with more cash but less time - a swap here, where the aspiring developer engages in a JV type deal with an investment of time and skill, rather than fronting the entire budget. This would allow the new developer to lower personal risk, and also personal upside of the success. However, lower risk, a chance to earn a survival living while managing a project could be a really excellent means of being able to gather experience and confidence, without risk of a disaster. Downsides are obvious, dealing with partners, and all that entails. At some point, a developer needs to control 100% of the deal, just to simplify their own estate, and reduce time spent on communication and investor relations.

6. Use the family home as leverage for lower cost construction funds - this is the ultimate double edge sword. You need cash to develop and the only place to get low rate debt is heavy leverage on the family home. Is it worth risking this to get cash? Unfortunately, with personal bank guarantees, all assets may be cross collateralized even without tapping into the family home. Fringe benefit here - make the principle residence interest payment deductible, this isn’t typically allowed in Canada, but an investor can create this benefit.

The obstacles to success of the critical first project are numerous. Paramount is simply locating a deal lucrative enough to cover the personal overhead of the developer, the financing cost, and the construction budget, with value to spare at the end. In my experience, many projects simply are too marginal to offer a risk adjusted return, in other words, they are profitable, but not if the risk is priced in, and the overhead of the developer. Those two items, as we have seen above, cost of monthly living for 18 months and the risk free return on capital currently available, is 5%. On that $1MM project, the $90k of living cost also needs added to the $50k of financing cost during the active part of the build. Simply put, does the project still pencil when $140k of non budget related costs are required to formulate the true price of the project? I would say my own best project only look good because I don’t need to factor in that living cost any longer, via two strategies. 1 is self performing multiple projects per year, and 2 is using company rather than bank borrowed cash to fund deals. These two strategies are basically risk reduction and survival strategies, and should not be permanent. There is no outcome more likely than the developer completes a project and at the end finds out the economic return would have been similar to that of purchasing a GIC at the bank of the same total project cost and vacationing in Mexico all winter. This does not mean not to do a project, it means that inevitably a project will need to be written off as tuition or learning experience.

The construction company as a non profitable key to massive value creation - the necessary evil here is running a permanent construction company, capable of pulling permits, warranty registration, and performing for other investors, spec builds, renovations, flips and rental projects, anything to survive. Ownership of a construction company is one of the worst businesses, endless work weeks, major brain damage of running crews, and the heavy weight of responsibility for everything that can and does go wrong. In order to operate the company needs constant cash injection, yet income is sporadic. A construction company is a ravenous cash burning beast of a business, making it easy to fail during a cash flow crisis.

Project management and site work pay poorly, yet are so essential to creating value. Ownership of a construction company, with its typical poor margins, is a key to unlock the superpower for the developer, the ability to create assets that cost much less than market value. A construction company that can barely earn enough cash to pay its owner is a very useful tool to create wealth via asset building, and those assets will earn more over time than the wage of the business owner, and, unlike a construction company, continue to generate revenue after construction ends.

The network is the key to the net worth - having those essential trades answer the phone and commit to a schedule. This is a second value creation superpower. An aspiring developer, with the executive MBA is a fail on having a network of pre-existing trade relations. This is where the construction company owner has massive leverage over other developers. How is it I have completed turn key purpose built rental projects in half the time of other developers, some of whom have gone broke and had to dump incomplete properties in judicial sale? The network of trusted trades, who welcome city inspectors to the job site, and get quick favourable inspection reports, running builds were I can get to drywall and exterior completion before winter even with a July start, and gain occupancy in 10 months rather than see the build drag on for 18 months of brain damage. This site condition is a precursor to value creation.

Finally, playing to win. After some years of experience, the self performing developer has a track record, understands what costs are for work to be done, and can start to see hidden value in land deals. Rather than spec builds with margins linked to luck and fate, interest rates and fluctuating commodities, a targeted asset creation program, the long game, can be executed. Avoiding now the GST and transaction cost on a purpose built rental project, self financing it, ruthlessly managing the build, achieving a better than typical cap rate, and re-financing it upon lease up. This is the way to win by creating the most value, and keeping all of it with very little fees to pay. This method can allow the developer to stack wins, a virtuous cycle of wealth creation and preservation, tax deferred and a flywheel of income to permanently eliminate the need to do wage work (or take on survival contracts). If one piece of advice can be given, it is to start this flywheel spinning in the individuals age of late 20’s, not 50’s. University education, totally useless, value can be created from working in the trenches to running crews, to manifesting a development vision into reality.

What is the end game? A re-finance ladder of maturing debt where a project is annually ready to be refinanced with a new equity take out loan. A tax free cash out withdrawal annually, while the other projects in the portfolio perform and pay off debt while equity builds, providing monthly income, appreciating to some degree, as market rents increase, and cost to replace rises. This is massive value creation, and nurturing of the assets over time. Why do they not teach this in school instead of marxist struggle sessions and victimhood hierarchies?

Value creation in infill development part 4 - designer selection

This particular topic is somewhat fraught because it involves personal recommendations or advice to projects that I don’t have any knowledge of, and personnel matters. Unlike choosing a drywall subcontractor, the end result of design work is not guaranteed. If you hire a crew to board the walls of your house, all should look almost indistinguishable upon completion. The design outcome is like an option on the future, choosing the design firm will have significant downstream impacts on your project. Give the same design brief to two unrelated design firms, with the same property and instructions, the outcome will not be identical. Inevitably, one would be preferred over the other. You could not know which designer to select without the existence of a parallel universe in which you assigned the same job twice and had a time machine to allow a do-over. I think design firm selection is somewhat like the manager of a baseball time choosing from among the pitchers in his bullpen. The correct designer is the one suited to the task at hand, the best designer for project A is not going to be as suitable for project B. You can tease out strengths of the design company using some tests and analysis. Along the way many red flags could be noted and should be monitored for. I have found many builders to be dissatisfied with their design company, for various reasons that can be categorized, into service, quality, pace, and cost. The developers themselves can be their own worst enemy through the calibre of their now involvement in the process. Fair criticism is warranted because the design company wage expectations (how much they bill per hour for even junior staff can be high), and lofty promises are made that are not always manifested in the work. Also, a degree of compromise is needed too, the design job is not easy. If I did not need the design skill because I was capable of preparing my own plans, then I would do it myself. But because I can’t, hiring design is an essential decision for every project.

One overarching perspective I have on these designers, is the level of personal involvement I have had to engage in, to achieve my objectives. It is unrealistic to expect to write a cheque, then wait for an email with the final design package ready to go. However, my involvement tends to be far higher than I would wish it to be. I don’t have to assist my drywall contractor to finish his work to my satisfaction, but, with design, I have had to participate much more, and this time is not compensated for, it can feel like a donation to the value creation mission, and a highly strategic one. I fund the design bill, which can be very large, but I have many unbillable hours reviewing, commenting, writing, meeting, etc. The back and forth can be frustrating and time consuming, yet the outcome can be very satisfying, and so impactful on the construction, and operation of the asset (maintenance!). For this reason I have a bunch of recommendations and then some accompanying red flags regarding design selection.

