A typical process is to make a list and visit the lighting store and put together a selection package. In this instance, having a unique renovation, we flipped that process around and had the light store owner visit my site to come up with a list of suitable lights. I like this a lot because I was able to leverage the knowledge of stock and appropriate lights from the source of the greatest expertise. A few weeks later and the lights are going in and we can enjoy one of the more fun parts of the process.
A never ending chronology of screwups
Sometimes you just have to relax and enjoy the endless small screwups that add a little vitality to the building experience. A typical villain in these affairs are the Drywallers, and everyone who comes after them and doesn’t notice obvious flaws, including the builder. In this case the plug is buried and the paint and baseboard is done. So one little oversight of not cutting out the plug results in a bunch of mess and paint repair problems at the end. While this should have been caught earlier it really isn’t visible to someone who isn’t consciously looking in just the right spot.
Are the supply chain woes ancient history for the builders?
A few years ago we had ordered up appliances, size specific, for a project. Those never arrived and we scrambled around to buy display models from whatever hardware store had them. This was a costly hassle, and a year or so later after the houses were completed the appliance dealer called me and announced the appliances had arrived. I had them shipped to a secure place and paid the bill so we could have a spare set for emergency use. This was another instance among many of hoarding behaviour by desperate builders. Yesterday we installed the last of the appliance hoard, and we enjoy a more spacious garage too as our hoard has diminished to just random hvac duct components and some tiles. I hope we never again face the impossible challenge of unavailable critical parts and the supply chain has healed itself. Ordering lately has been good, the problem now is the price. The builder gets so much less product for every dollar invested in the build. The legacy of the supply chain fiasco is now everything costs more so everyone has to pay more for the same house.
Glass detailing
The crew was back to complete ensuite shower #2. Some nice details were executed here.
Leathered quartz install
We were able to latch onto a new slab product that shows a really nice texture but has that impervious quartz property of being a durable and low maintenance surface. We are definitely a big step closer to interior completion on this renovation
Showhome about to open
Stagers arrived today to set up the house and I’ve been working through some details as well. Current inventory in the market appears to be very low, so we are listing in advance of the classic ‘spring rush’. The project was efficiently run, and is now approaching the end of month 7. What I find fascinating is we are basically 200 days into construction from a hole in the ground to an operating show suite. Backing out holidays and Sundays, we need to finish more than 0.5% of the build per working day (for each house), through all weather conditions. It is a tribute to my professional and skilled trades that this is even possible to conceive of being achievable to finish that much work. Looking back there were days where I had 5-6 crews on site and significant orchestration to referee this chaos was needed. Plenty of construction lessons learned as we navigate these tricky schedules.
Radical transformation via the major rehab
While we are still grappling with the typical regrets about not doing a full demo and starting over with a larger footprint, the rehab is coming along well. Huge gains can be realized in these old houses by a little bit of framing and rework of whatever bad ideas were incorporated into the original design. After the changes are made it can look like it was meant to be from day one, in this case 1959. This stairwell has been subtly modified and fixed to create more light, equal treads, and finally new railings where there used to be walls. All of this adds up to a big impact and also quite a bit of work and expense.
More unhinged commentary on RCG city wide rezoning in Calgary from your friendly builder
April 22nd, 2024 is shaping up to be D day on the RCG land use issue facing inner city Calgary when the only voters that actually count (the Council + Mayor) will cast a deciding ballot. I am sure the self appointed neighbourhood activists are marshalling support now while creating TED-talk like powerpoint slides to illustrate the profundity of their ideas against the evil townhouse developers. For insight into the minds of this cohort of society, all one needs to do is browse the Nextdoor app and scroll among the comments related to any development issue.