Recommendations

• The design brief - a detailed written document on what success means drafted by you, the developer. The specifics must include both ‘To Do’ and ‘Not To Do’ components. For example, I wish to use windows of a certain maximum size such that they can be removed from a delivery truck without a machine. Or, I do not approve roof slope below a 3:12 pitch. These details, up front, can go a long way to prevent downstream problems where the design company wants to charge for re-work, because they weren’t properly instructed in advance.

• Portfolio review - with a new company, you must know what they can do and what they are good at. You must not hire a company that is not skilled at delivery of outcomes within the parameters of your project.

• fee structure - the up front agreed upon cost of project must not waver, scope changes must not be needed, and fees cannot be paid for work that cannot lead to permit approval. The contract needs to be structured in a way that payments are linked to success, not the designer burning up some arbitrary amount of time, and needing more from you to get to satisfactory work that achieves what is in the design brief.

• local knowledge - city planning departments are different enough that a design firm will not be able to operate among many jurisdictions effectively. A personal relationship between planner and designer can work magic for the client. Reputation and relationship is well worth paying more for, as it likely comes with familiarity with navigating black box type local rules too. The more complex the project, the more pitfalls a good designer will avoid, saving time.

• Pace of work - there are so many techniques used by the design companies to avoid being penalized for not expediting work. While they cannot control the city planning response time, they can commit to turning around their work promptly. Too often the review comes back from the city and it sits and waits, and is not returned comprehensively enough to address all city concerns. High quality response to the city is an indicator of a good design team.

  Unfortunately the red flags are many, and painful. Here is a list;

• Impractical work - the designer simply has no concept of construction realities, or very little site knowledge. Many designers have spent little time on a job site or have never been responsible for actual construction work. This leads to poor transition from concept to reality, or plans are not viable. Leaving it up to the crew on site to ‘figure it out’ is a symptom of deficient design.

• Artists not designers - this type may value their portfolio more than the hard job of taking the plans and making them work. I am not interested in building artistic sculptures, I need houses to function, that means roofs that drain water, yes, I need a house to function in bad weather. Not all design companies see this as a priority of their scope of work. Climate conditions need to dictate how I can avoid major warranty problems with water, and this is more important than a flashy rendering that attracts clicks on social media.

• design to be expensive - there is nothing easier in designer-land than to layer on cost with little benefit other than ‘looking good’. Unfortunately I have to work within a budget in order to create value that eliminates some type of products, or labour specialties. Designers choosing to include very expensive items simply out of habit or routine is common. Expect a certain type of designer to push back from working within the developers construction budget, avoid these. One example, a project calls for a patio door, and the note on the plan calls for a folding/sliding accordion style feature. The builder looks at this and determines it is likely to cost $15k, the entire window and door package budget for that unit is less than this one feature. The design company assumed that was within scope, likely the designer has never ordered a window package before and is unaware of the implications of what has been drawn.

• lack responsibility - many construction documents have embedded phrases shedding accountability for mistakes. These disclaimers are copied onto each page of the plan. The designer needs to be accountable for errors, and they make them all the time. Purchasing design from a professional must include a level of accountability for accuracy. Also, mistakes are largely repairable, a good designer will, at their expense of time, issue corrections. Often the designer will view it as reasonable to charge for site visit and re-work of their own defects.

• Overbearing sense of importance - the designers today do not even design the structural parts of the building. That means trusses and joists and tall wall details, and foundation designs is all done elsewhere. When the design work is done, it is really only half complete to get to a final building permit. The client has significant time involved to get to construction well after the designer has received final payment.

• high cost - the design company is benefitting here from payment before the real work is started, often, gaps and errors that appear could have been improved upon before construction. The design company benefits from early compensation, because the owner has more funds available to spend at the beginning of the project than the end. Design can be one of the higher cost items that costs the owner a lot of expense to carry until completion. If permitting is a six month process, and construction one year, that is 18 months of carrying cost to the builder, this is a real expense. In other cost categories, such as the landscaping bill, carrying cost could be insignificant if the work is done immediately before occupancy. There is no practical way to retroactively renegotiate a design fee at the project conclusion for poor work. Imagine a developer going back to the design company and giving a list of deficiencies contained in the plan, and asking for a partial refund.

• lack of expertise - the design firm needs to be a specialist in the rules governing the work required. Given the cost of hiring designers, they must have the knowledge already, the developer is not paying to train the design team. A proven track record showing projects completed in the asset class the developer is building is a demonstration of expertise.

• and finally, the client himself has not engaged the designer with an outcome being possible without a miracle. Lack of client knowledge of what will create value is one of the largest red flags. Designers have to work among true constraints like bylaws and land size, and the boundaries of structural components.

  Hiring a design firm is undoubtedly a major decision, and one with implications for the entire process. Value is created at this stage, and the developer making large investment in design needs to extract every ounce of quality from the process. Developer involvement through the design brief can lead to such significant work being permitted, in a reasonable time, to multiply the design investment into tremendous value creation. As years pass, the design quality delivers perpetual value, while the cost of the design work dilutes into a rounding error in the overall economics of the property. In the context of the infill developer with a time horizon of permanent ownership, investing in design is one of the biggest levers to value creation. A great relationship with design is a partnership of alignment of interests, the classic win-win.

Value creation in infill development part 3 - land selection

Land selection is fundamental to success in value creation, without the land, a project is impossible. Closing the deal itself is among the most easily accomplished steps along the journey, because it is transactional, finding the right deal however, that can be a challenge. Deal finding strategies are covered elsewhere, this post assumes the quest for land is ongoing, a few candidates exist, all with promise, and the task at hand is choose the best candidate, unless something really good comes up that must be moved on quickly. The purchase of land sets in motion a chain of events that really impacts the future life of the buyer, a substantial time commitment to carry through from raw land, to realization of a finished project is a must. Land, once purchased, is to me at least an irrevocable commitment. It means a cascade of events is ordained, starting with design, then permitting, and construction. Once ground is broken, there is literally no take-back without incurring a loss. My first couple of project could be considered a Machiavellian death match, sink or swim, all in, win, or be laid in the dirt, and attempt to explain to the spouse about that million dollar personal guarantee she signed. I’ve since grown more risk adverse than those early days, with more to lose. Regardless, the problem with finding a great deal, and signing the deal, at that stage the investor cannot possibly know the future outcome of the cost to execute. There is no possible way, for a new investor to go from locating a hot listing, to determination of the likelihood of the value creation potential within a few hours available to signing a firm contract. Essentially you cannot properly underwrite a complex project within the time available to choose whether or not to purchase the property (in a hot land market, which is common). I do recall a land deal made while walking my dog at the paskapoo slopes park, before the walk was over the contract was reviewed and signed. Did I have time to sit at a computer and ponder some spreadsheet on cost to complete? Obviously not, at that time the instinct to purchase was strong, and the outcome two years later was a successful tale of value creation. How did I sign this deal with complete confidence and no regrets? I incorporate some meaningful tactics to increate my level of comfort with the deal.

Fundamentals of infill land selection include the following;

Grade of Land - I like to use a letter based criteria, based on location and fundamentals. A,B,C etcetera. I have a tenant profile in mind, and assume what aspiration they would for have for their house that I can exceed, or at least fulfill. Technical factors related to servicing, proximity to amenities, reputation of the community or area, park space, walkability, supply constraints, employment centres, all of this factors in and a letter grade can be assigned to distinguish among sites. A common misconception is the most expensive or prestigious community is grade A. Often those estate areas present real difficulty, or the buy in is too high, or zoning problems prevent development. We don’t need the best lot to create value, often, a good lot, grade B or B+ is ideal.

Utilities and servicing - this is a major factor, power lines, access points, laneways, slopes, soil condition. Any technical factor is considered here. I would go so far as calling my deep services contractor for a little chat. I’d guesstimate the likely troubles with enmax, and the likelihood of getting utterly screwed by the power situation. I’d use my construction omnipotence to come up with some number about how the city staff will delight me with unwarranted surface improvements. I’d throw in a huge number for dealing with storm water fees and site work, and then cry a little. I’d use a qualitative approach to the total servicing compliance cost, such as, will the perceived cost be more than, or less than, the pre tax annual income of my spouse. That will add or subtract a letter grade to the quality of the deal.

size and unit program - if the site is somewhat unconventional, which tends to be the type of site I like, I’d factor in the gross area, examine the bylaw for density per hectare, and determine, after subtracting parking, what my footprint size would be for each unit, and how many units are achievable. Given the nature of these projects, I may have some desire to hit an abitrary number, like five, to make CMHC financing possible. A land deal where five units cannot be realized would be downgraded. A deal where five units would be possible without needing basement suites would be upgraded. More parking would always be preferred over less, and frontage tends to be preferred over length, and flatter rather than hill slope is better for controlling cost

Proximity to amenities - This criteria is subjective, yes, so I attempt to apply some ridiculous quantitative aspects to it. For example, is the community considered in the media to be ‘trendy’. Trendiness is good marketing speak for attracting quality tenants. Inglewood and Kensington are among the select group of oxymoron communities perpetually labeled trendy. It does not matter that the definition of trendy is to be influenced by most recent fashions or ideas, in infill development, typically only the older, smaller communities are perpetually trendy. The newer sprawl communities are attributed the degree of trendiness that Hillary Clinton would have assigned the voting potential of deplorables in a flyover state. Trendiness is correlated to walkability to independent shops and services and distance from the Walmarts and Mcdonald’s franchises. Identifying ‘trendiness’ seems to require gourmet coffee, boutique ice cream cones, and wood fired pizza pies. If the price of a serving of coffee is more than $5, or cone of ice cream is more than a quart of hagendaz, likelihood of trendiness is strong. Some communities are defined by proximity to trendiness. For example, the realtors are so beholden to the magnetism of trendiness, they cannot help but attempt to appropriate adjacency of trendiness when mis-representing development potential of a property. For example, every MLS listing in the community of Renfrew attempts to co-opt the trendiness of Bridgeland in the listing description. Does this mean Renfrew isn’t any good to develop, no, it just means Bridgeland is much preferred. A property listing in Bridgeland has never declared proximity to Renfrew to be a feature, because Bridgeland can be advertised using its own merit, whereas Renfrew has fewer trendy elements. And yes, I did develop one of the best parcels in Bridgeland and thought of this at the time. I simply avoid communities I dont see strong potential in, I look for capital appreciation and great tenants, grade C areas are not my forte.

Supply Constraints - A ground oriented townhouse in certain areas is the real estate equivalent to a moat for a Buffet owned business. There are simply few land deals available, or ever will be available, constraining the type of supply that I like to develop. While the city may be enlightening itself on infill building rules, it doesn’t mean the good locations will ever have a surplus of incoming supply. The savvy buyers from Ontario will snap up those volume D rated deals near Balzac, I will stick to communities rated A or B due to land constraints.

Available funds - with the slow moving nature of acquiring financing, it may not be possible to line up the right type of debt to allow a land purchase. Plenty of banks won’t touch a land deal, and those that may, you’ve got to have some pre-existing relationship. If a hot deal enters the market it is best to make an unconditional offer anyway, as the seller often has multiple buyers, inevitably one with cash. Offers with quick possession dates are often selected first if the seller is motivated, again, it appears unconditional cash deals work best to tie up these lots. Plenty of the deals contain old houses and are not even suitable as rental properties, the reason they hit the market is they are in such poor condition it makes no sense to repair them. If I have no means of closing the deal promptly, I likely need to pass on the opportunity, rather than jeopardize assets partly built to chase volume.

Cost of inventory - This is a new project and business killer. In the past, during the cheap money era, it was better to hold more inventory because the nice lady at the bank was offering you 0.25% on your cash. Since you need access to the cash quickly to acquire land, most investment types that lack instant liquidity or have market risk are poor options while searching. Now, with cash earning 5% or more, buying land, holding it, paying property taxes, etc, with the risk free rate being so high, the land will cost the builder 10% per year to hold a property, or more. This incredibly expensive additional land cost gets magnified if the builder needs to hold more than one lot (which I do). At this moment in the market, it appears better to only hold land that can be put in production immediately, and take the risk that something can be found in the future, even at a higher price, than to buy too much land today, harming the war chest needed to actually execute a build.

Many of these land selection criteria are simply related to experience in how I want to develop, and in what areas. I certainly don’t want to be spread out over this massive city, that is a management problem. I’d not tend to develop in an area I consider to be lower in grade than a ‘B’. And a ‘B’ can be different from investor to investor depending on how the criteria are weighted. A consequence of building in these trendy areas is the land deals are small, and scale is rarely possible. I prefer the type of project without basement unit, contrary to the dominant form of infill development now common. As the city makes RCG and HGO projects easier to permit, perhaps more land will become available, but it still relies on a willing seller and a house economically viable to demolish and rebuild. Most of the inner city is good to invest in, with long term appreciation and inflation protection almost a guarantee, these communities are all small and well located. The land tends to remain the biggest single component of a project cost, but in my experience, not a category to skimp on a few dollars, if a trendy location is only a few percent more in cost than a non trendy area, buy the quality first. Make sure when you are marketing your completed units, to describe how trendy, or at least trendy adjacent the area is!