While it may appear unfair to post derogatory commentary on the quality of ideas put forth in opposition of infill townhouse development in the RC1 and RC2 areas consider it this way. Are the infill developers experts in dentistry and piloting airplanes? Do the developers comment on performing root canals and landing jets? However, in these development matters such as townhouses and affordability, the greed-addled developer is viewed as a biased and self serving entity, while the frozen in amber zoning advocate is a kindly matron of community character and family values. Here is a brief update on the zeitgeist of those opposing the city led land use change to RCG;
community members have expertise the planning department cannot possess - Mr. Jones has lived in his neighbourhood for 35 years so nobody can match his understanding of the fine grained urbanism of a street of homes. Mr. Jones term of residence has currency in his weight of opposition to any redevelopment which is based on the unique character and quality of the area. The local councillor needs to vote for Mr. Jones - If Mr. Jones emerges as the loser of a housing decision, then the democratic process is flawed. Mr. Jones needs to continue to benefit from zoning regulations - Mr. Jones’ financial plan depends on continually profiting from housing scarcity. Mr. Jones should not participate in offering housing solutions - Mr. Jones wants housing built, but it should not come at the expense of his tranquil enclave of detachedness, and sprawl is a good response to growth. Lets rebut this a little;
There is no expertise here that a city planner cannot comprehend - Mr Jones lives in a community with ‘park’ in its name, like Glenmore Park, Chinook Park, or Rutland Park. These communities are all from the same era, planned in the same way. There is no profound unique character justifying conservation, these communities are all similar, and contain detached homes. City Planners are smart enough to determine how townhouses can fit among 50’s bungalows and contemporary mansions.
Term has no currency - Mr. Jones has lived there so long that he suffers from a delusion that he has earned a degree of deference from society in land use decision making. Actually, the likelihood of him continuing to live there is annually decreasing dramatically, not increasing. Those that wish to move into the area in new housing that is yet to be built are the people that will be residing there for the next decades, long after Mr. Jones has vacated, and sold to a developer. Why would the opposition to redevelopment put forth by Mr. Jones (who has been comfortably housed for decades) matter more than a massive societal need for new supply? Mr. Jones enjoyed a great run of using regulatory power to keep out infill development, but the run is over now and it is time to rebuild these older, small homes occupying the best land in the City, and townhouses need to be part of the menu.
Council cannot vote for Mr. Jones self interest - Each community has a Jones, such that there will always be a voter that wants no infill townhouse development. If Council agrees with the populist angst against townhouses, then townhouses will remain illegal to build in the best locations where townhouses need to be built. The outcome will be…a housing crisis. Is that not what we have today? Council needs to exercise wisdom to do what is needed, not what is wanted.
Regulatory profit seeking is a poor means of managing ones personal financial affairs - The planning department cannot be used as a way to create scarcity so an entrenched minority can enjoy escalation of property value. This comes at the expense of basically everybody else who has to take on massive debt to buy overpriced housing, or faces horrible housing options. Individuals who base their personal financial success on sitting on the couch and having the house value escalate are enjoying a type of regulatory profit capture that doesnt need to exist. Mr. Jones can do what anyone else needs to do and find way to earn money outside of tracking MLS price appreciation from his enclave. The planners owe no debt to Mr. Jones and his retirement program.
Mr Jones is not presenting a viable pathway to housing solutions - There are not any great housing solutions for affordability, only tradeoffs. What perpetuates the problem are people like Mr. Jones that oppose townhouses because they feel they rent or sell for too much, but then only wish to allow new detached homes to be built that are vastly more expensive than townhouses. Somehow, they only see more detached homes as a way to solve the housing crisis. Unfortunately the housing industry is better at selling high margin luxury product than low cost entry level product, and the CREB stats typically portray massive low end demand, and an abundance of high end supply. The mismatch of housing cost vs the financial capacity of those underhoused is not going to be solved by RCG zoning. A good tradeoff will be enough market supply so that income earners can find housing without entering a bidding war, while city resources are spent to house those that would otherwise be homeless.
In the marketplace of ideas, you don’t hear much from the developers. These are solitary types that tend to be pretty busy building stuff, and are disinclined to monitor the political fray. Developers make tough calls on investment decisions, and feedback is merciless. Through this crucible of personal risk, and pressure of executing infill townhouse projects, the developer gains a level of insight and expertise that is unique. I’d like to hear more developers commenting on development issues to hopefully create more cover for the politicians to enable and de-risk infill development. Without the developers, the current ratio of 88:12 sprawl to infill will not change to be more balanced.