Value creation in infill development part 2 - fundamental questions

Value creation is the art and science of infill development success, where the end product exceeds the cost of the inputs (land, labour, material, expertise, time value and risk capital). The inputs are in the care and attention of an individual or team entrusted with execution. The magic recipe is found in the quality and efficacy of the executor. Highly Leveraged land ownership, an unrealistic concept drawing, and a vague but optimistic marketing pro-forma is not execution, it is speculation, or a fairy tale. I don’t daydream about value creation aspirations, I live it 100% of the time, and I’m intolerant of such dabbling dilettantism in my market by weak handed players. Below are a few of the key questions likely to be common to most infill projects, and some answers related to my value creation experience.

What is the execution and what does it mean to do it well, can you measure execution? The execution is the degree of mastery of the inputs and tasks that lead to value creation. Generally this is going to be the builder combined with project manager, that can be the same entity in smaller projects (my typical project has been too small to divide these two). I believe execution and value creation are inexorably linked, but the execution is more measurable, against a budget, schedule, and relative quality of work. The value creation part is determined by the market, client reaction, appraisal, and appeal to the credit market. For classic purpose built rental projects, the value creation is theoretical because it is only measured by an appraisal if required by a banker looking to check a qualification box. I wont pursue an opinion on market value if it is not required to get financing, as the report is quickly outdated. I have executed projects extremely well, while allowing myself some grace for the inevitable screwups and do overs.

Is value creation all about profit and margin? No, profit suggests a sale, or a cessation of value creation. Value is enduring and is a continuum, that grows over time. The allure of creating value is distinct from cashing out of a project, which tends to create a taxable event, value is not necessarily taxable, today, with the removal of new rental supply GST, value is given preferable tax treatment vs spec home business. The sheltered nature of value creation is a storage of wealth in a physical asset, and can be leveraged into more value without being lost or traded. A benefit of value, is that once created, it can provide a more passive income source, a stark contrast to the act of execution, an intense period of action, the opposite of passive. Transfer of the energy and willpower of execution of value creation into passive income, is the key to the longevity and resilience of the developer. Avoiding transaction fees and letting the compounding nature of these assets work over time is how value is nurtured over decades.

Can the execution be outsourced? I think perhaps, but the more outsourced is the execution, the more value that must also be shared, not all projects have enough value potential to attract the execution talent needed. The risk of attempting to outsource the execution is the strong likelihood that the interest of the project owner and the project manager are not aligned. Attempting to outsource value creation is indicative of an individual who wants to shortcut the execution challenge, making that person susceptible to the weakness of a poor choice of manager. Many investors view their own personal time to be too valuable to be engaged in project execution. This is possible for high wage earners, but based on median wages in Canada, this is not true for all but the highest paid individuals. A poorly managed project could waste far greater sums of time and money in a month than a typical employee would earn per year. My tactic has been a rigid, bordering on maniacal control of execution, despite the obvious personal toll it takes to manage the execution to the standard set. Self performance of the execution has a major benefit of allowing a degree of opportunism, compounding the value created by capitalizing on unforeseen tactics to improve the project. Self performance is also scale limiting, in both project size and the amount of projects that can be tackled by one person. Outsourcing more of the execution, while sharing more value, could lead to more volume and overall create a lot more value. This is an eternally ongoing point-counterpoint, in the end, most any infill project today is significant enough that vast value can be created vs typical household net worth. This is the allure of being the majority owner of the value, it isnt a wage tied to time, and it can improve over many years as markets grow. The upside of the value can exceed multiples of what a person could earn trading time for money as a skilled worker or white collar professional. Potentially a focus may be required, is it better to own a majority of a small project and have total control, or to own a fraction of a large project and have little influence? Which of these approaches is more likely to have value mismanagement, or fees and tolls embedded in operation, diluting the value? To answer these questions, a person could examine my portfolio direction and see my preferred project size. I do have aspirations to attempt larger projects that better fit the world of finance, yet the crown jewel portfolio assets I most pursue tend to be too small given the land size of typical infill properties.

How technically skilled must one be to manage the execution of the infill development? Expertise in the running of the project is obviously essential. The natural order of the job site is chaotic and risk filled. Management brings order to the chaos. Certain legal certification and registration are likely needed to run any infill project, which is why I maintain these in good standing. Execution can be partly a question of ‘who not how’, but you must know ‘who’ to put in place or risk putting into motion something awful. Anecdotally, I have managed projects far better than other projects I have observed, of similar scope, taking twice as long and showing inferior quality. I have also seen amazing feats of construction prowess by larger build companies that I have no hope to replicate without a team of similar calibre. Building a team that executes the value creation is one way to scale, and also a way to vastly increase overhead cost. There are many levels to execution, the secret is using a manager at an appropriate level of competency at the scale of a given investment. Typically bigger is better here, and larger fees from more units can attract pro teams with a track record. I would say to any aspiring infill developer that wishes to start out at the top, how could I show up at a dentist office and operate on a patient, or at an airport and pilot a jet, so how could a person of limited experience expect to manage the execution of a seven figure construction project effectively? There is a vast capability chasm between a typical educated person and a professional value creator with multiple successful projects in his portfolio, of that asset class, in that jurisdiction. It appears unwise for a new developer to tackle a multi family build as his first attempt without support. Execution skills and contractor relationships do not translate well to different geographies. This limits a developer in how many markets hard earned experience and knowledge apply to. I’m even afraid to step out of calgary now, a jurisdiction I can predict with some certainty how the city will react to my plans and what work will cost to execute vs the value likely to be created. Unfortunately I am a value creation specialist only in a tiny slice of geography, in a niche market.

How does an infill developer determine if a project is likely to create value? This may well be the million dollar question. Imagine the folly of committing resources to a large project only to learn, too late, that the end result won’t create any value, instead it will create a loss. This could mean the sales or appraised value of the units would amount to less than the input cost. Instead of value creation, you’ve destroyed your own equity in the deal. Or the ill managed time and effort to complete the delayed work simply erode the value, day by day, until none remain. Each of the inputs must be estimated, from land selection through to cost of the time of construction. This is a massive mathematical undertaking with a high margin of error, usually you still have to vote with your gut, very early, before purchasing land. Clearly one must enter the deal with fair sized buffer, such that an increase in any input won’t eliminate too much value. After all, the reason we do those projects is to create value, not for fun or practice. I once counselled a prospective developer to bail on a project that had an excess of slope stability and soil retention cost. Those would look impressive when built, but cost too much and not create much value. Not all the inputs will create value equally, one must figure out what the key inputs are that will magnify value, like unit count, or quality of floorplan, or location. What market to build in could have more impact on value than the actual project itself! In a smaller project, all the value of one unit is likely lost to fees and compliance, again, this makes the case that larger projects will create more value due to dilution of fees as part of the overall body of work.

what has been the secret ingredient to my most successful projects that led to the most value being created? Sadly, market luck has been a huge factor in initial value creation. Massive action, which has been required to execute every project, hasn’t been as much of a factor as I would have estimated up front, other than through its role in taping the bullseye to my own back where luck could strike it. The infill market components, like land value, and interest rates, and yield or net operating income can fluctuate substantially. Of the project inputs I can control, land selection has been huge. But the greatest has been a blood commitment to getting it done, with quality and pace incorporated in the mix. The secret then is willingly and eagerly paying the personal price, sometimes seven days a week. Nobody realistically can or should work seven days a week permanently, but this is playing the game to win, and refusing to quit until it is won. When fuelled partly by passion this is the dynamite that overcomes obstacles in the way of execution. Endurance and grit then is a key to unlocking value creation. Another has been a singular focus on preliminary value engineering. Without going into too much detail, the ability to value engineer the documents comes from the 10,000 hours of lived experience in the trenches suffering as a wallet victim of bad design. To simply know, is to then find a way to make design changes to avoid problems ever becoming real. The casual observer could never imagine what has been done to detour land-mines before they show up at the site, eliminating entire categories of cost and value destruction. And, inevitably, something will be missed, so speed in overcoming mistakes cannot be underestimated. Becoming a person who can decide, and who lives comfortably with the consequences of the decision is how the project can actually change the individual, and better prepare him for greater challenge.

What type of person should and should not be considering tackling these projects? A person who, over the course of their life has shown a disinclination to commit, to crumble under pressure, who is indecisive, who lacks discipline, who cannot delay gratification, who can’t work hard for months without income, these are deadly value destructive traits. If this is you, run from this business and invest in safer markets. Execution is not for someone who is prone to flaking out when it gets tough. An infill project executor may feel like they are getting kicked daily, and the moments of triumph can be outweighed 100:1 by the hardship. Pre-project personal development via exposure to increasingly difficult tasks and levels of responsibility prior to jumping into the infill game is relevant training for an aspiring developer. Risk exposure is a real thing and a failed project could lead to bankruptcy. Even a successful project could lead those in charge to be depleted, diminished, and burnt out, but also the proud owner of a massive fountain of lifelong new value. The upside of these projects is the satisfaction that comes from winning the game, inflation protection, time off the grind. A masterful executor takes satisfaction from the manifestation of his vision and the above market cap rate too! This lengthy post appears as somewhat of an autobiographical diatribe, whispered into the web, where few persons shall tread. Rant over, we can move on to more practical methods of value creation.

Value creation in infill development part 1 - an introduction

This is the first in an ongoing and likely open-ended series of posts on value creation in the context of the infill developer. We will discuss what exactly this means, and what it doesn’t, pitfalls often encountered, tales of woe and horror, and triumph. Value creation is a distillation of intangibles, yet a physical manifestation of willpower, somehow abstract, but cultivated in the real world of mud and markets, and visualized long before execution. And execution, the key phrase, often repeated in this series, it is all about execution. What does it mean to execute value creation as an infill builder? I know a few things about this space, I have the 10,000 hours of repetition, but do not claim to know it all, or even enough. There be levels to this pursuit after all, I know mostly about the level I play in, and little of those levels above. Value creation is distinct from employment for sure, employees create value but not necessarily play in the realm of the owner/investor. A mindset is surely needed to create value, but how to cultivate this mindset, how to transition from wage work to value creation work, an obstacle many cannot overcome. And finally, strategies of what to do with the value, to compound it and shelter it from those who’d take it from you.

I find myself somewhere in mid-career, blessed to be freed of survival work, largely due to following my own strategies discussed in these posts. My focus now is laser sharp, to create value, and execute my plans into reality. These posts hopefully can help aspiring developers chase their own dreams, a road map that I wasn’t able to find when I needed it. I can respond to specific questions and will post replies to clarify my thoughts on topics of interest. Thanks for reading and good luck!

Priced beyond perfection- land sales that stymie any scenario other than a standard deviation of positivity.

On occasion a remarkable land sale gets remarked upon on these posts. This one is particularly egregious, my new favourite phrase. Given the carrying costs of land and the cost to build, these deals appear to appeal only to the most cash rich builders who also have the highest tolerance of risk and the most optimistic outlook. In my view these highly optimistic scenarios don’t often unfold according to the schedule of how they’d need to in order to justify such investment exuberance. Nevertheless I’ve been wrong and right plenty.

City wide RCG zoning implications, the dissonance of the public opposition

Some time has passed and we can all digest the implications of the new policy direction to change the basic zoning of the city. This will allow townhouse/rowhouse (seems interchangeable terminology here) typology basically everywhere in the developed residential areas (the inner city as it is known, where I work). I don’t see a massive amount of supply being added, given there are only so many building companies specializing in small scale townhouse construction. These are complex and costly endeavours, and I pity any new entrant into the business choosing a townhouse infill as his first project, unless he has a lengthy background in building, project management, and the mind numbing technicalities that arise and must be conquered, and loads of cash. The bigger companies already complain the smaller lot projects don’t necessarily work for them, simply because they need more scale than a handful of row houses to justify funding a team. Of course, you need a team to build anything more than one or two houses at a time, the company owner is perpetually caught in the middle of this scale conundrum. Simply put, starting a bunch of townhouse projects scattered throughout the city is really hard logistically, and would require eight figures of financial backing to do so. Not many new volunteers I would guess that would result in a massive amount of new supply beyond what is already earmarked for investment.

This brings us to the next point of commentary, the calibre of opposition raised to oppose the policy change to allow redevelopment, formerly prohibited, in the swath of RC1 and RC2 zoned areas that surround the city core. The arguments put forth often show a level of dissonance, to rationalize the opposition a person has to tie a knot with their tongue because the central argument means something different than what it purports to, you must interpret the coded language. Councillor Carra did a nice job of highlighting this, while challenging the anti-supply contingent to come up with better arguments. I didnt hear any great arguments against supply, but plenty of dissonance. Here are a few key themes observed.

• Rowhousing will cause economic harm to existing property owners property value, Allowing RCG will enrich developers by driving up property value. All of this I think is misleading and argues that RCG zoning will make property value both lower and higher AT THE SAME TIME, which is impossible. The real argument made is single family home owners just dislike row housing, density, people and cars, and want to entrench their currently free amenities (empty streets, lots of space) using the authority of the city bylaw and planning department. If all areas have equal RCG potential, then that removes the current premium on land with current RCG, or easy to rezone to RGC status. There is currently a scarcity of RCG land, once the maps are changed, this artificial shortage is gone. Given the same size of building industry and its investment potential, the impact on land value will be low, because now every property has the same upside, whatever it is, of the RCG zone. We could see less competition among builders for land, this is overall a good thing for new housing affordability. Developers will not be enriched by land value increases, that benefit flows entirely to the land seller, the same people that oppose development also take the highest bid when it comes time for them to sell. All the scarcity driven, high land cost we see today does is make new supply more costly, which leads to the second point of dissonance, shown below.