2023 year in review, briefly...and a bit about 2024
Trying to avoid a dramatic novel here. 2023 was a good year to be a builder. As I promised at the end of 2022, I finished seven homes in 2023. Should have been nine, but you can only do so much. I think the continuous and unrelenting focus on creating value through infill development as my strategy is working. It lends a focus to decision making that is otherwise absent without this overreaching statement, basically, it makes it easier to decide what direction to pursue in a field where there is countless options.
While seven completions sound good, note, that not even one of them was started in 2023, this was all carry over stuff. The three starts in 2023 were not able to get finished, this is like a troublesome hangover. If every project takes longer, then the way we calculate yield is divided by a number greater than one. That makes performance much worse, of course, I am in no way suggesting I advocate a start in January, that is tough way to launch a build, just to complete in the same calendar year.
With seven completions, how much is the finished value of these homes, and what is the amount of input in terms of land, material, and labour? Does that even matter since I had no equity stake in one of the builds, and that none of them were for sale or sold, which was also a remarkable occurrence? Regardless, it looks like the value of completions was a little over $5,500,000. That is some serious value creation, from empty holes in the ground to occupied homes. And I am definitely not saying I was able to do this alone, there was a support network of many guys who brought their expertise and skill to the job sites. The only sale I had was my own house I built in 2014 and sold in spring, and that one doesnt count toward my summary of work done in 2023. What was ridiculous about that 2014 build is that it sold basically inflation adjusted for much less than its value in 2014, and that is disappointing given how much tax, insurance and debt service that house ate up for eight years, and how much more the cost to complete that same model would be today.
People get really worked up about that bogeyman ‘property values’, particularly when discussing infill townhouses. What they should really be concerned about is how little actual appreciation their property has experienced adjusted for inflation. I’d say most houses just match inflation and sometimes fare worse, particularly when you include the repairs, tax, insurance and those costs can be at minimum 1% of the property value each year. In a low inflation environment maybe 3% annual price growth is ok, but since 2020 we have had more like 20% inflation. The declining purchasing power of wages is now the defining characteristic of this era of horrible governance we suffer from in Canada.
Being so occupied in 2023 with finishing houses, I didnt really get a chance to fully permit a couple of townhouse projects. There was so much uncertainty in what type of model to design, land use changes, finding the right consultants, it just took a lot of time and delay after delay was observed. Now I will suffer from some real lag between 2023 and 2024 projects. This is pretty bad management, and I dont even know when I can break ground on my next townhouse projects. Maybe I should take some time off this summer! The good news about these townhouse projects, is that I have little exposure to the crazy volatility of the market. If prices go up, go down, stay flat, that is ok for me. The key as always is the refinance at the end, it didnt work out well for the 2023 townhouse project, but we are pursuing the 2024 projects in a way that the CMHC will like better. Having the federal government control financing for all new construction in Canada is just so utterly unappealing to me, it is the antithesis of how a market should function. Why do we need these banks if they are allergic to financing developers? With the privilege of money creation should come the responsibility to issue it to perpetuate a multi family construction housing stock in desperate need of new supply. Instead we have to beg the feds for debt?
In other, happier news, the inner city building association is tackling the intransigent departments that make building harder than it needs to be. Just before Christmas word was circulated that we can change the surface improvement process, notably the sidewalk replacement issue. This is a major feat and worthy of commendation. If key individuals dont invest major energy in these process improvements, they wont happen, and the biggest beneficiaries are the freeloading builders that don’t even participate. Regardless, this is a huge change for the better.
We are well into January as of this post, and I am wrapping up a couple of nice large detached homes in the SW, and considering my next move. 2024 is looking to be a good year, and Calgary could see significant land use bylaw changes, like a blanket RCG townhouse land use across the inner city. I welcome these changes and look forward to new opportunities to create value, and execute on my townhouse visions. Sean
2023 prediction review edition
It is that time of year again to review my predictions from last year, and see how I did as a market Nostradamus, or is it a market Nostra-dumbass. Lets take a closer look at my predictions;
less volatility - land, labour, interest rates, commodities, bankster rug pulling, in all of this I think we will find less volatility than over the past two years. This doesnt mean low volatility, just lesser craziness than before.