• The new RCG supply we see built today is already too expensive and damages low cost housing stock - The dissonance here is that, if you accept housing in Calgary is already too expensive (I do), then that means the current regulatory environment is not working to promote affordability, so should be changed. Allowing more supply of the least costly grade oriented supply option (rowhousing) surely cannot make the market work worse than it does now where the regulations restrict RCG supply to a very small land base. The public, when standing at the podium, fails to grasp this. Next, there is plenty of new RCG townhouse sales data, these units sell for much less than nearby semi detached, and far less than single detached new builds (by half or more). Simply put, the RCG product is the lowest cost new wood framed grade oriented building possible, this is not from greedy developers, the product cost is a reflection of its inputs, the commodities and labour are expensive today, and increasingly so. The next comment is demolishing of old single houses for rebuilding as rowhouses damages the affordable housing stock. Surficially, this makes some sense. The builders target the worst houses, because they can be economically demolished. This could lead to fewer overall low cost houses to rent. However, why are these houses so cheap to rent? They rent lower than the cost of holding them, because the houses are fully depreciated, maybe were purchased decades ago for a low price, and often have $100k deferred maintenance problems. These homes are rough enough that they can be unfit places to even live. Swapping one totally trashed house, for six townhouses is still a net benefit to five new households, this is forgotten by the public. Society needs to accommodate some people in poverty by giving them housing at far lower than its true cost, but the way to do it is not by curtailing supply of land for renewal, which drives up housing prices for the entire population. Are people really advocating for keeping the existing decayed housing stock as is to allow it further deteriorate?

• The city needs to offer housing diversity rather than a blanket zoning approach - This comment exemplifies the flawed argument frequently heard. It means that by Council valuing diversity, it also must value the form of diversity of not allowing diversity. if this seems odd, it is just the typical dissonance of the public. The premise is blanket zoning is wrong, because to have diversity over the entire inner city, some areas must remain as single detached enclaves. This then contributes to diversity, because community A,B and C allow row housing, yet community X, does not. Community X only allows single housing, so it is a demonstration of overall diversity. Those promoting this are engaged in a doublespeak, they are saying their community is special and should remain as single detached only, because of character, and integrity of the design, and other arguments of why wealth enclaves are a good thing outweighs need for supply during a housing crisis. no solutions are offered other than token support for housing diversity, as long as it is somewhere else, far from their enclave. The problem is, given a chance to control development, many communities would outlaw any building except new single houses, the most expensive housing option. This is the system we largely have today, which is creating housing scarcity by choking supply, and the only new housing option is luxury product over $2 million.

• Rcg zoning is a massive negative impact to the community, but also not going to supply enough to make a dent in housing problems, thus, should not be done because it is not a significant enough improvement. This argues that RCG will harm existing communities, due to the usual bogeyman, traffic, density, shade, etc. And it will not solve the housing crisis, and it isnt meaningful enough to add enough supply to solve the affordability problem. This argues that RCG is a major change but also a minor change, thus status quo is the correct course of action. The response to this is difficult. What can you say other than something cannot be both major and minor, concurrently. This type of respondent wants the city to annex more land and sprawl, and put massive apartment towers on park and ride lots near c trains. These are some terrible solutions to a housing crisis, but shows the capacity for creative problem solving among the general public. Best solutions presented involves ring fencing their valued Rc1 core areas, with all the density packed onto busy roads. The enclave residents then do not have to make any concessions inside the core area and can virtue signal about their progressive and unselfish approach to redevelopment.

• The public is shy to attend the public hearing because they dont want to be publicly shamed - This was actually commented on by Councillor Chabot, his constituency was very opposed in private communication to him, but they did not want to speak publicly. Perhaps this is because their ideas are so terribly self serving, classist and nimby? The Councillor Chabot constituents must have truly awful arguments opposing new RCG housing supply if they are scared to debate their position in public or attach their names to the public record.

• RCG zoning is a socialist style plot - This is a poor argument because RCG is a deregulation and red tape removal program to enable the market to function better. Again, how can this be socialist central planning when it is supported by the small business community that dominates this market segment. The opposite can also be argued, that the current system is heavy handed against individual property rights, anti competitive, uses bylaws to crush business development and poorly allocates supply of new product (sounds pretty socialist to me!). RCG is a massively pro-business policy, hardly a socialist plot by an NDP dominated Council. RCG is one of those broad spectrum policies that can unite both right and left in a common direction, rare today.

I think summarizing all of this it appears as typical Calgarian reaction to accelerating evolution of the city. A forecast of 200,000 plus per year population growth (2023) for Alberta was recently discussed in the media. New patterns and ideas on how to house an influx of people is needed, not just sprawl and detached homes, or Rc1 communities in decline with falling population within them during a crisis. We only saw 66 MLS listed new townhouse sales in 2023 reported by the realtors, this is tiny amount of new product coming to market for sale (lots of rentals were built though). The pendulum has truly swung in the other direction, this is the next generation - the millennials, exercising newfound power over its parents and the city it is inheriting. Will the opportunists among us adjust and take advantage of the changed marketplace? Will the city ever tackle the restricted covenant problem it has a major role in unwinding? Will the Province help with the financing hardships faced by home builders that is impacting new investment in supply? These are next on the to do list once the zoning issue is fixed.

my construction race against the weather

When it gets cold, construction slows. this seems to be the law of nature around Calgary and can only be defeated by massive expenditure in terms of labour, heat, and hoarding materials. I’d prefer to do none of that and simply use the favourable autumn weather. This means a few tasks must be done, some in order, some less restrictive. The volume of work is as follows, 1. gas install underground, 2. garage pour, sidewalks and patios pour, 3. sewer and water install, 4. paper and wire prep for stucco, 5. inspections for all pre board related activities, 6. insulation install and spray foam, 7. load drywall, 8. prepare scaffold and materials for stucco, and soon after do the sand and cement scratch coat, 9. trench for electrical to garage, inspect and lay cable in trench, 10. acrylic stucco final coat after scratch coat cures, 11. frame and prep garage for stucco, prep siding soffit fascia and garage doors, 12. install mast for electrical service and inspect garage electrical, create enmax billing account, have power connected, 13. commission the furnaces and have gas account up and running, condensate lines, other mech room work before furnace firing, 14. whatever else comes up!. If this appears to be a lot of work to compress into a short period, it is. All of this is currently in some stage of readiness at my site, and most of it needs done before October is over, or perhaps a little later if the weather is ok. Often there are plenty of warm spells up to and sometimes beyond Halloween that assist greatly in these construction races against the weather. Some of the stages require drying and curing, multiple days of preparation before work can proceed, or dry weather. Any work that isnt done may need to wait, and this could actually be the month of May 2024. That is a tremendous amount of time to wait for a project with an early winter finish date to wait six months for mild May weather. I think over the years we have learned the true cost of waiting for some of these stages, or have accepted delays from contractors that created a chain reaction of delayed work and the onset of winter. This year I have committed myself to getting the project complete before Christmas and this means everything outside has to be done. So far we are looking good, the next two weeks will be pivotal.

The end of incrementalism - Calgary embarks on a significant change to the restrictive zoning rules, finally.

During the Mayor Bronconnier era I was much less of a council observer than today. One exception was the despicable decade of nimbyism regarding secondary suites that bled into the mayor Nenshi era, the one I observed much more, even dragging on into the second Nenshi mandate. At the time the boomer heavy Council was able to defer, defray, and deny the legalization and construction of much needed basement suites. The conservative council was extremely interested in denying the rights of the individual to do as she saw fit with her property. Of course, basement suite development occurred in massive numbers, with the general public just denying the silly rules and building many of these suites in their private residences. This shadow inventory made up a significant portion of lower cost rental housing, eventually the rules were updated after much high profile and embarrasing bickering, currently secondary suites are largely a non-issue.

Next was introducing the townhouse or row house zone into the Rc2 areas, where a good set of contextual rules was drafted, each property would need a council vote to be re-designated to allow the row houses to be permitted. This remains a slow and costly process, but, with each successive council, the likelihood and predictability of success became much more certain. Some city led rezoning was done as part of main streets initiatives, and with the advent of local area planning, lumping a group of adjacent communities into a revised master plan, more policy backing was provided to rcg aspiring builders.

This incrementalism was quite successful in adding new supply, fortuitous it can be looked upon, as a lot of purpose built rental stock hit the market from 2018-2022, as a massive wave of immigration and demand for grade oriented rental housing arrived to Calgary. The consequence has also been a run up in land values, and now, with high cost of financing, a lack of land supply to be rebuilt as rcg rental stock harms supply growth today, when the need has never been greater.

With the city decrying a housing emergency, a task force was created to address the supply of affordable housing, and one of its key conclusions was to engage in a mass land use change of the base zone, largely Rc1 and Rc2, to the rowhouse/townhouse zone, Rcg. This would change, almost overnight, a large amount of the untouchable and exclusive housing stock, particularly in the Rc1 areas, to allow multi family development. Note, the Rc1 areas have the best locations, and largest lots, and the most restrictive rules, as they don’t allow any building except the much maligned McMansion. As of the special council meeting on Saturday, September 16th, 2023, the previously unthinkable actually took place, and by a vote of 12-3, the policy passed. It can now head to a future council meeting where a clear path to do the broad land use change will be executed by the city admin.

My thoughts on this include a sense of relief, that the people in charge actually show an ability to act. One of the greatest issues we have today is our slow and dim witted levels of governance, and the fecklessness shown on addressing key issues. Instead we tend to get government creating more problems, or attempting to solve make believe problems through virtue signalling. A broad based land use change would have been impossible just a few years ago. The tiny changes, allowing basement suites, to allowing some townhouses in some areas, and then all at once leaping forward to a mass land use change is a tremendous shift. It will save so much time, cost and headache for the builder, that, in combination with the new Federal ruling on gst will make development of multi family homes much more viable. This is a major benefit to society to balance supply and demand, thus mitigating future rent and home price escalation in Calgary. Those arguing against it, including the three opposing Councillors, appear as stodgy dinosaurs, relics of a boomer era of backroom planning politics, where preservation of wealth enclaves occupied by campaign donors would drive land use policy. Special mention of the Councillor who attended the full session despite being due to give birth is warranted, as she wanted to make sure her vote would count in case it was a split Council. The typical gatekeepers and their arguments appeared to fall far short of swaying Council, other than the usual suspects who have zero sophistication in land use matters and typically vote against infill development anyway. Absent a new modernized zoning bylaw, this change appears to be the biggest story in Calgary land use planning in our lifetime.

The unnecessary panacea of modular building

Good trades render modular construction unnecessary, thus, modular construction is only needed in the absence of good trades (like remote sites and tourist destinations). Lack of good trades is a societal failure, not a justification for modular as a panacea. In calgary we have good trades (and a simply massive construction sector) and modular isn’t catching on despite decades of hype. If modular was better, the big boys would have latched onto it years ago and it would by now dominate production. If the big boys don’t do it, the reason is it doesn’t make dollars so it doesn’t make sense. Of course what does make sense is mini prefab items, like trusses, and cabinets and flooring, and possibly prebuilt wall sections. All the work is done elsewhere and the workers on site assemble finished goods to save time and be more specialized. This stuff has all been perfected ruthlessly in a competitive market. modular housing isn’t a solution for what really ails society, affordability. Modular housing costs more than site built because of the overhead of the factory and the inability of the factory to overcome its inherent disadvantage, shipping, craning, and constraints of roads and wires, and that the type of housing demanded doesn’t fit well on a trailer nor within the confines of the existing city and development rules. Modular housing doesn’t benefit from factory scale as promised, because while everyone who wants a truck can use a ford f150 (millions made, all slightly different but identical major systems with interchangeable parts), everyone who wants a house doesn’t want a mass produced model with different paint and gadgetry packages. So housing doesn’t scale in a factory the way it would need to, if we wanted to lower costs. Some modular builders position themselves as premium alternatives, benefiting from climate controlled production, customized architecture, or they use extremely expensive equipment and go after net zero or European style quality This is the antithesis of mainstreaming new supply that could ever make a dent in demand. These models are likely to have walls of glass, integrated appliances and $1000 faucets, so the factory can create margins in its very high cost per square foot product that will be very expensive relative to site built competitors.

This brings us back to the central issue of affordability. Housing isn’t affordable because the individual components add up to what they add up to and can’t readily be economized, even when built smaller. And the land trades like a hard asset in an era of currency debasement, adding massive cost. Governments are such feckless creatures they simply add extra useless waste and fees and tolls and grifts upon the builder, eroding affordability further. The banks then take their share by lending money into the atmosphere and collecting interest upon what they created, this is a huge cost category today now that the easy money days are behind us. One small solution would be really cheap loans to builders, but that isn’t politically feasible as it is easily twisted in the media as handouts to the wealthy capitalists. However, society wants cheaper housing at scale, the most likely suspects to innovate into lower cost higher supply housing is by definition wealthy capitalists creating huge disruptive companies (like a Tesla), not governments, and not boutique artisans. So we come full circle to the conclusion that Modular isn’t the answer (yet, and maybe never) and there is no answer except less government taxes and involvement, less banks influence over the sector, and more innovative builders.

Further thoughts on pace of work

Despite the obvious mantra of construction, time = money, a person such as myself needs to peel back a few more layers of the onion. Slow work, in a high cost capital environment is a disaster that mainly hurts the builder. I prefer a shared risk model where everyone takes on the pain rather than one person bears it all. This is hard to find a way to distribute the cost of slow work so the builder tends to eat it.