I was largely correct here. The volatility in Calgary was fairly low, especially relative to other years. Supply was limited likely due to home owners having fewer good options to move or enjoying the last years of their cheap debt before they adjust upward to market rates.
infill home values flat by year end - I am going here with a prediction that prices of Calgary infill housing will go up and down a bit over the year, and end up fairly close to even. Too much rate hike headwind, which hasn't really percolated throughout the economy yet to foresee price gains, yet lots of demand and lower supply than average to set a price floor. plenty of price increases on inputs are pre-destined, unfortunately, making it expensive to build, also an apparent lack of good land listings on the MLS.
On this I was wrong. Or was I? It depends on what metric you choose. If you look at condos, the price and sales value was up a lot, same with townhouses. This is partly based on what quarter of the city you are looking at too. The stats package of the overall market showed a 10.4% increase according to CREB, while some townhouse and apartment prices are up around 20%. Yet the median price is only up 4.21%, which is much lower than the overall market suggests. In the future I need to be more specific on my predictions. One alarming stat is the inner city semi detached market has a large standing inventory. Yet another reason I truly detest that segment of the market. Also I recently found out that 61000 people moved to Alberta in q3 2023, that is a lot of demand for housing putting a strain on the market. For sure this accounts for price growth pressure, and we don’t know if this population influx is sustainable or not.
a year of finishing - fingers crossed this is correct. I need to finish seven houses, and start two, plus start another large rental project, and
Here I was correct for sure. I did finish 7 houses, spread over 3 projects, and a couple basement suites as well. I did start three single detached houses, one being a full Reno, and those are all close to complete. I didnt get to start another rental townhouse project however.
effectiveness of the inner city builders association - many upcoming complex and difficult negotiations need to take place, the association will draw from its strength of membership to tackle these.
Here I was correct. The association is doing great work, and as we approached the year end word spread that we are going to see a major change in one of the many really awful issues related to sidewalk repair and replacement. This could be the latest and most massive win for the builders!
Overall my predictions for 2023 were pretty good. It is also a year where the predictions I made had a fairly high degree of probability of actually taking place. I don’t think I’m going to do a 2024 prediction issue, as I truly don’t know what is going to happen. I am not even sure what I am going to build because I have been too busy to get my permits in order and likely will suffer from a development lag. Maybe my 2024 prediction is to take more much needed time off.
What portion of costly component upgrades does the new house buyer actually appreciate ?
This topic is in the realm of how much energy and investigation would you need to perform to even approach an answer with any degree of confidence? In general, the new house shopper visits a bunch of show homes and likely chooses the combination of location, price and attractiveness of the house best suited. Each house is different, regardless of the veneer of homogeneity created by the newness factor and that each house has a ‘warranty’. Each builder has incorporated into the house an endless variety of feature and upgraded components. I’ve seen the inner city projects now in an apparent arms race of how many costly luxury products can be incorporated and how high the asking price can be pushed. Contrast this with show homes I’ve seen in sprawl areas where the builder hardly wraps the bathtub with more than a single row of cheap tile. Some standalone items can be really expensive like a tub filler, or a light fixture. Others are layered in and installed in a way that cannot be changed. For example house with multiple sinks for the kitchen, bar, laundry and prep room. Those sinks can be 3/4/5 hundred or even 1000 dollars each. And they are under mounted in a polished quartz slab, not changeable at all. These components really increase the cost to construct, and can be cut from a budget to make the price of the house more attainable. Does the buyer who shops these houses notice, appreciate and add up the different specifications in the houses they visit in a way that differentiates certain homes over others?
I’d like to think the house shopper is pretty savvy, but I suspect they may often like what they see, but not be really aware of the cost of the components. It needs to be the job of the agents involved to highlight these items, often the selling agent is not on site, or the buying agent has no knowledge of material costs. Does the builder need to put a price tag on the show home to show how all the individual bits add up to the asking price in a seven figure spec home ?
A pre Christmas finishing gift for the builder
Hardwood floors, tile, countertops, kitchen. All of this lined up to complete before Christmas. This is like a nice gift for the builder to see a bunch of the good stuff go in all at once. I suspect that this stage of the project which represents 1/10 of the build by time and effort equals 90% of what interests aspiring builders out there in becoming a builder. I think a better approach is to find more satisfaction in the early stages where the going is really tough and to line up a bunch of small wins.
Inability to stay on any sort of schedule - who, what, why and how
I’ve noted over the years a significant degree of time losses following the drywall stage. Sometimes even the drywall stage, but that is a different story. Post drywall delays are debilitating on my construction momentum. The inability to get through the next couple stages is resulting in delay of about a month. Culprits are fuzzy completion dates, inability to commit to starts, slow delivery, poor cleanup efforts slowing turnover to the next stage, and busy crews. Rolling over from one delay to the next is costing me week after week, pushing out tile and electrical final work, even impacting delivery date for concurrent shop work booked in advance for delivery to site and not flexible. Part of the answer is much clearer expectations from us as the builder to compel crews to deadlines. I need these guys to prioritize my schedule over their internal schedule. The incentive structure on these parts of the build is totally misaligned with my interests and costs not decisive factors in trade performance and payment. This is the construction conundrum of the era, perhaps every era!
Product change - lacquer to water base
Switching from lacquer to water base product is a long time in coming to the market I am familiar with. the quality of the lacquer finish is very good, that is a certainty. It comes with too much volatile vapours, toxic, flammable, dusty, and nasty. The quality of the water base products seems to get better all the time, it seems like it is plenty good enough for the most part to use exclusively. One exception appears to be the priming of raw material, as the water base primers can cause some swelling of MDF materials, and clear coat of stained wood. This is a major reduction in lacquer use, a solid leap forward. The water based product tradeoff to me, even if the finish isnt as good, is so worthwhile. Lacquer is some of the worst product with the most risk. Let’s all get rid of it or mostly get rid of it. Over time the water based stuff will become indistinguishable from lacquer, or lacquer will be regulated into professional spray booths where it can be managed safely.
if it is dog friendly product, that makes me happy too. That is a freshly sprayed door sitting next to our friendly beast and we dont share exposure to chemicals that are not good for anyone.
The most disingenuous untruth commonly marketed in housing today is…
That net zero passive house, euro spec, Swiss German style, beyond step code type of housing is only ‘marginally’ higher cost than conventional housing. The reality is a lot of these projects are unlimited cost art projects, or secondary vacation homes for warehousing wealth and only inhabited for a few weeks of the year while the owner visits exotic markets like Whistler or Aspen. The massive embodied energy involved in fabricating the components brought to site from foreign lands is unlikely to be factored into the environmental equation. Some of these projects will feature kitchens that cost as much as entire homes elsewhere in lower cost communities. These homes are the equivalent to a Ferrari with an added battery pack so they can use less gas yet offer the same performance as an older gas guzzling model. The green features incorporated are as much egotistical hubris to compensate for the true impact of building somebodies third vacation home as a meaningful demonstration of decarbonizing housing. This type of work has almost no commonality with conventional budget based housing to supply to the broader society, it is much closer to commercial construction found on a publicly funded institution like a research lab or art museum. The wages and consultant expense to design and execute these homes can exceed $1000 per square foot, and only the finest and best available craftspeople can attempt them. This offers very little as scalable lesson to the broader housing industry.
Challenging rework to make old houses better
I’m reminding myself again how expensive renovation can be when you try and radically improve the old building. I think in many instances it makes more sense just to demolish and start over.
don’t do development dabbling dilettantism
Survival instinct number one for all my builder friends. A pretty rendering created for marketing purposes on a crappy location doesn’t make a good project choice. Rewarding a speculator makes no sense, do the work yourself that the speculator wants to capture as easy money. There is no value left to be created when a speculator just gets a development permit passed. They unfailingly believe they are entitled to a significant share of the value created by the massive undertaking of investing in actual site work. I wouldn’t buy this property if it was the last site in the city remaining for me to build on. Fortunately at this moment I have plenty of better opportunities than this. The general consensus is the land valuation promises of these realtors is super bloated, they even acknowledge it privately.
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.
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.
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.
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.
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.
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.
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!