A second misconception is that faster work is worse work. I’ve debunked that myth on my sites many times. Often faster work is done by pros, who are extremely productive. It isn’t rare to see a true pro crew made up of all ‘A’ players work 4x the speed of a lesser crew. I’ve had crews where it is hard for me to keep the deliveries coming soon enough so they don’t have to quit early. I’ve had crews where the material sits forever waiting for an opportunistic scammer to come along and grab it.

But back to cost of capital. A typical smaller infill project will require some outlay of cash and credit to eventually approach $2 million as completion nears, with funds stuck in raw land for at least a year or two, drawing down cash reserves or taking hostage of the builders limited funds. Those final finishing months, with delays due to supply chain and busy crews, or when finished and waiting to sell can be really costly. Cost of the money can approach now the second most expensive line item behind land. That invisible drain is a massive parasitic drag that can eventually sink the strongest builder. A lot of builders are skilled at fleeing the sinking ship and ensuring they take the smallest loss, basically by burning up other peoples money.

The approach I’ve often used is less leverage and a greater focus on execution. Instead of the cost of capital being the second biggest expense, you can minimize it with pace of work improvement, and low rate internal funds, or even better, funds borrowed at low rate from other assets like cmhc deals. In the market today I have a hard time believing that double digit interest rates will be sustainable to the builder who also has to overpay for land at the outset. It seems like a recipe for margin squeeze.

And this brings us to today where there is a strong favourable sentiment. Land prices and input costs are very high, some at record levels. Interest rates for buyers are likely at the highest number they’ve seen in their adult lives, thus has to cap upside of home prices. Immigration is high, and the energy economy is doing well. All of this is fickle and subject to change, particularly the in-migration, out of province investment flows, and behaviour of Saudi princes and Russian authoritarians. This appears to me like quite a risk recipe, and I’ve stopped looking to purchase any land for the remainder of 2023 and into next year. I’m happy to build out my inventory, some of which I’ve had too long already. Past experience suggests that the market will cycle and much better land deals will result, eventually. Every project is taking longer than it should, and this leads to the greatest risk of them all for the builder. He starts building when the market is good, but pace of work is so slow that by the time he finishes he’s in a totally different market. This has happened to every calgary builder with any sort of track record. Seems to me this will happen again.

The easy days of summer building

It is remarkable how much easier and quicker work gets done in the summer months. The warmth, long days, crew productivity and soft soil make large pours quick and easy. We went from a hole in the ground to windows, roof, shingles, and a basement slab pour in a short few weeks. Over the winter, this can all be done, just with tremendous struggle and extra hoarding, heating, and difficulty. I need to avoid late summer and autumn starts, it is easily said but not generally followed through. I’d prefer to start some houses in may or June and have all the outside stuff wrapped up in October.

How does this not leak?

All of my regular readers will no doubt recall my frequent comments on upper level decks, and the fastidious details and products needed to ensure these don’t fail. To me these are all cost and risk and liability with minimal upside. That sort of exchange feels pretty sour to me, so I won’t be inclined to do it. Certainly won’t be putting a warranty on it. Roof decks are a whole different level of construction execution, third floor issues, etc. without getting too bogged into detail, I won’t do it. Yet when I see it done by others I’m just baffled. Particularly when a roof deck is installed with dozens of railing bolts drilled through the tiny waterproof layer. After doing this you can’t even be assured the vinyl materials isn’t already compromised from day 1. Someone explain to me how this doesn’t leak, because I’m way too dumb to comprehend it.

Leasing underway

We are now leasing the livebridgeland.com project. One townhome and the garage suite are currently available.

Garage suite progress - almost done

We are pretty pleased with the recent progress and finished product over at the garage suite. While it was considerable effort to add on a standalone building to a townhouse project, I think we leveraged some real construction synergies as well. Our opportunistic approach along with the scale of the townhomes lent itself to a more economical building, despite the heavy specification of the costly mechanical systems deployed. The finished product feels a lot more like a single detached home than it does a tacked on real estate derivative. This was an unexpected outcome. I hadn’t actually thought through what the finished home would be like. I was more conscious of the troublesome sewer design and how to manage costs. In the end I lavished upon the garage suite much of the same materials as I would in a seven figure luxury spec home. The end result is both unique and familiar. A second floor bungalow, disconnected from any neighbouring structure, yet somehow centred in the heart of Bridgeland. I just may be having a change of mind on if these should be built more often. Relative to a condo in a high rise, cramped, no parking, neighbours above and below, this home is far superior to that model of development. And no condo fees!

More budget Metalworks

We are entering phase b of my metal install plan. More perforated cut and dropped off at the powder coat booth. Is this a fun and economical way to achieve adding a little bit of decoration?

Acceleration of the patina

My rusting metal siding wasn’t rusting evenly enough for my liking. The solution was a re application of the special sauce mixture of peroxide and salt water and a back brush. This helped to smooth out and apply the rust how I wanted it. From this point onward it can weather and a natural patina can be created.

Degenerate people and their degenerate behaviour regarding infill redevelopment

It does appear there is a rising tide of thievery, vandalism and predation around the inner city. A lot of this is just routine deplorable types, who scavenge and steal to feed their bad habits. Worse are those that seem to target business owners and job sites, taking tools and ruining livelihoods of actual hardworking people. Now we are seeing attacks against the nature of development itself. There is a common perspective that infill is bad, nothing should change, worn out buildings decaying and vacant are ‘heritage’ and new housing is evil. You see some really awful examples of this mindset on Facebook community groups, Nextdoor app, and social media posts. Recently some degenerates torched a pile of lumber at an Inglewood location, actual arson, and pushed all the fences into the excavation. They basically just demonstrated a vast chasm between their own ignorance and those of the people that are rebuilding neighbourhoods from the inside out, often overcoming significant obstacles. At some point we will have to hire armed guards to protect our houses from these vandals, because the police don’t take it seriously. .

The washing machine time bomb.

The washing machine can alternatively be called a time bomb, ticking away until it is ready to go off, in an uncontrolled flood. One recent adjustment has been attempt to make the washer ‘safe fail’, as in, when it fails, it is ok because it won’t cause much harm. We did this by relocating the laundry facility back to the basement, the place they used to before the second floor trend came into being. A laundry room inside your home is a luxury, so why turn it into a liability by positioning it somewhere where it can do the most damage. And yes, I have done emergency floor drain, and I have clad the floor and baseboard in tile and caulked the edges. Still floods.

HGO everywhere. The missing middle unleashed in calgary.

It does appear now the tide has really turned in the missing middle solution to home building. The built forms, outlawed for so long, are unleashed upon the calgary infill market via hgo. It seems like a wave of hgo rezoning applications are hitting the streets now, with a flood of investment cash and builder interest. Is this just the right solution for a year of substantial immigration? I think so. I’m planning one too. Mine will be seriously interesting and different.